Making Wine, Beer or Water Heaters

It is fascinating to look at the fluctuating fortunes of some of Australia’s wine producers. You would have to have been doing a Rip Van Winkle to not be aware of Southcorp’s woes after the merger with Rosemount. At the time, it was heralded as a wonderful advance which would give Southcorp the necessary management expertise and experience to be able to expand and crack the lucrative US market.

Unfortunately, it did not turn out as it was hoped, or indeed expected. Southcorp may not have been as profitable as they would have liked prior to the merger but now, some years post merger they still have a very bad dose of financial indigestion and it will take a long time before they manage to get back to what the market would deem as a reasonable level of profitability.

To try and achieve increased profit they have embarked on a number of strategies. First and foremost amongst these was the elimination of rampant discounting, especially in the UK, a strategy which was used to achieve sales volume. A good move for the company, but not so good for the consumer who had got used to “deals” on their favorite wine.  

Next came the cost cutting, always a good move to try and increase profit. When I interviewed Brian Finn, who at that stage was acting CEO as well as Chairman of the Board in September 2002, he said, “We don’t have any significant plans to trim costs, not in a dramatic way. A company is yet to be found that that can save its way to prosperity. The way we are going to be prosperous and to succeed is to make the revenue go up and to eliminate uncontrolled and inappropriately applied discounting. What will improve the profitability of our company is to improve the profitability of the products we sell.”

With the arrival of John Ballard, the slate was wiped clean, huge write-downs were made, and project Veraison was launched. What is project Veraison? In essence, it involves making savings by improving productivity in packaging and distribution, whilst reducing freight, staff costs, and winemaking duplication. It is hoped, in time, it will save $28 million a year but it will cost $58 million plus to do it. Now this does make sense but as Brian Finn said, “you can not save your way to prosperity” so more is needed.

Southcorp is not the only major producer to be feeling the financial crunch and whilst it was reported that Southcorp is considering sale and leaseback on assets, the leasebacks would not include vineyards or wineries. This week it was announced that Fosters wine division earnings had slumped 32% and it was projected that things could get worse before they get better. In a separate article the next day, it was announced the company had placed nine of its vineyards on the market.

Traditionally the major players utilised a combination of fruit from their own vineyards and bought-in fruit which gives them maximum flexibility. By owning their own vineyards they can control costs but more importantly quality, and then there is always the marketing edge. By using their own fruit, especially for icon wines, there is product consistency as well as being able to talk about the grapes on the label. By the same token, Grange comes from multiple vineyards and its reputation has been enhanced by the ability to select the best fruit. However, many wine lovers still look towards single vineyard wines and there can be a great marketing advantage if it is used to effect.

Some companies have limited vineyard holding and a few respected companies even have no vineyard holdings. Rockford is a perfect example of a winery without vineyards. The secret to producing good, consistent wine with limited vineyard holding is in the management of the relationship with the growers. If the winery is heavily involved in the viticulture with their growers and the relationship is well managed on a long term basis, then good consistent fruit is possible. Rockford at one end of the size scale and Orlando at the other both do this well. Both are well and truly “in bed” with their growers and do not rely on “casual relationships” to get good fruit.

Hardys, after consolidation with Constellation is experiencing not only increased growth in its Australian wine operation, its profits are up too. Orlando, who are part of Pernod Ricard certainly do not seem to be suffering any major financial headaches either, so it’s not a case of being at the big end of town that is the cause of the problem. Likewise, many of the other mid to large companies are also doing well, Evans and Tate, and McGuigan Simeon to name just two. In reality, it is about one thing and one thing only: the management of the organization.

It does make sense to rationalise assets. At the moment and for the foreseeable future there is likely to be a grape oversupply so in some ways the strategy to sell of vineyards makes loads of sense but that strategy could backfire for a number of reasons. Firstly, when the price of grapes goes up, which indeed they eventually will, then those companies without vineyards and long term contracts could have problems. But there is an even more important reason why it can backfire. If producers just sell off good vineyards and do not manage the long term relationships with their growers effectively, then they will have difficulty in maintaining consistent, quality grapes and this will be especially noticeable in their icon wines.

Once again, the secret is in the “management” of the relationship. One can only wonder if the companies that have had difficulty managing themselves in the past, who sell off major vineyards, will have what is required to “manage” the relationship effectively with their growers. If not, they could be making very ordinary icon wines or even worse, back in the beer or water heater business.

Copyright © Ric Einstein 2004