2012: a watershed year for New Zealand wine

This year much will change for the NZ wine industry. The low volume season currently developing in Marlborough and the rapidly growing Chinese demand for Hawkes Bay reds will set in motion a hugely positive period for the entire sector. Following a challenging phase of over-supply of Sauvignon Blanc on one hand and insufficient demand for Bordeaux style reds on the other, it’s a much needed and timely shot in the arm.

But it may not look that way to everyone. In Blenheim there’s a definite sense of “about bloody time” as a set of large and relatively new Awatere-based wineries are expected to take a big hit this vintage. Overall yield from the district is expected to be 30-50% down which puts these operators in a difficult position. Over the last four years they’ve led the charge in pumping out a vast range of no-name labels, supplying all takers at prices that make no sense except to the desperate and the greedy. It’s estimated that one large winery has over 70 labels on international markets, supplying importers, retailers, supermarkets and restaurant chains.

Many existing suppliers were shoved aside in the rush to secure outlets for too much wine and to grasp sources of urgently needed cash. Prices have been set well below cost and multi-year contracts signed. Now of course, these last two elements are looking rather problematic. As a contracted supplier to a UK wholesaler for Sauvignon Blanc at £23/dozen (yes, that’s correct), you’re now wondering where the wine will come from given the light season. Heading out to seize as much fruit as you can at $1,750/tonne is not the answer.

If you fail to secure the fruit and can’t supply the contracted volume, there will be problems, starting with a legal letter from the UK. If you secure the fruit at a price three times higher than you paid last season and fulfil the contract, your problems are much closer to home. Your already desperate cash position and negative GP gets much worse and the bank that’s been camped in the office for the past two years has a seizure.

For those Marlborough wineries that have been in the game a little longer and have played a more prudent hand, the good times might be just around the corner. Fewer low-price no-name labels on the retail shelf means an opportunity for higher returns. Less aggressive competition in the market offers the chance to re-acquire listings at a realistic level. Then there’s the likely implosion of the bulk wine sector, that’s been undermining profitability for too long. Much will hinge on the course taken by the banks now controlling the large and fragile wineries most likely to collapse this year. But that’s a story for another day.

Our oft-neglected friends in the Hawkes Bay are also feeling brighter. In the limited time they have at home, back from Chinese marketing trips, their closest friends will be the banks, sniffing out who best to back. Their discussions are all about sales growth and expansion. About time. Producing outstanding red wine for an audience full of praise, but placing few orders has been frustrating, to say the least.

The new buyers are eager, optimistic and pay cash up front. Not just for wine, but also for wineries and vineyards. The scale of their market suggests that demand for Hawkes Bay reds will soon exceed supply. The appetite will move to more expensive styles and for many wineries the magic word “allocation” will be back in vogue.

All this is exceptionally good for a wine sector that has been treading water for some years now. Despite the stresses on the industry, it’s remarkable that in a global recession export growth has continued strongly and that despite an obscenely high NZD, wine businesses have made the numbers work. The 2012 vintage shortfall will accelerate the completion of the rebalancing period for Marlborough, bringing closer the point where demand exceeds supply. The J-curve in sales growth for Hawkes Bay reds will rapidly ease the financial burden on these wineries and give this region a chance to focus on what its future should really be.

These two regions are the engine rooms for New Zealand wine and their prospective good health means the sector outlook is bright. Investors and lenders can re-look at wine with more confidence now than in the last five years. The industry itself is undergoing a strategic and structural re-think that is well timed. Things are looking up.

Time To Buddy Up

Wineries have always collaborated at an operational level: sharing vineyard equipment, leasing tanks, borrowing a filter, swapping ideas and advice. At a generic brand level too, the New Zealand industry is highly cooperative, establishing an impressive and united presence in key markets. However, when it comes to commercial matters, wineries have not been quite as sociable.

While collaborative, the wine sector is also immensely competitive: thousands of brands, all chasing limited retail shelf space or a prized restaurant wine listing; the astonishing growth in global demand until recently; a strong and confident entrepreneurialism amongst winery owners. It’s no wonder wine businesses preferred to do their own thing.

But that mind-set has to change. Facing a future where sales are slower and margins tighter, wineries need to reconsider their historic attitudes to commercial collaboration. Business cooperation can take a number of practical, small-scale forms:

Administration: This role can be combined across wineries for accounts, logistics, shipping & operations. A winery with a strong admin person could charge them out to others.

Cellar Door: a shared tasting room will dramatically reduce overheads. A good example is The Wine Room which markets five Marlborough wineries
under one roof. The respective brand positions do need to be carefully managed, but this is not an obstacle.

Marketing: a single well qualified person can cover the needs of 3- 4 wineries very effectively. Wineries each get the benefit of a professional at a quarter of the cost.

Sales: small wineries benefit immensely from sharing a sales team, especially in the domestic market. Unlike a commission agent or distributor, the reps are working directly for wineries and are more effective as a result. Where a larger winery already has a domestic sales team, a non-competing range from a smaller player can be added.

Export: for international sales, a one professional can handle the needs of 4 – 5 wineries on a day to day basis. Winery owners can visit the market on a targeted basis.

Collaboration can extend to forming a business dedicated to the marketing and sales of a set of wineries. The winery partners share the governance. A sales management team is recruited and run, overheads apportioned, a plan implemented and supported. As the new “distributor” need only to cover costs, there is a margin benefit to wineries compared to working with a distributor. In addition control of the winery’s brand and closeness to the market is a major advantage.

The cooperative approach can extend across the winery’s operations and business. Recent discussions Winepartners advised on covered a “swap” of winemaking and cellar door space for marketing, sales and viticulture resources.  At present we are working on an offshore distribution position for a group of selected wineries. This is a long term project that will create not only a strong brand and control position for the wineries concerned, but significantly higher margins than they would otherwise enjoy. The collaborative model has plenty to recommend it.

An Uncertain Future

The New Zealand wine industry is undergoing its most fundamental shift in form and prospects since the vine pull of the 1980s. In that case, the problem – a national vineyard planted with the wrong varieties and far too much of them – was solved with government intervention. The vineyard re-planting that followed set up the industry for astonishing success over the next 25 years.

New Zealand wine then experienced rapid growth in demand, but latterly an even more rapid increase in supply as inexperienced and opportunistic participants entered the sector. The looming over-supply was delayed for 2-3 years by lower-yielding vintages and the surge in exports to Australia. The huge 2008 vintage arrived just as orders from export markets were slowing. By then, the “perfect storm” had arrived in every market: oversupply from all producing nations, prices falling, recession dampening demand and pushing wine buyers to lower-priced wines.

With a global credit shortfall, highly geared wineries are failing. They’re unable to secure capital or produce the increased cash from sales that their business and the bank demand. There will be numerous receiverships over the next 9 – 12 months. Well known and long established labels will disappear from the shelves as weakened participants drop off. Consolidation will occur as wineries merge operations to share overheads and reduce costs. Ultimately there will be fewer brands and bigger producers in the local wine game. But for now sales of wineries and vineyard land will be limited as there is little appetite for investment in the sector.

Banks are reluctant to “fire-sale” distressed vineyards, as when they do, the entire value of their wine sector loan book will fall. But at some point they will be obliged to unload. As the price of vineyard land falls, it allows a new set of owners to enter the market at a much lower price than their predecessors. These new owners will be able to support the current, heavily discounted price of our flagship variety – sauvignon blanc – as a going concern. This presents a new threat to profitability in the sector.

The current low prices for sauvignon blanc have been created by inventory disposal – from vineyards direct to supermarket labels and from over-stocked wineries desperate to raise cash. These sales are rarely profitable. However, cheaper land prices may make the discount prices the new normal. If this occurs, price recovery from the current slump is less likely. What’s more, sauvignon blanc is harder than most wines to differentiate by quality, so the prospect of creating price tiers (value, premium and luxury) for this variety is limited.

However, export growth continues to be strong and there are many world markets yet to be exploited. Over the long term the New Zealand wine industry has a bright future. If production is managed as well as it has been in recent vintages, demand will once again exceed supply within five years. Whether the wine sector in its new form will be able to take advantage of this opportunity and profit from it is yet to be seen.

New Zealand’s Wine Writers: The Rankings

These rankings are based on our assessment of these writers’ current reach, impact, influence and standing. For wineries seeking an effective outcome from their media sampling this will provide a useful guide. We have not attempted to include in this view the career achievements, lifetime contributions or industry collaborations that many writers can claim. It’s a ranking that will change with time, as each writer’s commissions and engagements bring them to a wider or narrower audience.

The Top Shelf
Bob Campbell, Michael Cooper, John Hawkesby, Jo Burzynska,
Yvonne Marie Lorkin, Joelle Thomson

A Close Second
Cameron Douglas, Jane Skilton, Sam Kim, Sue Courtney, Warren
Barton, Rebecca Gibb, Paul White

Not Without Influence
Peter Saunders, John Saker, Kerry Tyack, Glenda Neil, Kate Fraser,
Paul Tudor, Peter Shaw, Vic Williams, Geoff Kelly, Charles
Gill, Charmian Smith, Deborah Walton/Peter Morice, Martin Gillion,
Keith Stewart

Creating a successful Wine Brand

New wineries often approach the market with strong ambition and an expectation that they will be the next Cloudy Bay or Felton Road. The reality is typically less rewarding. Simply growing great grapes and making superb wine does not guarantee success in the crowded and highly competitive world market.

Wineries tend to neglect the fundamentals of business planning when it comes to marketing. New Zealand wine is a super premium product, ranged in sophisticated retailers and top restaurants and purchased by wine-involved, affluent consumers. The choice of a wine, amongst tens of thousands on offer, is driven by many different factors.

The single most influential factor in creating a successful and sustainable position in the market is the core Brand Message. This is delivered through the media, the internet, wine retailers, sommeliers and a consumer’s personal contacts. Getting it right is vital to your wine brand’s success – short and long term.

The second most important success driver is the adoption of a long term Marketing Strategy. This dynamic plan directs the implementation of the Brand Message through all media:

- packaging and labels

- brand material (brochures etc)

- web activity

- promotion, advertising and PR

- trade support & communication

- sales actions

Without these two core marketing elements, your fine wine may not find its consumers fast enough. The wine sector is littered with small businesses that are overloaded with aging inventory of medal winning wines. Slow sales means slow cash: no business can afford that for long.

The Brand Message and Brand Story

Your Brand Message provides the fundamental guidance on what is unique and compelling about your brand to the key audiences: consumers, trade and media. It is supported by your Brand Story – the brief script you repeat constantly at tastings, to sales people, with media. It must be entertaining, have depth and richness, be truthful, easily remembered and encourage its own repetition. This consistent repetition will be the major force in defining and creating your brand in the market.

A well defined Brand Message allows you to:

- Brief and direct creative providers accurately and effectively: designers, writers, PR, web agencies, advertising and so on.

- Keep on track and on budget with expensive and critical projects such as label design, website creation, advertising material, promotional activity.

- Ensure your message is listened to, understood and repeated by your distributors, the wine trade, media, consumers and of course, your own staff

- Be true to your original ambitions and objectives for your wine business over the long term

- Intelligently adapt your marketing approach to remain relevant as the market evolves

- Avoid expensive distractions that may appeal in the short term, but provide little long term gain

Make it Happen

There’s too much at stake for a young wine business to not take the long term view on their new brand. Work with a brand marketing specialist to create the brand framework you’ll need. Avoid letting a designer or PR person take point on this project – few have the specialist insight required.

Ideally you’ll be with a brand expert who understands the unique nature of the wine category. This is important: wine marketing and the global wine market require perspective, experience and insight that is particular to the sector. The asset you’re creating with your wine brand will have immense value, so don’t put its creation in the hands of a marketing generalist.

A new brand for New Zealand wine

The wine industry has been praised for its marketing and promotional efforts, but the implication that clever marketing has led to a high-end position globally is wrong. In many markets the premium sought by NZ winemakers for Sauvignon Blanc has always been questioned – Germany, Benelux, the USA, Japan for example. Those markets have never attached a high value to our distinctive, but simple white wine hero.

Now, with excessive supply, the price position once enjoyed in valuable markets like the UK and Australia is plummeting. We have to ask ourselves: Was scarcity the driver of price – not smart marketing or a distinctive wine style?

What has always been lacking is a genuine shared vision and intelligent brand development for “Wine NZ”. This has never been a priority as the primary focus was on planting and selling.

It’s time to re-think what NZ wine – the brand – has to offer the world. Premium priced Sauvignon Blanc may well be a lost cause, but we have Pinot Noir to consider: both as an exceptional opportunity and as a looming supply issue. The promotional efforts of the past need to be discarded and a strong, relevant and compelling brand position developed.

Sauvignon Surplus Solved?

Perhaps the angst over all that surplus Sauvignon Blanc is misplaced.

According to NZ Winegrowers the projected demand for branded (bottled) NZ wine from vintage 2010 is 265,000 tonnes. Their production forecast is 283,000 tonnes, suggesting a need to move 18,000 tonnes in bulk form to balance the equation.

If my maths is right then the projected 2010 surplus is just 6.3% of the harvest. Hardly a crisis.

Better still, the growth for bottled NZ wine exports in 2009 (MAT) was about 9%. If we maintain that growth, then NZ will have demand for 288,000 tonnes in 2010/11.

Quite logically, the 2010 production forecast is equivalent to the total current processing capacity for the entire industry, says NZWG. Without a lot more stainless steel fabrication the intake for 2011 onwards won’t be able to grow much from the 2010 forecast of 283,000. Meaning less production than forecast demand.

That looks like a very good thing. Flat production, 9% growth per annum, the 2010 vintage surplus absorbed and the 2011 vintage selling into what may well be an under-supplied world market. Problem solved?

The Toughest Market

With jobless figures at 15 million, the largest since the Great Depression, the United States is in the depths of a severe recession. Wine sales are down 11.2% in the premium category and demand for wine over US$20 has plummeted. Forecasts for the NZD suggest a cross rate of USD0.80 by mid 2010. Is this really a market New Zealand wineries need to be in?

The United States has been one of the most attractive markets for NZ wine over the last decade, but also one of the most challenging. Despite the best efforts of motivated importers, the success of brands they manage is determined by powerful state distributors. Over the 90s substantial consolidation in the distribution tier has meant fewer players, each with a massively overweight portfolio of wines. Even established and successful brands are struggling to secure the sales they require. New brands have little chance of gaining a new position.

Demand for premium wine – New Zealand’s market position – is falling, while consumers shift their purchasing to value priced wines. Restaurant business is shrinking, as diners go out less often and when they do, they spend less. Distributors are downsizing their portfolios and importers are failing to place new wines into this tier. As a result, the importers have closed the door on new brands in their own range.

Young wineries from foreign sources such as New Zealand have little chance of finding a good partner in the United States. This group includes both large and small operators, award winners and no-names.

The weakness of the USD and the increasing strength of the NZD make the prospect of working the US market even less attractive.

However, the United States has experienced 15 years of constant demand growth and has risen to become the second largest wine market in the world. Even in recession the news isn’t all bad. According to Nielsen, U.S. wine consumption continues to grow overall because “people see it as an affordable indulgence”. While some classes of wine are falling, especially wines priced over $20, other varietal niches such as Malbec and Rieslings are growing.

New Zealand wine exports to the United States continue to expand – up 19% for the year to end November 2009. Much of this surge is driven by bulk Sauvignon Blanc, which accounts for almost 50% of the growth in the past year. While the US market is being trained that wine from New Zealand can be very affordable, it is also showing interest in our higher priced premium reds with pinot noir up 10% over the last year.

Despite the challenges, the United States is a market that cannot be ignored. It’s too big, too influential and once it’s out of the doldrums will offer huge opportunity to New Zealand wineries. It makes sense to find a position even in the downturn, in order to be positioned for market recovery. But how can access be secured when importers’ doors are closed?

One approach is to implement the collaborative model: like-minded wineries forming their own import group and hiring experienced, well connected US sales representatives. The availability of top quality, proven wine sales professionals has never been greater, as US companies downsize in the recession. Warehousing and logistics can be handled by specialist providers on the East and West Coasts. This strategy is now highly relevant and would insert a solely New Zealand oriented wine supplier into the market. Right now may just be the ideal moment.

Your brand – Lost in Space?

When you’re talking about your wine brand every day it’s easy to believe that the market understands it as well as you do. Talk to wine writers, overseas visitors, your importers, consumers at a tasting, and you know they’re interested in what you’re saying. They’re engaged with you and listening to your brand message. But you have to hope that when they move on, they remember the key things about your wine brand – enough to make them try it and hopefully recommend it.

But we know that consumers retain very little from most encounters with wine brands. With so many wine brands in the market, the competition for consumers’ attention is truly overwhelming. Your brand is a very small star in a universe of supernovas.

To shine brighter than the other brands out there you need a strong, clear and consistent brand message. This is the script about your wine and your brand that you repeat ad infinitum at every opportunity, to all your audiences. But be aware: how they receive depends on who they are.

Think about it this way: your brand is the Sun and your audiences – trade, media, consumers and distributors – are the planets of a Solar System. Your brand message is a radio signal heading out into the galaxy.

The closest audience to you are your Distributors here and overseas. Their role is to represent your brand and pass on those key brand messages. They’re the closest audience to you: they hear you better and understand what you’re saying. It’s Earth: life as we know it. Distributors expect to be sent strong, clear and detailed brand messages and they receive them without interference. As a result they’re in the best position to pass on your brand message to other audiences such as the Trade.

A long way further out is the Media – a bit like Mars in our Solar System. They receive your radio signal, but it takes time to get to them and there is a lot of static that interferes with reception. The Media can accept and log reasonably simple messages about your brand and then re-broadcast them to Consumers & Trade. However, they deal with a lot of radio traffic from all around the galaxy, so your signal (brand message) needs to be consistent, clear and compelling to get their attention.

The Trade are located far from the warmth of your Sun/Brand. Like the Media, they get a huge number of radio signals, not just from our galaxy (NZ) but from around the universe (the world of wine). Distributors orbit a bit closer to the trade, so their signals often get through when yours don’t. The Trade are like the Media: the brand message needs to cut through a lot of static and clutter. Their orbit is in a remote area of your brand’s solar system. Think Neptune.

Finally, at the furthest reaches of the solar system are the Consumers. A huge gas giant, this mysterious celestial body can barely make out the weak radio signals that reach them months after dispatch. To them, your Sun/Brand is just another flickering star in a vast, glittering universe of choice. Planet Media is a far closer source and much easier to hear.

It’s easy to see that each of your audiences receives and interprets your brand message differently. You can’t assume they’re on familiar terms with your brand and winery. Create and refine your Brand Message, then broadcast it clearly and consistently. Tailor your message to suit your audience and the distance they orbit from your brand.

New wineries – same old mistakes

We regularly see the same mistakes being made as new wineries enter the market. It’s odd that owners of new wineries, having been successful in other fields, often fail to implement business basics with their new venture. Winemaking and marketing is one of the most competitive, capital intensive and risky sectors around, but it has had an inappropriate reputation as a lifestyle or trophy investment. Those who enter the category with either of these two concepts in mind rarely see a return on their capital.

Here’s a look at some of the gaffes new wineries make – if this looks familiar, don’t feel too bad, you’re one of many.

All Vision, No Plan
People entering the wine sector are entrepreneurs – investors with a vision, funding, and plenty of energy and optimism. Plunging huge sums of money into a new vineyard with a wait of four years for their first cash return takes courage. Add on the capital for a winery and a cellar door with operating overheads and interest costs and it’s a venture of heroic proportions. That takes an unshakeable belief, access to serious financing and a plan that lays out the why, how, where and when for the wine business that’s been founded.

The truly surprising thing is that while the vision is always strong, the plan rarely exists outside the owner’s head. Vineyard development, grape variety options, potential wine style choices, even bottle shapes and label designs absorb new wineries. Business planning is an unwelcome distraction and anyway, making sales is a long way off, well after harvesting, barrel aging and blending. The wine will surely be spectacular – an award winner that will sell itself.

Taking this approach in any other sector would never be tolerated, yet in wine it happens commonly. The result is wine in the bottle with insufficient sales, a new vintage just around the corner and not enough ideas on where the money’s going to come from. Winegrowing is one of the few sectors where the farmer is also the processor and the marketer/salesperson. Each of those roles demands precise skills and a managed approach.

Planning is a crucial precursor to success and it’s a live, ongoing process, not a dusty sheaf of paper in a drawer. Formal planning provides the business and all its stakeholders with a shared view of how objectives will be achieved and growth managed. A simple winery business plan should contain these things: the vision, mission and objectives of the winery; an assessment of the market opportunities, risks and competition; marketing strategies including product, brand, distribution and resources required; production and sales forecasts, financial budgets and assumptions. If you don’t have a formal plan for your wine business, now’s a good time to get started.

Ignoring the Brand
Brand Architecture (aka brand identity, brand footprint, brand DNA) is the set of statements and concepts that together define what the new wine brand is all about. This is not just for the winery, but for the trade, media and consumer audiences that are the brand’s targets. It’s vital for the winery to be able to communicate clearly, concisely and consistently why their story is interesting and relevant. If they can do that well, it will be much easier for the market to embrace their wine. New wineries tend to bypass this step – that’s a big mistake.

The brand architecture examines and defines the key attributes of the brand. It provides guidance and cohesion to the look of the brand and its message. It provides a road map on how to market and sell the wine brand, minimising debate and costly non-core marketing activity. It’s created by marketing specialists who understand branding. Not designers; not advertising agencies; not printers. The brand architecture must be created in concert with the new winery and by marketers who are close to the fundamentals of the wine sector.

Strong brand architecture will identify the target audiences and their motivators; specify the brand identity and values; define the brand rational and emotional attributes; state the brand essence, the brand proposition and the story; and finally nominate the tagline or slogan. The brand footprint also enables the development of the brand visual identity by a designer and ensures their skills are best directed. Without a design brief led by the brand architecture, design costs can and often do blow out alarmingly.

New wineries often struggle with this aspect of their young business, as brand work is an intangible, specialist area. Unlike tractors, barrels and wind machines you can’t touch it or see it. Yet experienced wineries clearly understand the importance of getting it right with the brand early on. A casual approach to branding leads to a confused, diluted message, ad hoc activity and high costs. In the marketplace, that spells failure.

We’re all Designers at Heart
Creating their wine label at the earliest opportunity seems to fascinate new wineries; it’s as if this is a guarantee of their future success. It’s certainly something to show your friends when the shots of the infant vineyard aren’t holding their attention.

But wine labels are only part of the entire visual identity of the winery’s new brand. In addition to the label and logo, there will be signage, a website, brochures, shelf talkers, banners, cartons, stationery and so on. These elements all need to work together to ensure cut-through, distinctiveness and memorability. The brand’s visual identity should support the brand’s positioning, its price point, provide suitable cues to the target audience and work with possible new elements, such as a sub-brand or even an upper tier.

Without creating the brand architecture first, one that has a target audience in mind and a clarity of message; without a clear and concise brief to a designer, that leads to the visual identity and logo, the new winery has a label that has been created prematurely and in isolation. In a highly cluttered and competitive environment, the wine label needs to work effectively as part of a brand communications suite.

DIY Marketing & Sales
The wine sector is populated by a large number of underachievers. Not in viticulture and winemaking, but in branding, marketing and sales. The wine may be great, but the other elements in the marketing mix don’t work quite so well. DIY is usually the diagnosis here.

Many new wineries believe that the hard work starts and ends in the vineyard and cellar. “Once the wine’s in the bottle, the world will be beating a path to our (cellar) door. The marketing and sales can’t be so hard, we’ll do it ourselves.” Others come out of a business background and believe that their professional skills and contacts will ensure rapid and ongoing success. All are imbued with dangerous optimism and insufficient knowledge of the wine category, trade and consumers.

The audiences a winery speaks to about itself and its product are relatively sophisticated and they are spoiled for choice. From the global corporate machines to the top ranked, iconic wineries the key audiences (media, trade & consumer) receive well tuned and finely crafted brand messages. They are constantly flattered, hosted, rewarded and thanked for their attention and spending power. A new winery has to cut through all this clutter and static to bring the focus onto their new wine brand. This is hard work, it’s specialised work and rapid results are required.

Put it this way: You wouldn’t ask a marketer to make the wine – would you?