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.

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