Australian wine sector still facing strong headwinds

Posted by Isobel Drake on 16th November 2009

The ongoing oversupply of grapes and a volatile Australian dollar are exacerbating the difficulties faced by many Australian wineries, according to the annual financial benchmarking survey for the Australian wine industry – Vintage 2008 report, released today by Deloitte.

In its tenth year, the Deloitte survey examines the financial performance of wineries across Australia for the 2008 financial year, and is based on the individual financial results and information provided by wineries.

Red wine and bottle - Foster’s wine review

“The fluctuating Australian dollar is making wine more expensive in overseas markets, where traditionally our brand image and reputation has been for good quality, inexpensive wines,” Deloitte audit partner and leader of Deloitte’s Wine Industry group, Stephen Harvey, advised.

Mr Harvey said that the glut of supply had not helped Australian winemakers when it came to promoting the high quality of our offerings.

“The wine industry has struggled to focus attention on the quality of our premium brands in these overseas markets,” he noted. “The continued supply of large amounts of high-quality wines at lower prices has made their task more difficult. The perception that Australia is only a volume producer has almost made us a victim of our own success.”

“The Australian dollar fluctuations during 2008 and 2009 and the now strong exchange rate have had a substantial impact on the price Australian wine businesses can afford in order to get their wine into overseas markets,” he added.

Mr Harvey believes the industry needs to make some hard decisions, after it produced a near-record grape crush in the 2008 vintage.

“While the drought and heat waves across South Australia and Victoria during the vintage period did not appear to have a negative impact on the actual 2008 vintage yield, it can’t just be about increasing our volumes every year,” he said. “There are going to be thousands of hectares of vines that won’t be picked this year.”

“For those wineries that savour the long-term view over the rush to get ahead, the glass is still half full.”

Significant findings of the Annual financial benchmarking survey – Vintage 2008 were:

$0-$1 million wineries
Wineries in this group had a lower average earning before tax (EBT) of -7.4% of revenue in 2008 compared with to an EBT of 1.9% in 2007, in part due to their gross margin decreasing by 7.8%. This category also had an interest expense of -7.7% of revenue compared with a target of 5% of revenue as recommended in the benchmarking guides.

$1 million – $5 million wineries
Reporting an average gross margin of 48.5%, the highest of all categories in the survey, wineries within this group recorded a sharp rise in EBT to 8.2% in 2008, compared with -8.7% in 2007.

$5 million – $10 million wineries
This group recorded an EBT of 0.8% of revenue, compared with 9.8% in 2007. Average gross margin for 2008 of 40.6% of revenue was less than the sustainable level of 50% suggested in the benchmarking guides. The drop can be attributed to an increase in general administration costs from 23.4% to 28.1%.

$10 million – $20 million wineries
The average EBT for the $10-20 million wineries was -7.4% of revenue compared with 7.4% in 2007. Average gross margin for 2008 of 34.7% of revenue was considerably less than the sustainable level of 50% of revenue suggested in the benchmarking guides. Within this category, 60% of the participants recorded a loss for the financial year ending in 2008.

$20 million+ wineries
Wineries with revenue over $20 million had positive EBT growth, up from 18.8% in 2007 to 22.1% in 2008. An average foreign exchange gain of 9.3% of revenue added to the strong EBT results of wineries in this category.

Best performers
Wineries termed ‘Best performers’ represent the top quartile of wineries for the $0-1 million, $1-5 million and $5-10 million categories based on their profitability as a proportion of sales.

Wineries in the $0-1 million and $1-5 million categories achieved an average gross margin of more than the suggested 50% of revenue in the benchmarking guides, and earnings before tax of around 20% of revenue. The $5-10 million category had an average gross margin of 45.6% and achieved earnings before tax of 12.7% of revenue.

Domestic wine sales
During 2008, the best performing wineries in both the $0-1 million and $1-5 million categories sold over 75% of their wine volume in Australia for between $15 and $50 per bottle. Best performing wineries in the $5-10 million category sold around 65% of their wine in this price range.