Investing in wine covers much more ground today than it did when I first penned this section in 1997. Since then there’s been a plethora of new investment schemes in bottled wines, many of which are unlikely to deliver on their promises. There’s also been spectacular growth in a brand-new industry of commercial cellaring facilities. The greatest change, however, has been in the extraordinary focus at the top of the food chain in Australian wine of single-purpose publicly listed wine producers. Australia’s five largest wine makers processed 936,120 tonnes of grapes during the smaller-than-anticipated 2003 vintage, out of a national total of 1,360,601 tonnes. That equates to just under 69% of the entire crop. The largest producer, The Hardy Wine Company, is owned by Constellation Brands Inc., which is listed on the New York Stock Exchange. Next comes Southcorp Wines Ltd, listed on the Australian Stock Exchange (ASX). Then Orlando Wyndham, whose parent Pernod Ricard is listed on the Paris Stock Exchange, followed by McGuigan Simeon Wines (ASX) and Beringer Blass Wine Estates, whose parent company, the Foster’s Group, is also listed on the ASX. Next up are our two largest family-owned producers, De Bortoli and Casella, which owns the spectacularly successful [yellow tail] brand. So, it’s now possible for small wine investors to take a stake in the top end of the Australian wine industry, as well as in an increasingly large number of smaller and medium-sized producers such as Evans & Tate, Peter Lehmann, Reynolds, Xanadu and the Lion Nathan Wine Group owned by the Australasian brewer Lion Nathan Ltd. The 1990s proved to be the decade of corporatisation in Australian wine. The second half of this decade was also a time of optimism and prosperity in Australia, resulting in unprecedented returns from publicly listed wine companies as exports spiralled and the domestic market went into overdrive. Sadly, this period also set the expectations for wine industry profits for the longer term at an unreasonably high level. Using EBIT (Earnings Before Interest and Tax) as a measure of performance, most Australian wineries rate around 11% of sales income. Much lower than this, and it becomes difficult for a winery to remain in business. Most wineries target an EBIT of 15%, while the industry’s top performers now pull in an EBIT of 30%. In its heyday prior to its reverse take-over of Southcorp, Rosemount is likely to have been pulling in an EBIT of more than 40%. With the industry’s change from a traditional family-owned business model to a corporate one, fund managers and share analysts now take a more active role in the process of operating wine companies. Some winery management decisions are being made to please the short-term requirements demanded by the share market, ahead of the long-term strategic interest of the companies themselves. In particular, funds are being diverted away from necessary long-term capital requirements, such as the inventory of oak cooperage and other infrastructure, in favour of the need to be seen to be returning profit and dividends to shareholders. The risk is simple: wine quality, the industry’s inherent edge, may actually be compromised. Until the investment sector moderates its profit expectations from wine, and accepts that it is a long-term industry subject to economic cycles on a five-year basis, the ongoing differences between the short-term requirements of the share market and the long-term interests of the wine industry will remain mutually exclusive. The wine industry is now a victim of its own success, as having been seduced by its remarkable run in the late 1990s, funds managers and share analysts are quick to point the trigger at companies performing below these historically high levels. Wine is a long-term business. Long-term success demands strong brands and healthy distribution. The large and medium-sized Australian wine companies have both. Fifteen years ago, Australians were unashamedly borrowing from European and American sales models and even copying labels. Today however Australian wines are perhaps the most emulated in the world. Local brands like Penfolds, Rosemount, Lindemans, [yellow tail] and Jacob’s Creek are amongst the most valuable in the world, but their value is constantly being under-estimated. The present difficulties of corporate Australian wine are well known and well publicised. Southcorp has taken a hammering, the extent of which is perhaps greater than the company actually merited. Today the market still appears to be concerned over the supposed over-supply of Australian wine, while on the other hand expert industry forecasters are predicting a serious run of smaller than anticipated vintages. There is already a genuine shortage of Australian white wine, and a red wine shortage is likely within three years. In last year’s edition, I wrote about my concerns with the Australian Wine Exchange (AWX), which enables people to buy and trade shares related to wine. Almost a year to the day I penned those words comes news that this venture is to close down. While there is absolutely no joy in seeing a small business fail to achieve a level of sustainability, perhaps its future closure reflects a sea change in the way people consider investment in bottled wine. In short, there has been a reality check, as potential investors are gradually coming to recognise wine investment for the poisoned chalice it usually becomes. The last year has seen the hysteria surrounding the release of the 1998 Penfolds Grange. If you were one of the lucky who bought at $300 and sold at $800, you might think that wine investment was easy. If you were one of those who bought at $800, I want to know what you were thinking. The last time a Grange was released to such a reaction was the 1990 vintage, which rapidly shot from under $200 to around $600. This great vintage of Australia’s flagship red now fetches $500, less than it did five years ago. Much of the recent price increase in premium Australian wine has been a direct consequence of the over-enthusiasm displayed by certain opinion leaders in the US towards what are now slowly being recognised as the false idols of this industry. Given the tightening of the US economy and the realisation amid certain quarters in the US that they might have been excessively bedazzled by the glossy exterior of certain Australian offerings, things are beginning to change. It’s too early to declare that the bubble has burst, but not too early to say that the wheel has begun to turn away from the so-called ‘cult’ Australian labels. To make a success of investing in bottled wine you need volume and a market. The amounts produced of our proven performers on the secondary market are still vulnerably small, while the market has yet to develop a proven willingness to pay what are often the ridiculously high prices demanded by those who do attempt to cellar wine for a living. As I wrote last year, Australia’s genuine classic wines from top vintages from makers with sound reputations will provide a return on investment, as well as ultimately being a better drink, which is after all what they were made for. They’re what this book makes an honest attempt to identify. But, as they become better known around the world, it’s getting harder to find them in significant quantities, especially at the right price.
