Wine industry returns to profitability

Profitability is returning to the wine industry, although small winemakers may still be doing it tough, according to Vintage 2013, the latest benchmarking survey of the industry's finances by accounting firm Deloitte and NZ Winegrowers.

Bigger may be better when it comes to making money from wine, with the survey showing that the largest winemakers, those with revenues of $10 million or more a year, produced pretax profits in double digits as a percentage of sales.

However, the smallest producers, those with annual revenues up to $1.25m, made average pre-tax losses equivalent to 5.5 per cent of sales. Those with revenues between $1.25m and $10m earned average pre-tax profits in the 6.5 per cent to 7.5 per cent range.

Deloitte partner Paul Munro said that while a second successive year of increased profitability showed a sustained turnaround in the industry, the positive results clearly favoured the larger end of the market.

"Successful business models certainly exist within the smaller wineries but the survey results appear to show that it is more difficult to generate acceptable returns at the smaller end of the market," he said.

The survey also found that average revenue per case of wine sold ranged from $88.85 to $113.31.

However, the smallest wineries were on average making a pretax loss of $9.73 per case, while the largest winemakers made an average pretax profit of $17.96 per case. The survey also found that debt to equity ratios had fallen across the industry, with all but the largest companies having debt to equity ratios below 50 per cent.

"It appears that the expected pressure that lenders would be exerting on wineries to reduce debt levels is starting to materialise," Deloitte said.

And although financial performance in the industry was improving, it would need to improve further to put it back on a firm footing.

"Gross margins are still below assumed sustainable levels. However, in comparison to prior year results, higher gross margins and mostly higher ebitda [earnings before interest, tax, depreciation and amortisation] levels were achieved through cost rationalisation, which illustrates that wineries are being forced to manage their expenditure carefully to remain profitable," Deloitte said.

Munro said the widening gap between the profitability of the largest and smallest wineries could open the door to mergers and acquisitions, as well as increasing interest from wealthy overseas investors.

But wineries looking for partnerships should be careful about who they jumped into bed with.

"It would be prudent to select the [other] party carefully and ensure due diligence is undertaken," Munro said. "Overseas investment can be useful provided the investor's interests are aligned, and they have a level of emotional engagement and skills to bring other than just money."