Out of wine into beer?
All good things come to an end. After ten years of rising export volumes, Australian winemakers could lose their price advantage on the international market as the Australian dollar trades near a 23-year high and a record drought pushes up the cost of grapes.
It’s funny old world. In the old days, those who changed their minds often were called airheads. Today, they are called analysts. Why? Well, who but analysts could get away with contradictory recommendations all in the space of a few months? Agreed, market conditions may change, but what about the poor lot called employees? What are they to do with their company’s shares, which they receive as part of their salary? Watch the value of their work diminish? Live with the knowledge that no matter how hard they strive, all is futile should the financial markets decide otherwise?
These days you have to have strong moral fibre if you work for the Foster’s Group. Each morning you open the newspaper you will find some article criticising the management’s decision to move into wine 12 years ago. Now that’s tough. Because it implies that Foster’s management had a choice. Which it did not. Readers will remember that Foster’s only bought into wine because its domestic beer market had started its long-term decline. Also its management then reckoned that a few strategic acquisitions would get it to the top of global wine companies. So it paid USD 482 million for Australian wine company Mildara Blass. In 2001, it moved into California with the purchase of Beringer Wine Estates for USD 2 billion, and in 2005, it paid USD 3.2 billion for Australia’s top wine company Southcorp, the maker of Lindemans, Rosemount and Penfolds wines.
And today? Foster’s and other listed Australian wine companies are faced with either cutting profit margins to keep brands competitive or raising prices and risking a decline in their 10 percent share of global wine exports. Some dilemma, we’d say. Because whatever choice they take will weigh on their shares for some time.
Shares in Foster’s, the second-largest winemaker in the world after Constellation Brands, fell more than 7 percent in 2007, the stock of wine company McGuigan stock lost half of its value.
Foster’s and McGuigan, which generate almost half their sales overseas, deal with an Australian currency that has gained significantly in value against the U.S. dollar. The falling U.S. dollar and rising Euro also stand to hurt exporters in France, Italy and Spain, the three biggest wine-producing nations, while benefiting U.S. wineries.
At the same time, vintners in Australia, the world’s fourth-largest wine producer, are also being squeezed by the most severe drought in the country in a century.
The cost of grapes from the 2007 harvest rose 5 percent from the previous year, according to Australian Wine & Brandy, a government body. The average price per bottle rose 2 percent in 2007, the largest increase in eight years and the first since 2003, it was reported.
Australia exports more than 5 percent of its wine production, the second-highest proportion of output among the top 12 producers in the world after Chile, according the Australian Bureau of Statistics. For comparison, France only exports 33 percent of its wine, Italy and Spain about 29 percent and the United States 16 percent.
The 2008 harvest, which will start soon, may be as low as 800,000 tons, about 43 percent less than the 2007 harvest of 1.4 million tons, according to the Winemakers’ Federation of Australia.
As Foster’s has to buy about half the grapes it uses to make Australian wine, the higher prices and increased scarcity will lead to higher costs and may even force the company to import supplies, analysts believe.
