Wine share market

Thinking of investing in wine shares? Do it, but only if you know what you’re up to. Recent years have seen unprecedented growth in the value, profit and interest in wine industry shares, but you only have to go back to 1995 to seen the other side of the story. Back then, after a tough vintage, BRL Hardy Ltd, Australia’s largest pure listed wine stock, was valued around $1.50. Today it is around $6.60, although earlier in the year it peaked at over $7.95.

As Darryl Paul from Macquarie Equities confirms, it’s cautiously ahead for wine stocks. The market isn’t rating wine companies as highly as it used to on a price-earnings basis. ‘The market is factoring in more caution, although there are some exceptions like Peter Lehmann Wines’, he says. There have been some rumblings in the wine share market, caused by issues like the Kingston Estate scandal in which the illegal additive of silver nitrate was found to be added to Australian wine. ‘After a few shocks the sentiment does change’, says Paul. ‘But most stocks are still beating their forecasts and while the momentum in the sector has still been strong, this has certainly turned along with earnings momentum in this respect.’

Paul cites reasons like reduced domestic sales and the destocking in the retail market much of which I believe has to do with the introduction of the GST with the dampening of the industry’s outlook. ‘Perhaps the optimism based around good volumes of domestic sales with people drinking better and a higher spend per bottle has run its course’, he suggests.

On the other hand, there’s still a very good chance that exports will save the day, especially since Australian wine is nowhere near saturating any of its export markets, especially the US, the UK and Germany. Recent falls in the AUD only serve to make Australian wine even more competitive in these markets.

So, as the share and finance industry is rapidly discovering, there’s more of a difference between beer and wine than mere alcoholic strength. Breweries have traditionally played a solid role in the standard investment portfolio, and for all the right reasons. Their product is consistent and hardly varies from batch to batch, let alone season to season. Beer requires water, hops and grain, usually barley. Because the grain doesn’t have to ripen to the same extent needed for flour or milling, it’s harvested comparatively early while relatively moist, virtually guaranteeing a satisfactory crop every year. Hops are similarly consistent, while water of sufficient quality for brewing is omnipresent. Hell, some of Australia’s best beer is even made in Adelaide!

Beer is cheap to make. Ask any brewer why beer is as expensive as it is and they’ll all have the same answer – the government. Sure the wine industry is being treated abysmally by the boffins in Treasury, but the brewers will tell you they have been milked for generations. But there’s still good profit in beer and people will buy the stuff virtually irrespective of what it costs.

Beer is strongly branded and loyally purchased. Once a Victoria Bitter drinker, always a Vic drinker, irrespective of how much XXXX might be on discount. Breweries start panicking once they lose a mere fraction of market share, so strongly can they depend on the loyalty of their markets.

Little wonder that breweries have traditionally been such a sure long-term investment. Maybe not as dynamic today, but you know they’ll be there tomorrow.

Wine could hardly be more different. It can be made using processes as sophisticated as those which put man on the moon or with techniques and traditions that predate the Industrial Revolution by centuries. Yet the raw materials from which wine is made – grapes – are as dependent on the sun and the rain as any agricultural enterprise. It’s no accident that wines have vintage years on their labels, for a vineyard that makes a stellar wine one season may produce another nigh on undrinkable the next.

Even our larger wine companies, most of which can be traded on the share market directly or indirectly, are at the mercy of the seasons. Each of Australia’s four largest makers, Southcorp Wines, BRL Hardy, Fosters Brewing and Orlando Wyndham, have spread their vineyards over a large diversity of wine regions in a bid not only to create diversity of their wines but to spread their risks in difficult seasons. Despite this, a poor flowering and some unseasonally hot, then damp weather during the 2000 growing and ripening season reduced Australia’s national crop from an expected 1.3 million tonnes to 1.13 million. Southcorp, whose intake actually reduced by 6 this year, has already used this as a reason for a downwards revision of profit forecasts. Others will doubtless follow.

So even the mighty are at the mercy of the elements. It’s so easy to ignore this fundamental fact while browsing the glossy predictions of new entrants to the share market. In my experience most recent prospectuses and forecasts for new wine industry developments have erred strongly to the wild side of optimistic. Incredibly, that hasn’t dampened the enthusiasm of those with the highly-publicised excess of investment capital earmarked for wine.

Wine is becoming more expensive to make, not cheaper. In recent years grape prices have soared as the industry’s potential to supply export markets has succeeded the amount of fruit available to it. After a correction in 1999, grape prices for 2000 are holding. Meanwhile, prices for imported oak barrels which are essential for much premium wine, are increasing. Imported bottles and corks are going much the same way.

Drinkers of bottled wine are more inclined to buy around and taste a range of brands, rarely settling for any lengthy period on a certain brand or product. The very nature of wine culture makes the sort of brand loyalty witnessed with beer seem out of touch and primitive. Everyone is looking for something better, at a better price.

While a brewery can experiment about and quickly respond to changes in the marketplace with low alcohol beers, cold-filtered beers and dark coloured beers, it can take about three years to create a new wine from a fresh idea. Wineries have been typically slow to respond to change, simply because unless there’s a supply of grapes lying around which happens to be perfectly suited to the new idea, it takes around three years to get a half-decent crop from a newly established vineyard.

But don’t get me wrong. Wine has clearly arrived as a potentially valuable and worthy type of share investment. It just requires more understanding and a different approach from other traditional shares, especially beer, to which it is often compared. In Europe vignerons have business plans which take into account what they’re leaving for their grandchildren. As Australia becomes more a part of the world wine market the more we’ll find that’s the sort of industry it really is. Please login to post comment