On February 22 at 12:51pm, New Zealand Winegrowers CEO Philip Gregan was in Christchurch for a business meeting–when everyone and everything around him began to shake violently. Three weeks on, Christchurch is still digging out from the 6.8-magnitude earthquake (though perhaps acknowledging the good fortune to be spared Japan-like devastation), the worst natural disaster New Zealand has experienced in its short history.
Gregan returned to Auckland safely. But it wasn’t as if peace, quiet and serenity awaited him there. The New Zealand wine industry–for which Gregan is the public face–has a uniquely ominous cloud of its own design hanging above it.
The industry is moving into the 2011 grape harvest that’s barely started, but it’s already characterized by oversupply and associated economic woes. Over the next several weeks, the rare lulls between growers’ and winemakers’ hours-long spells of picking and processing grapes that normally mark a harvest will be rife with finger-pointing–particularly at Gregan, but also at each other, the international-conglomerate-controlled wineries and even the banks. While no one doubts that plenty of producers will make high-quality wine this year, speculation is widespread as to who will actually still be in business when the season’s final grape is picked.
The 2009 and 2010 vintages saw relatively flat production volume amidst the economic crisis and in the wake of a massive bumper crop in 2008. But this year, New Zealand’s wineries are projected to produce a whopping 310,000 metric tons of grapes–a significant boost from 2010 yields. That would be a good thing if all signs pointed to a strong global economy as well as worldwide demand for that much wine from a tiny island nation in the South Pacific.
But the situation is such that grape prices are the lowest they’ve been in a decade, land prices are severely depressed (transactions are practically nonexistent), and the New Zealand dollar is too strong to encourage robust export activity. It’s a safe bet that in 2011 New Zealand will produce and sell as much modest-quality bulk wine than high-quality selections that find their way onto fancy restaurant lists and shelves in wine shops around the world.
However, under-fire Gregan needn’t worry. And neither should the vast majority of New Zealand’s growers and winemakers. Painful a vintage as 2011–and perhaps a couple more years–promises to be, there’s only really one thing to say to New Zealand’s wine industry once the books on the harvest are closed:
“Congratulations–you’ve made it. You’re now officially a successful wine-producing nation.”
Those are probably especially difficult words for anyone in New Zealand to hear. If there are two things Kiwis don’t like, they are being indistinguishable or unrecognizable from everyone else, and having a low-quality product of any type in the global marketplace with the words “Produce of New Zealand” stamped across the packaging. But such is the long-established reality of the global wine business; there’s more mediocre wine than good, and in any successful wine region the few Screaming Eagles stand on the shoulders of the hundreds or thousands of critter labels. New Zealand is simply learning this later than the rest of the world’s wine regions–and in a much more compact, painful time span.
Like a teenager stumbling uncomfortably into the challenges of young adulthood, the first signs that New Zealand’s wine industry was achieving market maturity appeared when New York Times wine columnist Eric Asimov wrote in 2007 that “New Zealand Sauvignon Blanc used to be a go-to bottle for its piercing, vivacious refreshment. You can still find wines like that, but you have to choose carefully among producers.” It’s difficult to think of another long-established wine region where this isn’t the case, from Napa to the Northern Rhone. In terms of New Zealand, however, Asimov was especially prescient.
Today, between one-third and one-half of what comprises New Zealand export wine is bulk. In layman’s terms, this means that a supermarket chain or importer in the U.S. or U.K. pays pennies per liter of Sauvignon Blanc that a New Zealand winery produced but doesn’t want for its own, established brand. The wine is shipped overseas in a large bladder to the buyer, who bottles it, labels it with a cute brand and puts it on a store shelf for $10. The quality-driven, estate-bottled winery that can’t get its product to shelf for less than $15 is, obviously, painfully undercut.
Just a couple weeks ago, my friend and fellow blogger Jayson Bryant visited the U.K., and filed this dispatch about how many cheap, one-off brands of New Zealand Sauvignon Blanc line store shelves in that country. Even though there might be plenty of people who enjoy these wines, which then act as a gateway to higher-end bottles (New Zealand sales are still trending up, worldwide, anywhere from 10% to 35%, depending on the export destination), quality-driven producers and industry watchers have a much more grave outlook. So their argument goes, consumers in export markets can’t possibly like the taste of these low-quality brands with the New Zealand name on them. Not only are they unlikely even to see these brands on the shelves a year or even a month later, consumers might swear off New Zealand wine for good after the first sip.
That’s certainly the belief of someone like Bruce Kerner, a former Hollywood studio executive who retired with his wife, a television producer, to a vineyard at the western end of New Zealand’s largest winegrowing region, Marlborough, in the late ’90s. All the Kerners wanted to do was grow high-quality grapes and sell them to the highest bidder, plus make a little extra wine for themselves on the side. That dream was going along fine for several years. In 2000, the first producing year for the Kerners, they and growers like them earned, on average, about NZ$1,150 per metric ton of grapes. At, for argument’s sake, 15 acres of Sauvignon Blanc and six tons per acre, that’s a gross of NZ$207,000. Not bad.
Land and grape prices shot up over the next seven years, with a grower averaging more than NZ$2,000 per ton in 2007. Supply was also relatively balanced with global demand, so life was good for growers and wineries alike.
This year, however, Kerner will be lucky to make NZ$1,000 per ton of grapes he grows–essentially, operating at break even or possibly a loss. Alternatively, he can produce high-quality wine under his own label and export it to the U.S. (which is, in fact, what he’s doing), where it will land on the store shelf for US$15-$20 per bottle. But the sad truth is that for Kerner–and the hundreds of growers like him–neither is a particularly good option right now. Here in the U.S., more and more $10 Sauvignon Blancs with cute labels and contents of questionable quality are arriving on store shelves by the day. He’ll lose the price battle.
(Within about five minutes of typing the above sentences, I received an email from a company that helps connect bulk buyers with sellers of wine, beer and spirits. The company has created two New Zealand wine brands for clients operating in the U.S.)
This is a storm Kerner and other growers like him have little choice but to wait out, but also continue producing high-quality grapes through it–possibly incurring even more losses.
Farmers and the Foreclosure Era
To understand how and where things went awry, one first needs to realize that farming wine grapes is unlike any other form of agriculture in two important ways. The first is that less is more: Depending on the grape variety, there’s a sweet spot of how many grapes each vine can grow; finding the right balance and not cropping so low that the fruit ripens too quickly and not so high that the vines can’t ripen all the fruit (and thus, don’t result in good-tasting wine), yields the highest-quality and most profitable fruit. It’s not like corn or cotton or soybeans, where the more crop you grow, the more money you make. There’s a quantity-quality balance that must be achieved.
The second issue is location: Not only must grapes be grown inside a geographically defined area in order to have the region’s name written on the bottle’s label, certain pieces of land within that designated area might be better suited for grazing than for growing grapes. Yet wines made of grapes grown on either type of land get to display the same region’s name on the label–which is often more important than the wine brand itself. It’s the rough equivalent of there being several models of Lexus that offer massaging leather seats and reliability, and just as many that come with an 8-track player and stall in the middle of the freeway at rush hour.
Now, let’s say you’re a New Zealand sheep farmer circa 2005. You know two things: (1) The more wool you produce, the more money you make; and (2) You see Kerner and other friends growing grapes and selling them to wineries, all of them making more and more money each year while you’re struggling to scratch out a living as the costs of raising and shearing sheep keep rising–and your profit margin is shrinking by the day. So you decide you need to buy more land and plant grapevines. The problem is, most of the prime grape-growing land is already planted. And those marginal areas don’t get sufficient water. Well, not to worry–today’s your lucky day.
For starters, the Marlborough District Council has instituted a multimillion-dollar irrigation scheme that’ll get water to areas far beyond where Bruce Kerner’s vineyard sits–once believed to be the boundary of grape-growing possibility in Marlborough. Second, the banks are practically giving away free money, on par with practices for home lending in Florida, California and Arizona. Dig that necktie out of the closet, knock on the bank’s door at 9am, and in just a couple years you’ll have a fully developed vineyard a few miles from Bruce Kerner’s property, with adequate water. All it cost you was tens of thousands per acre of land to purchase and develop, plus annual farming costs in those first few non-producing years. But with grape prices on track to be $2,400 per ton by 2008, you’ll make plenty of money. Of course, you might want to overcrop a little to ensure that you generate more cash–especially if there isn’t a tonnage restriction in your contract with the winery. It’s the same as those days of raising and shearing sheep: The more you produce, the more money you make.
Such thinking was as rampant throughout the New Zealand wine industry as much as the belief that a two-bedroom house in Stockton, Calif., purchased for $800,000 one day would be worth $2 million the next. Sure enough, in 2008, New Zealand grape growers handed 285,000 high-priced tons over to wineries, a leap from 2007’s 205,000 tons. Over the next two years of grinning and bearing the global economic meltdown, tonnages remained steady even as grape and land prices sank. But now, here we are in 2011, with land and grape prices sagging even further, and more high tonnages projected to roll in. All signs seem to point to more oversupply, and more pain for growers.
For a moment, put yourself in Bruce Kerner’s shoes. He’s still trying to grow high-quality grapes to achieve a higher price. But growers–like the former sheep farmer above–in newly developed vineyard areas are cropping at double the tonnages he is, and forcing average prices down. Of his competitors’ crop, Kerner says, “The result is, it’s not truly a Marlborough grape, and [while there are] people who are producing good-quality grapes (and there are a good number who are doing that), the majority are producing grapes for bulk wine for $500 per ton. That has destroyed the economic viability of the business model for growers such as myself, to make a living from selling high-quality grapes.”
And that’s just the beginning. He and other growers I spoke with complain of two other factors. The first is that Gregan was quoted in the media as far back as December 2010 saying that 2011 would be a bumper harvest. This, in turn, allowed international buyers such as large supermarket chains and conglomerate beverage companies to put extra downward price pressure on growers. The second is that those large wine companies operating in New Zealand–Pernod Ricard, Delegat’s, Lion Nathan and Constellation Brands, to name a few–keep an eye on each other’s public statements as to what they’ll pay growers per ton of grapes in the upcoming year. One makes an official announcement, then all follow suit. Kerner goes so far as to compare it to collusion.
(I spoke with the New Zealand Commerce Commission, which told me that it had conducted a screening investigation on this very matter, pertaining to the 2009 and 2010 grape harvests. As part of the public communications surrounding any screening investigation, potential whistle-blowers were offered amnesty. But the commission did not find evidence warranting a full investigation, and the matter was closed.)
“In some ways, that’s classic conspiracy theory,” says Gregan of Kerner’s assessment of the situation. “Did [he] argue the same way when grape prices were going up? The market does what the market does. All these wineries to a greater or lesser extent are subject to the same market forces.” In other words, global economic stress forces the wineries to drop their prices at retail, and therefore pay less money to growers for grapes the following year. “What did [he] think when the prices were at $2,300?” asks Gregan. “Were [growers] arguing then that the wineries were colluding to set prices?”
Another winery owner I spoke with told me that it’s illegal for him even to discuss general grape prices with his dozen or so growers all in the room. They can talk about general industry issues, but price is a matter he has to settle with each grower, individually. No one seems to deny that Marlborough grape growers have close ties amongst each other, as do wineries–but no one went on a limb to support the notion that there’s rampant, wholesale illegal activity.
As for early reports of a bumper crop, Gregan doesn’t outwardly refute claims that he spoke too soon last year. At the same time, he insists that he can’t say one thing privately and another thing publicly. “[I] wouldn’t say we’ve got it 100 percent correct,” he said of his organization’s communications.
Gregan’s critics argue that’s emblematic of much larger problems with New Zealand Winegrowers: That, from a grape levy, the organization makes more money the more members there are growing more grapes–and that it turned the other cheek as land-buying and planting exploded, and cheap supermarket brands were created en masse. It’s probably very difficult for any quality-focused grower to read Winegrowers’ 2010 annual report, which states in bold letters on a glossy image: “Every bottle that bears the words ‘New Zealand wine’ should add to that reputation.”
While that may not be true at the moment, Gregan is unequivocal in his recollection as to how his organization conducted business the past decade: That, beginning in 2002, his organization discouraged vineyard plantings that outpaced demand, and that growers were naive to expect the days of $2,000 tonnage prices to continue. Sure enough, what jumps out most on page three of New Zealand Winegrowers’ 2010 annual report are two terms that describe 2011: “low profitability” and “supply imbalance.” Gregan doesn’t deny the existence of these problems.
“Everything’s not perfect,” he admits. The market grew in 2008 and 2009, and wineries weren’t necessarily prepared to put in the extra marketing effort that having more supply required of them (or, perhaps, they wrongly expected Winegrowers to do that work for them). At the same time, he’s quick to call out banks and speculators for their contribution to New Zealand wine’s supply-demand–and quality–woes.
“We were warning about the potential dangers of oversupply. But people spied an opportunity, demand was strong, we couldn’t keep up with supply and a lot of grapes were planted. Certainly the amount of money and freely available credit helped to some extent,” says Gregan. “Some of [the borrowers] I’m sure had been promised a 25 or 30 percent return per annum forever and a day. That was balanced on 16 tons per hectare–it was never realistic. They were warned, but they went ahead and did it anyway. Some of those people will exit the industry. Some of those vineyards that were planted on the wrong side of the economic contour line will be pulled out. That’s what’s going to happen.”
This should be comforting news for growers like Kerner–if they can hang in there.
The Way Forward
Gregan says he refuses to play the blame game–he maintains his only concern is regaining a supply-demand balance, and making sure nothing like this occurs again. He’s lucky in that there’s relatively little land left to plant in Marlborough, and that speculators will very likely be driven out of the business after this year. But he, other growers and wineries can also take solace in the fact that New Zealand now resembles the rest of the world’s established, successful wine regions–and none of them suffer from perception or branding problems.
Just look at Bordeaux, the most prestigious winegrowing region on the planet. According to a recent industry report, supermarket sales comprised 44% of Bordeaux wine sales in France. That’s a staggering amount considering that this is also the region known for bottles that fetch $1,500 or more on release. In 2009, more than 22 million cases of Bordeaux wine were sold at French supermarkets. Hint: these wines didn’t cost anything approaching $1,500 per bottle. More like €1.50. (In other words, there are oceans more low- to mediocre-quality wines produced in Bordeaux than high-end wines–they comprise 5% of Bordeaux, to be exact.)
And, for a moment, consider what I as a New York City resident can readily find on shelves in the wine shops near my apartment. The stores don’t carry those €1.50 Bordeaux wines, but they do have $10 wines. Those bottles send a better message to me and the rest of the wine-drinking world about what Bordeaux is capable of. Not all the $10 wines taste good, but I’d hazard a guess and say that the value-for-dollar comparison between New Zealand and Bordeaux at that level is pretty similar: There are hits and misses. Above that range, there are more hits and fewer misses (in theory) for both countries. And in both New Zealand and in France, cheap wines are readily available on supermarket shelves.
That said, if Kiwis are truly concerned about the New Zealand brand being damaged abroad, they need to try harder to keep their worst wine from leaving the country and just drink it themselves, as the French do. (Americans do it, too, with California wines.) The good news is, this is already starting to happen with New Zealand’s advent of sparkling Sauvignon Blanc, which was created only recently to help attack the oversupply problem. The sweet, carbonated, soda-like wine was an instant domestic hit, selling hundreds of thousands of cases for major producers such as Villa Maria. I tasted several of these wines on my trip to New Zealand last year, and they’re truly wretched. But newly legal New Zealand drinkers love them so much, that sparkling Sauvignon Blanc sales have taken a major bite out of the market for RTD Alcopops, long a thorn in the side of the beer and wine industries, not to mention law enforcement and health advocates. Moreover, if New Zealand’s 18- to 21-year-old drinkers get started with sparkling Sauvignon Blanc, there’s no reason to think they won’t take a step or two up the quality chain as they get older, and develop a taste for wine between sparkling Sauvignon Blanc and what’s landing on shelves in the U.S. for $10.
That, in lock step with tonnage restrictions, might be what sends New Zealand on the right path. A maximum crop level in Marlborough, for example, would prevent a grower from producing too much Sauvignon Blanc per acre and the grapes being used in a wine with the Marlborough designation on the label. This is an idea that quality-driven growers and producers have been raising casually for years–and something Gregan says he’s now willing to discuss. But it’s truly time for growers, wineries and NZ Winegrowers to skip the talk and get serious about a regional authority policing and enforcing such a program to help re-balance supply and demand. Not only would this help protect the industry’s reputation and brand abroad, it’d move prices up for high-quality grapes–and prices down for the stuff that goes into bulk brands and sparkling Sauvignon Blanc.
But perhaps the most important thing that New Zealand’s growers and winemakers need to come to grips with is that part of being a globally accepted wine region, by definition, means having a select few brands that command top dollar; a wide middle tier of affordable, drinkable wines; and a lake of questionable-quality wine that somehow finds its way into an open mouth with questionable taste. That’s just the way it works–from Bordeaux to Burgundy to Germany to South Africa to South America. New Zealand can’t be different in this respect if it wants to play the global wine game.
Along with that, grape growers must accept that their chosen profession is subject to the same market forces as every other commodity, from grain to natural gas. There might be a couple more tough vintages defined by depressed prices to come, but in that time overleveraged growers will lose their land and the survivors will decide which tier of the market they want to serve. This will keep grape prices from swinging wildly over the next 10 years as they did throughout the previous decade. The harsh reality, though, is that even as prices return to sensible, sustainable levels–and supply and demand find a balance–growing grapes in New Zealand will never again be so wildly lucrative. And that’s the way it’s supposed to be.
If you’re a grower and all this seems like too much to take, there’s an easy solution: Rip out your vines and bring in some sheep.