Roll out the barrels for greater diversity

Neill Culley with wife Denise and baby daughter Hannah. Chris Skelton / Herald on Sunday

Out on Waiheke Island, the Cable Bay boutique vineyard is investing more than $4 million on new production, restaurant and visitor facilities.

Co-owner and winemaker Neill Culley says the extra investment reflects a confidence in export growth.

The firm has plantings on Waiheke and in Marlborough, and sells to about 15 countries.

"We're also investing in the wine tourism industry," Culley adds.

Cable Bay produces about 25,000 cases a year and is aiming to boost this to close to 50,000 cases over the next five years.

Culley's optimism is typical. The wine industry is predicting it can more than double the annual value of exports to $1 billion by 2010.

Never mind that the Europeans are turning millions of litres of surplus tipple into industrial alcohol every year. Even Australia's wine sellers are struggling to cope with an enormous oversupply of grapes.

World overproduction of wine is put at around 7 billion litres a year. The bulk of it is in the European Union, where growers have been supported by subsidies.

But changes for the industry are finally being debated there.

Some Australian retailers have started selling their version of the "Two Buck Chuck" - wine priced at less than A$2 a bottle - because of the oversupply.

But NZ Winegrowers says local producers are less threatened by world oversupply because production is aimed at the premium end of the market. And surveys of local wine companies indicate they are confident that expansion will continue.

NZ Winegrowers estimated that in the year to April, exports were worth just under $500 million, up about 15 per cent on the previous year.

Domestic sales totalled about $400 million, a 9 per cent rise as local wines recovered market share from imports.

Five years ago, annual exports were worth about $150 million.

The star of the export show continues to be sauvignon blanc - which New Zealand has popularised. Last year, it accounted for more than 70 per cent of exports. It is followed by chardonnay at just under 9 per cent and pinot noir at more than 5 per cent.

This year's grape harvest was a record 185,000 tonnes because of the increase in vineyard area - now at about 22,000ha.

Sauvignon blanc grapes accounted for nearly 53 per cent of the harvest - the first time a single variety has been responsible for more than half.

It is now forecast that vineyard plantings will reach 30,000ha by 2010 as the industry heads towards its goals of $1 billion in export sales and $500 million for domestic sales.

"Current [overseas] market feedback is that there is still strong demand for New Zealand wine." says NZ Winegrowers chief executive Philip Gregan.

He accepts that some companies may produce too much and some too little, but believes the industry overall will be able to sell what it makes.

Delegat's managing director, Jim Delegat, agrees.

"I would be confident in saying that the existing and intended plantings that are coming into production through to 2010 would be in line with demand."

Rob White, chief executive of the NZAX-listed New Zealand Wine Co, is another believer. He says there is strong pressure on supplies.

"You can't buy sauvignon blanc vines for planting.

"They've all gone - the nurseries have sold out."

Gregan says the amount of extra production capacity shows exports could become as much as 80 per cent of sales over the next five to seven years, so it is important to ensure export markets are further developed.

NZ Winegrowers spends about $4.5 million a year on a generic overseas marketing programme that assists exporters.

The United States takes about 27 per cent of the exports, but New Zealand wine is still a novelty there.

"They hardly know New Zealand wine and there's a huge amount of excitement," says Gregan.

But the US market is "complicated" and he acknowledges companies are saying NZ Winegrowers' marketing there, which takes about a third of the $4.5 million, needs to do better.

But getting the Kiwi wine message out beyond a small circle can be expensive and NZ Winegrowers is reviewing the effectiveness of its spending there.

Peter Scutts, chief of the NZ Wine Fund, which expects its three operations to turn over $18 million from this year's harvest, believes New Zealand is meeting only 10 to 15 per cent of potential US demand for Marlborough sauvignon blanc.

He says young Americans are switching on to wine.

"As younger people drink the less expensive wines, they'll begin to trade up to wines like Marlborough sauvignon blanc and demand will just outstrip supply for a long time."

Gregan says exports to Australia have grown about 40 per cent in the year to April.

"Our wine sales there are on fire at the moment - but it doesn't mean it will continue forever."

Sauvignon blanc and pinot noir are the two bestsellers in Australia.

"Our wine styles tend to complement the Australian ones rather than compete head on," Gregan says.

But what happens if sauvignon blanc goes out of fashion? NZ Winegrowers says it aims to use the success of sauvignon blanc to help increase consumption of chardonnay, pinot noir and pinot gris.

"So we haven't got all our eggs in one basket ... long term we have to develop these other varieties," says Gregan.

White agrees on diversification, but has a caution.

"We clearly produce the best sauvignon blanc in the world, so that's your uniqueness, that's what you're best at, so clearly that's what should drive your business."

Another risk is the number of small New Zealand wine companies.

Keeping them afloat is an important part of ensuring the industry can meet diversification challenges, as they bring colour and innovation.

But it is believed many are financially marginal.

A national industry survey may provide data to help argue the case for excise tax relief to assist their sales.

The indexed tax of about $20 a case on domestic sales is hurting profits, particularly for the small wineries.

The Government takes in about $120 million a year from the tax on sales of New Zealand wine and about $80 million on sales of imported wine.

"There are lots of small wine companies, and I would think medium-sized wine companies, struggling," Gregan says.

Villa Maria's owner, George Fistonich, agrees on the need for change, saying the excise tax on wine aligns it with beer and spirits, when it is a much more complex industry that draws in considerable tourism.

"I think they need to recognise the incredible value of the wine industry."

But Customs Minister Nanaia Mahuta says the Government has no plans to give tax incentives to the wine industry or change excise duties.

She says wine producers are able to recover the cost of taxes through margins on their products.

But the industry says some relief for small firms will not have a significant effect on the Government's tax take and that competitive pressures make it difficult to increase margins to cover tax rises.

Gregan says the industry needs money to grow and much of that will have to come from retained earnings.

Whether the difficulties for small and medium vineyards results in an industry shake-out remains to be seen.

NZ Wine Fund executive chairman David Belcher, from merchant bankers Clavell Capital, believes that to be economically sustainable, wineries will need to produce 50,000 cases a year.

"So that really points to a lot of rationalisation needing to occur in the industry."