KEY POINTS:
In 1961 when George Fistonich founded Villa Maria Estate in South Auckland, the New Zealand wine industry had a bad international reputation for making "plonk", with our wine sales mainly consisting of port and sherry.
Spin forward nearly 40 years and the industry - which has brought forward its target of achieving $1 billion of annual exports to this year - has a premium global reputation and is a world leader in sauvignon blanc.
The industry may have catapulted from just $125.3 million in exports 10 years ago to this year's predicted total, but that is far from the end game, Fistonich says.
"I would see that we'll get to $2 billion and maybe over 15 years we should be able to get to $3 billion eventually."
New Zealand wine exports grew by 19 per cent in 2008 to $904 million, with domestic sales adding a further $400 million to $500 million to the industry's earnings.
"What we don't know is the effect of the recession but we're still in growth everywhere apart from the States," Fistonich says.
When the exchange rate was at around US80c the US market had been unsustainable with little profit, which, in combination with supply shortages in previous years, meant exporters focused attention elsewhere.
However, during the past four or five months people have renewed their effort in the US, he says.
"There will naturally be a slowdown in growth ... There has to be in a recession because there are going to be some people who are badly affected financially and they have to tighten their belts, but I don't think it'll be as bad as a lot of other industries."
A slowdown in growth could mean 5-15 per cent, rather than 20-30 per cent, although there will be some consolidation in an industry that had 585 wineries at June 30 last year, he says.
"I think it's a bit of a hiccup but I think overall [the industry] is healthy, I think definitely brands are important."
Good weather and more land coming into production saw last season's grape harvest soar by 39 per cent to 285,000 tonnes - a bumper haul that left the industry with an over-supply after years of shortages.
The shortages had encouraged wine growers to overcrop, while sauvignon blanc became so popular there had been a reluctance to plant anything else, Fistonich says.
In the year ending June, 169,613 tonnes of sauvignon blanc grapes were produced - nearly 60 per cent of the total.
The oversupply could help the industry to broaden its production base.
"I think the fact there's a surplus now of sauvignon blanc is probably a very good thing long term because I think in some ways it'll make people think and take a more long-term view," Fistonich says.
There was also a spirit of co-operation in Marlborough from where most of the oversupply had come, he says, and where a meeting to discuss the situation was attended by 600 people.
"We spelt out to all our growers that they've got to reduce their crops," he says.
Reducing yields would improve quality.
"I think the wines out of the '09 vintage will be quite outstanding, so it's going to have a big quality benefit," Fistonich says.
Deloitte corporate finance partner Paul Munro says export markets are pretty tough and there is a lot of debt in the sector, with reasonably heavy leveraging, particularly among vineyards.
There have been a number of vineyard mortgagee sales, Munro says.
"Somebody told me the other day that they thought there could be up to 50 vineyards in Central Otago that are in trouble," he says.
"I don't know that I'd necessarily share that view but that's what people are saying out there and just knowing how some of them are financed and knowing the financial returns that some of those vineyards businesses generate, actually it's believable."
Bigger vineyards will be more secure and the top 20 or so companies will account for the majority of the harvest, but there are hundreds of smaller operators.
Vineyards will be sold at values much lower than the cost to developers.
"At a lower value it starts to become economic again so the grapes will still be produced, the wine will still be produced," Munro says.
Jim Delegat, managing director of NZX-listed wine company Delegat's Group, says there will be unsold wine spread across a number of producers, and grapes left on the vine this year because of last season's bumper harvest.
"There is absolutely no point in adding value to grapes that cannot be sold as wine," he says. "I am very pleased with the way the season is shaping up in the fact that our yields have been moderated and that the harvest will be smaller than last year."
The theory behind the seemingly recession-proof industry is that although recession-conscious consumers cut back on restaurant meals, they still buy a bottle of wine for the dinner table at home.
"I believe that the world is only now really discovering New Zealand wine," Delegat says.
"Whilst obviously the events within the world will have some impact on consumer spending, we're not yet feeling it nor do we quite understand how it will affect us."
Delegat expects supply to be well balanced with demand by 2011.
The United States holds significant growth opportunities, Britain continues to grow albeit at a slower rate, Australia has exceeded expectation, Asia is showing promise and continental Europe holds opportunities, he says.
Exports last year to Australia, Britain and the US were worth $310 million, $250 million and $190 million respectively.
Last season's harvest has raised concerns about the ability to sell higher volumes of wine while maintaining a premium position.
"We're not as supply constrained as we have traditionally been and it is proving difficult for a number of minor players so there is a plethora of offerings out there at very low prices but when you look at the giant brands, such as Oyster Bay, that command up to 30 per cent of New Zealand category share in major markets it's really a different story, it's a different proposition," Delegat says.
New Zealand is benefiting from the slide in the euro forcing producers there to raise prices, while the New Zealand dollar exchange rate is playing in favour of the industry here, although costs remain high, he says.
"It's only from about December onwards that we're starting to get some benefit from the exchange rate because of course ... we have been hedging forward, and so given that we were playing it safe we're now taking a little while to work through our currency but our average basket is improving every week."
New Zealand Winegrowers chief executive Philip Gregan says scan data from British retailers covering about two-thirds of New Zealand sales show market share increased from 2 per cent to 2.2 per cent for a moving annual total to December 27.
New Zealand's share of the market by value grew from 3.1 per cent to 3.5 per cent while the average price per 750ml was 6.53 ($17.89), up from 6.29, with the next highly priced nation being France at 4.49.
Gregan says: "Given the financial state of play in the UK market we think it's a pretty damn good performance."
A RECESSION PROOF INDUSTRY
* The New Zealand wine industry expects to hit $1 billion in exports in 2009, a year ahead of schedule.
* The lower NZ dollar is benefiting wine exporters.
* NZ's share of the British wine market by value rose from 3.1 per cent to 3.5 per cent in 2008.
* The world recession is likely to see consolidation among NZ's 585 wineries.
