Wine fails to intoxicate investors

Costly production and slow returns are a handicap as technology stocks capture Wall St's imagination, writes DITA DE BONI.

Wine stocks do not excite Wall St punters, who will look elsewhere if the returns do not improve, says one of New York's leading security analysts.

Addressing a wine symposium in the Barossa Valley last week, David Goldman slated the performance of most listed wine companies. Compared with the performance of other beverage concerns, he said, "wine stocks do not consume more than 16 minutes a week in the life of a Wall St analyst."

Mr Goldman told the Challenger Beston Wine Symposium that although global consolidation was a reality in the industry, wine would continue to be a "party Wall St refuses to attend" unless the real growth that did exist within the sector made itself known to the market.

"Wine stocks can barely return 13 per cent to investors. Twenty per cent used to be an acceptable annual growth rate in stocks, but dotcom companies can now deliver that in one day.

"There is increasingly little interest in wine's ... annual growth rate and long-term growth story amid a technology-focused environment."

Mr Goldman said Wall St's view of wine stocks had improved since Foster's bought Californian producer Berenger this year, but the market was still waiting to see real returns.

Wine stocks publicly traded in the United States accounted for less than $US7 billion ($17.8 billion) in market capitalisation. That was dwarfed by three beverage companies - Coca-Cola, PepsiCo and Anheuser-Busch - which were worth $US230 billion.

Wine companies also consistently showed price-to-earnings ratios significantly below Wall St's Alcoholic Beverage 500 index.

"The growth, though, is absolutely real. In the US alone, wine consumption will double in the next five years, which is absolutely huge."

One positive for Australia was that its large wine companies - led by Southcorp, Foster's (Mildara Blass), Orlando Wyndham and BRL Hardy - had generally outperformed US stocks, he said.

But Australian analysts and industry figures were less complimentary about the sector's financial performance and warned that Australia will not be ready to meet phenomenal growth targets it has set for itself without leaving the "profitless prosperity" of the 1980s and early 1990s behind.

Salomon Smith Barney wine analyst Alexandra McPhee said some investors were tired of growth plans that never seemed to bear fruit.

Australian production - now about 700 million litres annually- is expected to reach the billion-litre mark shortly after 2010 and almost 2 billion litres by 2030. But the growth has not necessarily translated into shareholder wealth.

"Investors are increasingly focused on returns, but many question the ability of wine companies to deliver profitable growth," she said.



In New Zealand, the Wine Institute predicts that by 2005, exports will have more than doubled to 40 million litres, worth about $375 million, but that depends heavily on continued investment by the country's 350 or so wineries.

The local industry believes the capital-intensive nature of wine and the price of good grape-growing land limit our export potential, but sources at the conference said most wineries had problems managing cashflows.

In response, one company is working on a package pitched at small-to-medium wineries looking to expand.

Australian-based Challenger International, which opened an office in New Zealand in February, has introduced its Beston Wine Industry Trust concept, to marry funds from New Zealand investors to vineyards and other "hard" winery assets.

Challenger chief executive John Rowley said that in researching the concept, several wineries had indicated that lack of funds stymied their growth.

For many, public offerings were not viable and banks traditionally took a cautious approach to the slow-burning, capital-hungry production process.

Challenger would invest its managed funds into land, vines and equipment, freeing the producer to make wine, market and sell it.



The package stands alongside bank financing and venture capital funds in the market, but has some distinguishing features, namely that the funds are more expensive (13 per cent) than those offered by banks (about 11 per cent).

Challenger is a listed trust with $50 million invested in vineyards, and a $20 million deal pending in the United States. The company turned its attentions to New Zealand this year after noticing the similarities in the Australian and New Zealand markets, where the bulk of producers were cash-tight after planting hard to meet an insatiable overseas demand.

Phil Ruthven, chairman of IBIS, Australia's largest business-data corporation, said that over the next 10 years the global wine industry would see intense competition as producers fought to take a chunk of the premium market.

The wine industry would have to be more focused on returns and cost containment, which he said could be achieved by offloading all "hard" assets such as land, buildings and equipment and contracting out non-core functions.

"Profitability, more than growth, will be the biggest challenge in the first decade of the 21st century," he said.

"Regions will become increasingly important. But [a region] will not just be able to rely on greater volumes and economies of scale.

"It will have to focus on intellectual property, niche and ultra-niche positions in the world market and the jettisoning of every possible 'passive' asset in favour of leasing and factoring."

* Dita De Boni attended the Barossa conference courtesy of Challenger International (New Zealand) Ltd.