Tippling on brewers or vintners

By Peter V O'Brien

Friday 14th May 2004

The sharemarket has seen another spurt in listings of companies associated with the production and marketing of alcoholic liquor.

DB Breweries and Lion Nathan, under various listed names, have been the only constants in the loosely defined sector over the past 25 years.

Eight listed companies were involved in the production, wholesaling and retailing of beer, wine and spirits in 1979: Ballins Industries, Cooks New Zealand Wine Co, Dominion Breweries, Lion Breweries, Montana Wines, Quill Morris, Wilson Distillers and Wilson Neill.

The brewers remained while the other six were absorbed into various organisations, including the brewing companies, which onsold some acquisitions.

Nobilo Wines came and went in more recent times.

The sector gained three operators in the past year when vodka producer 42 Below, wine-maker The New Zealand Wine Company and vineyard operator Oyster Bay Marlborough Vineyards joined the list, the last two on the NZAX alternative market.

Oyster Bay is a "dedicated grape grower," meaning it sells fruit production to wineries for processing.

It is convenient to include the company in this discussion because its health is dependent on prospects for the winemakers.

Share price performance information for the current five companies is in the table.

The brewers did nicely despite boutique outfits nibbling at the margin of market share.

Wine companies were in a different category, given the expected substantial vintage this year.

Nothing is new in the wine industry. Investors with even moderate memories would recall the market-manipulating days when vines were ripped out to control a glut of grape juice.

A hint of what could happen in the wine industry was seen in New Zealand Wine Company chairman Mark Peters' comments accompanying the report for the six months ended December.

"As I have touched upon in previous reports, we do believe it is essential for the industry nationally in preference, but certainly in Marlborough as critical, to have an overall strategic plan to ensure that the wine produced is of the highest quality possible and that co-ordinated promotional and marketing activities are giving the right emphasis for wine growers, the wine companies and the wine buyers in all markets."

The statement's language and structure were convoluted but the underlying idea seemed clear with its indication that controlled production, marketing and quality was desirable.

It would at least be a more sophisticated approach than destroying vines.

Over-production in boom grape harvest years has been a "problem" common to all fashionable industries, such as kiwifruit, deer farming, corporate horsebreeding and goat farming.

Owning vineyards and wineries became a cult activity for monied sharebrokers, financiers and other city business bigwigs who moved from consuming the product to the perceived bucolic delights of producing it while sipping the output on charming verandahs overlooking orderly rows of vines.

No wonder long-established good-quality winemakers were concerned about their industry's development.

It would be a good bet that some listed and unlisted wine companies will be absorbed into bigger groups, following the historical pattern.

The brewers have no such problem, both being under control of international beer giants.

Winemaking is a seasonal industry, so well-managed cashflow, important for any company's wellbeing, is critical.

The wine producers and 42 Below make different liquors but have two things in common. They are the need to reach "critical mass" production and sales to ensure solid operating cashflow and the companies' involvement in niche markets.

It would be a business financial miracle if a New Zealand-based vodka producer and wine companies became market threats to the world's major wineries and distillers.

The report of 42 Below for the year ended March listed 10 impressive operational highlights for the period, including substantial penetration of international markets.

Critical mass has yet to be achieved, as shown in a $1.12 million net loss (in line with directors' expectations) and an operating cashflow deficit of $4.14 million.

The company had good potential from the base being established, a point investors noted when they pushed the share price past last year's 50c issue after a slump to 35c on listing and a 2004 low of 30c.

Investors would always be safe with the brewers, even when the sharemarket moved to defensive mode.

Listed wine companies and grape producers seemed to have a problem with the size of this year's harvest, subject to implementation of suggested industry-initiated controls.

A punt on 42 Below could be the most profitable in the sector, assuming the company turned sales growth intro appropriate profit and high positive operating cashflow.

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