Stock drop sets stage for supply battle

A weather-affected wine harvest has reduced bulging stocks and driven a small lift in Marlborough sauvignon blanc grape prices, a Rabobank senior analyst says.

That has led many in the industry to once again "view the proverbial glass as half full rather than half empty" when it comes to New Zealand wine, says senior analyst Marc Soccio.

In the agribusiness banking specialist's Wine Quarterly Q2: New Zealand wine - a glass half full, Soccio said an unseasonably cool and in some parts rain-affected New Zealand wine harvest this year of 269,000 tonnes - down 18 per cent on last year - had reduced the high stock levels that had fuelled a surge in bulk wine exports and private label brands in recent years.

The sharp fall in New Zealand production this year would constrain New Zealand export shipments for the first time in many years and create greater pricing tension in global markets, which would be to the advantage of manufacturer brand growers, he said.

"As a result of the lower supply in 2012 it is expected that a significant number of brands without strong supply lines will face supply constraints and rising costs over the coming year."

"On the whole, these looming supply constraints are likely to support reduced discounting activity and upward price pressure for New Zealand wines in global markets," he said.

The New Zealand wine sector had experienced turbulent times in recent years as the industry has struggled to contend with the strong supply response that followed a surge in demand for the nation's flagship product, Marlborough sauvignon blanc, Soccio said.

"Production jumped a whopping 39 per cent in the landmark 2008 vintage and producer profitability has since been eroded by a perfect storm formed by rapid supply growth, the onset of the global economic downturn and the steady appreciation of the New Zealand dollar since the beginning of 2009.

"Now, four years and significant hardship later, the stage is set for a battle over future supply with more limited stocks available from the 2012 harvest.

"Traditional manufacturer/brand owners seemingly have an opportunity to shake out some of the newer, more opportunistic players that have emerged over recent years, but the extent to which conventional brands can wrest back control of the supermarket still remains to be seen."

A co-ordinated industry effort to control supply over the 2009 and 2010 harvests enabled producers to step up marketing efforts without any further undue supply pressure, the report said.

Nevertheless, the imperative to clear still bulging stocks led to a surge in bulk wine export shipments from New Zealand as non-manufacturer/third party brand owners, such as grocery retailers and third party wine companies, throughout the world began to develop their own Marlborough sauvignon blanc and other New Zealand wine brands.

"Harvests in more recent years have been far less scripted, however, and have made planning particularly challenging for New Zealand producers," the report said.

"In 2011, fears of dwindling stocks in combination with favourable climatic conditions led to another dramatic

jump in production to a record harvest of 328,000 tonnes,

forcing monthly bulk wine shipments to more than 40 per cent of total export volumes in mid to late 2011."

Now, less than 12 months later, the weather-affected harvest has eased pressure on bulk export shipments, the report said.

"Surplus supplies in the past have meant that a significant proportion of annual sales of New Zealand Marlborough sauvignon blanc now occur through brands owned by grocery retail chains and foreign wine companies.

"These private label brands have been growing rapidly and competing fiercely against manufacturer brands, with approximately 60 per cent of the sales growth that has occurred in the past two years having been contributed by surplus bulk exports," Soccio said.

"The best managed of these private label brands have sufficiently integrated themselves into the supply chain to provide a surer basis from which to manage industry cycles and reinforce their position in the market.

"However, other more opportunistic brands will be less able to compete with manufacturer brands in the future as cost pressures rise and price disparities begin to narrow."