Light year impacts profits

“For those with bank debt, interest rate pressure will also be a factor, particularly when comparing to prior years when interest rates were extremely low.” Hamish says balance sheets of vineyard entities have typically held up “reasonably well” in recent years, with shareholder equity remaining solid. “However, we are seeing the servicing aspect, which is driven by profitability, becoming more challenging.”

The low production 2024 season will increase the average price per bottle for many wineries, as direct costs to produce the wine are spread over a lower volume, Hamish says. “In addition to this, the drop in volume is exacerbated if extraction rates – the litres of juice extracted from grapes – are lower, which we are also seeing due to the drier season.” The wine industry performed “very well” through Covid-19 restrictions and in subsequent years, but is now seeing a flattening of demand, which casts a different light on the low yields, Hamish notes. “At a macro industry level having a lower yielding year is likely preferential to a high yielding year if the market demand is not there.”

WK is working with a number of clients and their financiers to ensure business models remain sustainable. “We would recommend growers at a minimum conduct a simple break-even analysis and have an annual cash flow to understand their cash cycle. It is common for growers to receive their payments in large lumps, so management of this over the year is important, along with factoring in debt servicing and timing of tax payments.” They use tax finance “extensively” with growers and company clients, “to help smooth tax payment and align with seasonal cash flows”, he adds. “And we are seeing banks accommodate debt servicing by restructuring loans to interest only for periods of time whilst profitability and cash flow recovers.”

Many wineries are looking at their cost base, which has meant a reduction in the price per tonne they’re buying grapes for, Hamish says. “In addition, we are seeing wineries conduct reviews of their other cost structures and processes to enhance efficiency and remove waste from their business where possible.” Recent years have seen wine business selling most of their wine on allocation to customers, but reduced demand and a normalising of supply chain has motivated more proactive sales and marketing tactics, he says. “Utilising technology is also a key area where we see wineries develop to try become more efficient.”

The economic performance of the Marlborough region is explicitly linked to the wine industry. That means tighter times in wine, exacerbated by a broader economic slowdown, will generate further challenges in the year ahead, Hamish says. “Due to the lower profitability, we would expect to see some capital projects delayed, rescoped or abandoned. This will have a direct flow on to the ecosystem that supports the industry,” he adds. “We’re seeing already a lot of belt tightening play out across client businesses and households.”

Generally speaking, the last three to four years have been high performing for the sector on the back of strong demand for Marlborough Sauvignon Blanc “so we should be well positioned for a slowdown”, Hamish says. “There is a large capital base committed in Marlborough which needs to be maintained. With any primary production it will never be completely linear – there is always a cycle and often when there is a downturn it can also create opportunity for a business to review and improve their offering.”