Sometimes the good news is that the bad news could be much worse. At least that’s how it seemed to me when the wine economists met at UC Davis last week to discuss the continuing Australian wine crisis.
Kym Anderson, a leading expert, spoke about the problems in Oz at the symposium on “Outlook and Issues for the World Wine Market” and I thought his assessment of the “challenges” Australia faces was pretty grim. Big oversupply. Falling grape prices. More and more quality grapes sold off at fire-sale prices in the bulk market (40% this year compared to 15% in the past).
The best selling white wine type in Australia isn’t from Australia any more — it’s Marlborough Sauvignon Blanc. Even the Australians are tired of “Brand Australia” Chardonnay!
Maybe, Baby
Professor Anderson looked for a light at the end of the tunnel and was able to point to some potential sources of relief. Maybe water reforms could be implemented. Maybe R&D to help the industry deal with climate change would produce results. Maybe the new export strategy to promote Australia’s regional diversity and wine families would catch on. Maybe the China market will open wider and drink up the surplus.
Since the bad news was so compellingly concrete and the hopeful notes so speculative, I took the overall forecast to be very dark indeed. Imagine my surprise, then, when I attended a talk by another Australian expert the next day who described Anderson’s presentation as optimistic! When the good news is this bad, the bad news must be really bad.
Bad News, Bad News
Sure enough more bad news arrived shortly thereafter in the form of a Wine Spectator article, “Aussie Wine Company Faces Angry Creditor,” concerning the financial problems of The Grateful Palate group, which exports many hot brands to the U.S. market including the unlikely-named Luchador Shiraz shown here.
Trouble is brewing in Australia. The Grateful Palate’s Australian affiliates, which produce wine under labels such as Bitch Grenache, Evil Cabernet Sauvignon and Marquis Philips for American importer Dan Philips, are in receivership and face the danger of possible bankruptcy. Growers and other creditors for the South Australia-based affiliates of the company received notice on June 18. Many growers, already facing tough times, worry that they’ll never get paid for fruit they sold Philips.
Philips, the company’s founder and owner, confirmed that he is in negotiations with his top creditor, Dutch lender Rabobank, but declined further comment. The bank initiated the action to put Grateful Palate International Pty Ltd and several related Australian companies into receivership. The most prominent is R Wines, a partnership with winemaker Chris Ringland, but 3 Rings, a joint venture involving Philips, Ringland and grower David Hickinbotham, is also part of it.
This is bad news, of course, but bad news is no longer a surprise to those of us who are following the Australian wine scene. Perhaps it is really good news of a sort — an indication that the necessary industry shake out is gaining speed. Hard to tell good news from bad.
Darker or Brighter?
The same situation applies to the Foster’s de-merger situation. Foster’s, the Australian beer giant, bought into the wine business at the top of the market, paying an estimated $7 billion for an international portfolio of about 50 top brands including Penfolds, Wolf Blass and Beringer. The investment may be worth as little as $1.5 billion in today’s market.
Foster’s beer business is an attractive target for global giants like SABMiller, but not with the wine portfolio attached. So Foster’s announced a de-merger to allow the beer group to move ahead independently of the wine group. What will happen to the wine business? Who will buy these assets in today’s depressed environment?
When I posed this question to an Australian winemaker several weeks ago the answer came back quickly: China! Everyone in Australia is paranoid about the Chinese buying up our natural resources, and so we are convinced that they will buy up Foster’s wine business, too.
Interesting idea, I thought at the time. No multinational wine firm (Constellation Brands? Gallo?) would want to go bigger right now. But maybe a Chinese firm that wants to break into the global markets would take the bait. Might make sense. Maybe.
Bright Idea
Sure enough, the Bright Food Group. (Mission: “To build the company into a leading enterprises group in the national food industry, with famous brands, advanced technology, strong competitive power and deep influence in the world by the end of 2015.”) recently signed a three-way memorandum of understanding with the New South Wales government and the China Development Bank to explore opportunities for the Bright Group to invest in the sugar, dairy and wine industries.
A Financial Times article reports that the company is interested in “global top ten players in wine, sugar, food packaging, commodities and healthcare sectors.” Bright Food is currently studying both wine and beer assets in Australia, but has not decided to buy either yet according to the FT.
Many Australians no doubt consider the potential sale of yet another natural resource business to Chinese buyers bad news in terms of their economic sovereignty, but that bad news might actually be the best news they can expect given the sorry condition of the global wine market today.
Mike, your term, “economic sovereignty” is a fascinating one. At the height of its Empire, Spain depended on Italian bankers. The British Empire depended on India and trade with China (Here have some opium, Kid. The first one’s free.) Shop for a car in the States you’ll quickly discover “foreign” brands often have more American content than allegedly domestic ones. The only “economic sovereignty” I come across is in the posturing of politicians who can’t be trusted alone with a hot stove on a cold day.
No disagreement here, Ken, but the anxiety is real and, as you suggest, is easy to manipulate!
Look at the other acquisitions made by the Chinese recently, especially in the auto biz. Hummer, Land Rover, Volvo — all brands spun off by companies whose poor prior business practices put the companies and their brands at risk when the bottomless well of easy money went south.
What is maddening is that the American consumer continues to fund this sort of fire sale acquisition by giving our dollars to the Chinese for cheap goods made by cheap labor subsidized by their government and its agencies.
As an economist, perhaps you can point out the flaw in my logic — am I missing something here?
There will always be a buyer when the price is right; and if you have to dump an asset at fire sale prices, don’t be surprised when a smarter buyer comes back to beat you at your own game with the asset(s) they’ve recently acquired.
Hey Mike,
To me it seems unlikely that Chinese companies would want to invest in Australian wine that is increasingly being sold cheaply and in bulk. Chinese regulators and wine consumers tend to view foreign bulk wine as low quality and frown upon other nations disposing of their excess wine in China. In addition, China has a nearly bottomless supply of cheap domestic wine to draw from and Australian wine just doesn’t have the allure of its European competitors. If the Australian wine industry is hoping for a bailout from China, it shouldn’t hold its breath.
Foster’s has rebranded its wine group as “Treasury Wine Estates”
http://finance.yahoo.com/news/Announcing-Treasury-Wine-prnews-2087510919.html?x=0&.v=1
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According to the press release “Our recognition of Treasury Wine Estates does not impact our ongoing consideration of a demerger of our wine interests, nor does it represent fundamental change in our business model. It does, however, signify a new era for our employees, partners and customers.”
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So it doesn’t change anything, but it changes everything. Fascinating!
It would seem that the “re-branding” of Foster’s Wine to Treasury is just another step toward spinning off the division that is dragging them down. At some point, the price will be attractive enough for *someone* to buy the division and Foster’s will be using the loss as another write-down for the year in which the sale takes place.
Another article today about Barton & Gustier being sold by Diageo; seems the consolidations continue —