Business players take wine seriously

The restructuring of WA’s wine industry has led to the emergence of some surprising names.

WHEN most people think about the Western Australian wine industry, it’s the historic and iconic brands that spring to mind – names such as Houghton, Vasse Felix, Howard Park, Evans & Tate, Sandalford, and Leeuwin Estate.

But a very different set of names comes up we look at the industry from a business perspective.

Sydney-based investment manager CHAMP Private Equity is the state’s largest wine producer through its ownership of Accolade Wines. Its assets include the state’s oldest wine business, Houghton, along with Amberley, Brookland Valley and other brands.

China’s Hangzhou Wine Group is another big player, after taking control of one of the Great Southern’s largest wine producers, Ferngrove Vineyards.

Other names to have grown in prominence include relative latecomers to the industry, Jeff Burch and Peter Fogarty.

These four groups are the largest wine producers in WA, according to updated data for Business News’ Book of Lists (see page 20).

The current ranking is, not surprisingly, a big change from 10 years ago, when the big producers were Houghton (then part of BRL Hardy), Goundrey, Evans & Tate, Xanadu Wines, and Palandri.

All of these brands are in new hands.

Accolade owns the Houghton and Goundrey brands, though Goundrey’s large winery at Mount Barker is now part of West Cape Howe Wines.

McWilliams Wine Group owns the Evans & Tate brand, while its Margaret River winery is now majority owned by Mr Fogarty’s family business, Fogarty Wine Group.

Victoria’s Rathbone family owns Xanadu, while Palandri is part of the Chinese-owned 3 Oceans Wine Company.

Fogarty’s purchase of Evans & Tate’s winemaking facility made it Margaret River’s largest wine processor and the state’s largest family owned wine business.

Having started in the wine game nearly 20 years ago, Mr Fogarty said he was cautiously optimistic about the outlook.

“I see it as an exciting industry,” he told Business News.

“The tough years have been there for sure, but I think we’ve been through the worst of it.”

One reason for his optimism is that low yields in New Zealand have reduced the supply of cheap white wines from that market, which has come to dominate Australian sales.

“In the past six months I believe that has been arrested and we’re starting to see Margaret River SSB [semillon sauvignon blanc] come back into fashion,” Mr Fogarty said.

He also believes the lack of investment in WA wine will start to have an impact.

“People have pulled out vines and a lot of others are leaving vines dormant; they will take two to three years and a lot of money to get back into production,” Mr Fogarty said.

“If no-one is planting and demand is growing, where is the supply going to come from?”

But as an experienced investor in agriculture, he knows how quickly conditions can change.

“The outlook for the industry is better than it has been for a long time, but there are lots of variables. Who knows what will happen to yields? That could change everything,” Mr Fogarty said.

Others in the sector, such as West Cape Howe Wines managing director Gavin Berry, are more cautious.

“It’s still hard to sell wine at a margin, the high dollar is making exports tricky, and there are plenty of domestic grapes and too much New Zealand sauvignon blanc,” Mr Berry said.

“Nothing will change quickly so it’s best to plan accordingly.”

The financial reports published by Ferngrove Vineyards, which was rescued two years ago by Chinese investor Xingfa Ma, give a rare public insight into the real state of the industry.

After moving close to a break-even result in 2011-12, Ferngrove suffered an increased loss in the half-year to December 2012.

“We’re still in rebuilding mode,” managing director Anthony Wilkes said.

“We’re reinvesting back into the business and taking a long view.”

Mr Fogarty’s wine strategy draws from his experience at technology company ERG, which he ran for 16 years and built into one of WA’s most valuable businesses.

“We built ERG up buying assets at the right time and getting deals done cheaply when nobody else wanted to buy things. I’m hoping we can do the same for the wine business,” he said.

At its peak, ERG had 1,600 staff and its ticketing systems are still in use in many cities around the world, including Hong Kong and Singapore.

“They are considered two of the best transit ticketing systems in the world, and they’ve run fantastically for over 10 years,” Mr Fogarty said.

ERG also hit major problems in its latter years, with protracted contractual disputes adversely affecting its business and the ‘tech wreck’ smashing its share price, leaving investors out of pocket.

Mr Fogarty doesn’t have to worry about external investors any more, with Fogarty Wine Group being a private concern.

He moved into the wine industry in 1994, when his family planted the first vines at their farm property near Jarrahdale.

“From about 1998 we started making our first wine, and then we decided to build our own winery, and that was Millbrook, which opened in 2001,” Mr Fogarty said.

In 2000, he bought Hunter Valley winery Lake's Folly, which will be 50 years old this year.

“I’d always been a mad keen fan of Lake's Folly. That gave us a real premium brand and a good position in the market and I haven’t regretted owning that for one second,” Mr Fogarty said.

After leaving ERG in 2003, Mr Fogarty focused on Margaret River, leading to the purchase of the Deep Woods winery.

“We invested in the vineyard, fixing it up, and now we can pretty bravely say we are right up the top in terms of Margaret River reds. Our next aim is to get to the same level with our chardonnay.”

Fogarty Wine Group added to its holdings in 2009, with the purchase of Smithbrook Wines at Pemberton.

Big opportunity

It was the failure of the old Evans & Tate business in 2007 that created the biggest opportunities for Mr Fogarty.

His corporate advisory group, Pendulum Capital, brought in McWilliam’s, which purchased the E&T brand and its core property.

“I bought the old Evans & Tate vineyard management business and started managing vineyards McWilliam’s have in WA, and we still have that business,” Mr Fogarty said.

“They wanted the brand and the core site, but didn’t want to manage people and vineyards in WA.”

South Australian company Boar’s Rock initially bought E&T’s wine-processing facility, but when it came back on the market last year, Mr Fogarty took the plunge.

McWilliam’s joined Mr Fogarty as a 20 per cent shareholder in the Margaret River facility, which is the largest wine processing facility in the state with a capacity of 10,000 tonnes.

The NSW-based winery also underpinned the facility’s future cash flow.

“McWilliam's entered a long-term contract with us to do all of their processing here,” Mr Fogarty said.

“We have a good relationship with them, we work very closely, we share information, and that’s helpful because they have more experience than we do.”

More to do

Mr Fogarty, who started his working life as a lawyer in 1974, said he had no intention of slowing down.

“I guess I’m fairly driven and I don’t do things by halves, so if I get into something, I like to get my teeth into it, rather than just muck around on the edges,” he told Business News.

“I was the same in sport, sailing, whatever I did.

“People think I’m crazy buying assets, they say I should be slowing down and retiring, but that’s just not me.”

Mr Fogarty believes the growth of Fogarty Wine Group has created some useful synergies, in processing and production, in the single website for the group’s wine club, and shared marketing and buying power.

“One of the hard things for a lot of the smaller wineries is having people who can put effort into the marketing and selling,” he said.

His experience negotiating contracts had also helped the business.

“We have long-term commitments for off-take, not many people in the wine industry have that, so you can plan your future a bit better,” Mr Fogarty said.

He said the Fogarty wineries had a high percentage of direct sales, which helped maintain margins and achieve consistent sales.

The four Fogarty wineries also give the group a range of products to suit different market niches.

Mr Fogarty said the awards won by its top wines had helped the group achieve good prices.

“Our premium wines are priced well north of $20 and they are selling extremely well; in fact we’ve pushed the prices up and they keep selling well,” he said.

He also recognises that all wineries need to deal with the big retail groups, Coles and Woolworths, which have put pricing pressure on all suppliers.

“If you try to assume you don’t have to deal with them, you’re kidding yourself,” Mr Fogarty said.

“The people that are doing well have an exceptionally good premium brand that can command premium prices.

“If you are just an average brand at the behest of the majors, you can’t make any money.”

Mr Fogarty urged fellow wine producers to take a sensible, longer-term view.

“I think people are getting excited because this year was down in yields, they think prices will rocket up, but that won’t happen,” he said.

“Consumers are used to paying low prices, and if the fruit prices go up too much, the majors will go and get their wine somewhere else.

“We all have to be a little bit sensible, consolidate and don’t rush.

“That’s what we’ve done before, we act a bit like a housing boom; we get excited that prices will roar up, and all the growers want more for their fruit, and then prices fall off again. There is no consistency.”