Chinese backer helps Ferngrove rebuild

THE challenging state of the wine industry has been illustrated by Ferngrove Vineyards’ financial reports, which reveal the business has incurred losses totalling $14.1 million over the three and a half years to December 2012.

The difficult conditions continued in the half-year to December, when Ferngrove incurred another loss despite having raised $17.9 million in new capital to strengthen its balance sheet.

The biggest investor in Ferngrove has been China’s Hangzhou Wine Group, headed by Xingfa Ma, who owns 88 per cent of the business through local entity Pegasus Corp.

He invested $10 million in Ferngrove in 2011 as part of a deal that involved Ferngrove focusing on bottled wine sales in China through a network of retail stores Hangzhou planned to establish.

Managing director Anthony Wilkes said 60 Ferngrove-branded stores had opened in China since then.

The China strategy appeared to be working well in the 2012 financial year; sales to China accounted for 58 per cent of total sales and achieved a higher margin due to the elimination of the 30 per cent distributor charge incurred on domestic sales.

However, sales to China fell by 23 per cent in the half-year to December, with Ferngrove saying it was difficult to plan or estimate sales volume accurately without a long-term trading history.

“The (China) market is still in its infancy and our brand is new to this market,” the company’s directors said in their half-year report.

The directors’ report listed a string of challenges facing Ferngrove, which has nearly 300 shareholders.

Its business changed dramatically in 2011 after Treasury Wine Estates (formerly part of Foster’s Group) did not renew its bulk wine contract. As a result, revenue from bulk wine sales fell by 51 per cent in the half-year to December.

“Domestically conditions are still tough, with supermarket dominance resulting in heavy discounting and high competition and continued New Zealand sauvignon blanc sales affecting some of the key products Ferngrove produces,” the directors’ report stated.

Ferngrove also faced higher costs, after buying the 120-hectare Ferndale vineyard in July 2012 (for $2 million) and the 40ha Vintage Park vineyard in September 2011.

Mr Wilkes said the purchases of these neighbouring vineyards gave Ferngrove control of 350ha in total, and illustrated the long-term approach Mr Ma was taking to the business.

“The long-term results of owning these vineyards will see a reduction in the amount and cost of fruit purchased from contract growers,” he said.

Ferngrove was one of the largest and most ambitious wine businesses established in WA in the past 20 years.

Its Great Southern winery is capable of processing 7,500 tonnes of fruit per annum; in practice, its crush has averaged about 5,400t/year over the past seven years.

Its initial strategy was to produce wine for both its own branded products and for bulk sales to other wine producers.

With a current focus on bottled wine sales, including red wine, Mr Wilkes said the typical crush would be between 4,000 and 5,000 litres a year.

Mr Wilkes said the appointment of Angove’s as its domestic distributor was another important step.