Confirming the suspicions of many in the industry, a pre-existing wine oversupply and a strong dollar put pressure on the profits of smaller wineries in 2005-06, according to a survey by Deloitte and the Winemakers' Federation of Australia
Confirming the suspicions of many in the industry, a pre-existing wine oversupply and a strong dollar put pressure on the profits of smaller wineries in the 2006 financial year, according to a survey by Deloitte and the Winemakers' Federation of Australia.
The full text of a Deloitte announcement is pasted below
The cumulative oversupply of wine from the 2004 to 2006 vintages and a relatively strong Australian Dollar placed pressure on the profits of smaller wineries in the 2006 financial year, according to the 2007 Annual Financial Wine Benchmarking Survey, released today by Deloitte and the Winemakers' Federation of Australia.
The study examines the financial performance of wineries located across Australia for the 2006 financial year, and provides the wine industry with data upon which to benchmark results.
Deloitte Partner and leader of the Deloitte Wine Industry Group, Mr Stephen Harvey said wineries with revenues greater than $20m responded well to 2006 market conditions and recorded Earnings Before Tax (EBT) of 17.3%, whilst wineries with revenues less than $1m recorded EBT losses of 18.6% during 2006.
"Due to the cumulative 2006 vintage oversupply, wineries operating in the $0-$5m segment invested heavily in marketing costs in order to remain competitive, this in turn pushed up the cost of case sales revenue."
Stephen Strachan, Chief Executive of the Winemakers' Federation of Australia, said that the survey results are indicative of the difficult trading conditions that existed during the 2006 financial year.
"Whilst the difficulties of large vintages have decreased for the moment, winemakers now face new challenges as the effects of the drought and water restrictions come to the fore.
"In addition the consolidation of retail outlets in both the domestic and international markets, and the increasing number of wine participants and brands, put pressure on wineries to reduce prices and to increase marketing overheads to achieve sales," Mr Strachan said.
"We hope that the results of the 2006 survey will assist wineries to better understand the drivers of their financial performance and to identify opportunities for future profit growth."
Significant findings of the 2006 Annual Financial Benchmarking Survey were:
The average Earnings before Tax (EBT) for the very small wineries was -18.6% of revenue, compared to 8.1% in 2005, with 60% of the participants within this group recording a loss for the 2006 vintage.
$1m - $5m wineries
Despite reporting strong 'Other non-operating income' wineries within this category recorded a sharp decline in EBT dropping to -0.7% in 2006, compared to 2.7% in 2005.
$5m - $10m wineries
This group of wineries recorded an EBT profit of 12.2% in 2006. This group also saw a substantial increase in selling costs indicating that this market segment continues to remain highly competitive.
$10m - $20m wineries
Wineries in this group fought back from EBT losses of -7.0% in 2005 to EBT of 10.0% in 2006, attributable to strong performance in wholesale distribution, retail sales, and on-line orders.
Wineries with sales in excess of $20m have had the strongest EBT growth, up from 6.3% in 2005 to 17.3% in 2006. This group also had a sharp increase in export sales, increasing to 71% of total sales from 2005.
The export market continues to grow for Australian wineries with increases experienced across all sized wineries. Wineries in the $20m plus group have lead the way in export growth.
Smaller wineries struggled to fully utilise their production facilities and have therefore been unable to achieve the 50% gross margin objective set out in the Wine Makers Federations' Directions to 2025 report.
Domestic wine sales
During 2006 wineries operating in the $5m-$10m and $10-$20m categories were successful in increasing their proportion of wine sold in the $15-$20 bottle category, whilst wineries in the $1m-$5m category have seen the opposite trend with a reduction in proportionate sales in the $15-$20 bottle category.
Conversely, $1-$5m wineries saw an increase in the $7-$10 bottle category which may be attributable to these wineries selling surplus stock as clean skins and may have contributed to a reduction in profitability for this group.