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13/10/2008

Tony Keys responds to Paul Clancy's over-supply analysis

Tony Keys — author of The Key Report and contributing writer to the Australian and New Zealand Wine Industry Journal — writes in response to Paul Clancy’s article ‘Industry must unite to address over-supply crisis’, Daily Wine News Friday Forum, 10 October 2008.

I am in agreement with Paul Clancy and admit that I am sad to be so, as he must have been when writing the original. Clancy is not telling the Australian industry it has an ugly child, he is telling it the child is obese.

Clancy generously says, “There is nothing to be gained by the industry — winemakers or grapegrowers — seeking to find scapegoats.” He’s right, of course, but there is no reason why the steps that were taken can’t be laid out and those reasonable can’t indulge in a little soul searching.

Greed was the driver of this obesity. It is not the fault of the original authors of Strategy 2025 but the fault of all those extremely greedy producers, growers, investors who took it as gospel rather than what it was meant to be. As a document laying out what could be and what was needed to reach those goals, it remains unsurpassed in our industry

I remember it was somewhere around 1999/2000 that the A$1b export mark was broken, decades ahead of the 2025 prediction. It was also obvious that this heady expansion had a few flaws and the odd crack. However, the people then involved with the Australian Wine and Brandy Corporation and the Winemakers’ Federation of Australia were riding high and not willing to put this very greedy child on a diet. Clancy talks about “strong leadership”. I’m not in agreement with his logic. A parent who indulges their child is not a good parent. I think good leadership is now emerging as a result of lessons learnt. Back when newspapers were full of positive articles on how Australia was going to conquer the world and how we were showing the French, Germans, Italians, etc how it was done, the industry was in a blind indulgence of self congratulation and any urging caution were put smartly in their place. I feel more at ease with people like Stephen Strachan, Paul Henry, Robert Hill Smith, Michael Hill Smith, Josephine Rozman, John Grant, and a host of others who now appear to be proactive rather then the old guard who sat on the gravy train pumping up egos and talking up an industry that really wasn’t there.

The Key Report was established as an observer and commentator of the industry. The ridiculous prices paid for wine companies were simply not making sense. Remember when Jack Bendat took over Goundrey in the 1990s for around $10m and sold it to Vicour in 2002 for $62.5m? Also remember Hardys’ sale to Constellation Brands ($1.9b); The Petaluma Group to Lion Nathan ($229m); Rosemount to Southcorp ($1.5 billion); and the daddy of them all, Southcorp to Foster’s ($3.1b)?

In truth, Australian global wine sales never reached the heights the industry was deluding themselves they would. Stock was being moved via discounting and companies were over-producing and building up stock that couldn’t be sold at a profit but was sitting on the books at greatly inflated prices. All the above take-overs have resulted in the new acquirer declaring massive stock write-downs. Also, many of the private companies that didn’t have to publicly declare their business details were in the same position with more than one sailing very close to the wind.

For someone who has great affection for Australian wine and many people within the industry, it was very upsetting to watch this wonderful industry be so self-abusive. Lessons simply would not be learnt. The ‘she’ll be right’ attitude ceased to be admirable or charming and became arrogance.

The consumer was being dictated to. Of course they wanted National Wine Centre. What a debacle that turned out. Of course they would flock to wine sites such as Winepros and pay subscription fees for doing so — another debacle. People in the Australian industry thought the consumer could be herded.

Meanwhile, greed won out and vineyards continued to be planted. I put it very simply that the world does not want the results of a 2MT Australian harvest. Our wine companies simply cannot sell that much wine unless they dump it at below cost of production. Screwing the grapegrowers to the ground is nonsense, as they have to earn enough to survive and reinvest. Therefore, the sad truth is a need to scale back production on one hand and explore new market opportunities on the other. Unfortunately, emerging markets are unlikely to grow as fast as we need so it will be growers who will suffer.

Like it or not, what Paul Clancy is saying is truth. A harvest that tops 1.5MT and perhaps dips to below a million in a bad year will ultimately be better for the health of the Australian wine industry. How it can be achieved with the least pain is far harder to answer.

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Braud

Leeder Analytical

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Bayer

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