The grandson drives the Porsche

“Hawke’s Bay Wine Country” … conjures up nothing but positive images. Sunshine. Grape-heavy vineyards. Conviviality. Long relaxed lunches on winery terraces. Great tasting – and award-winning – wines, in many varieties.

With all this to offer, the wine business must be rolling in dough. After all, winemaking is the glamour biz of Hawke’s Bay.

Too good to be true? Well, it isn’t exactly true.

Watch media headlines over time and you’re likely to be puzzled. On the one hand, example after example of Hawke’s Bay wines winning prestigious awards and tastings. But on other days, gloomy headlines about falling consumption worldwide, a glut of product on the market, desperate price-cutting, grape growers with cancelled purchase contracts, and wineries for sale.

A confusing message: Hawke’s Bay is producing terrific wines … that lose money.

At least confusing to me. So I set out to learn more about the situation, interviewing several leaders in the wine industry – Graeme Avery at Sileni, Steve Smith at Craggy Range, Peter Holley at Mission, Nicholas Buck at Te Mata, Rod McDonald at Matariki (also chair of HB Winegrowers). I talked to some others under “deep cover.” And read up on the official line from NZ Winegrowers and HB Winegrowers associations. Here’s what I learned.

First, some basic facts. HB has about 71 wineries and 172 grape growers. We have about 4,700 hectares of wine-producing grapes, including the largest plantings of red grape varieties in NZ. Reds make up about 50% of plantings and production. But chardonnay is the largest single variety planted, at 26% (followed by merlot at 25%). With this profile, HB Winegrowers promotes the Bay as “New Zealand’s Red Wine Capital.”

And as the awards testify, our best reds are world-class. Go reds! But, as one winemaker said, “Medals don’t translate into money in the till.”

Unhappily for our reds, 55% of NZ wine sells abroad. And when the world’s consumers look at New Zealand wine, they see white! Specifically … sauvignon blanc, mainly from those over-producing opportunists in Marlborough! Currently, fully 80% of all wine exported from NZ is sauvignon blanc … “the workhorse of the NZ industry.” If New Zealand wine has a brand image abroad, it is sauvignon white … bought in supermarkets more than wine shops.

The white problem
This white image — and market reality — causes our red region some problems.

Firstly, when the “externalities” of global recession, flattened demand growth, and over-supply force wine prices down worldwide, our exports immediately take a hit, most notably all that sauvignon blanc. But reduced margins for “sauv” ripple through the industry. As Graeme Avery says: “Everyone in the industry needs a sauv to market … it’s the door opener that allows us to introduce other varieties.” While the top end reds make the reputation amongst connoisseurs, said several of my experts, all producers need a lower price “commercial offering” to generate cash flow and pay the rent. And if sauv prices are driven down, it’s that much harder to maintain prices for more expensive reds.

Secondly, compounding the global forces, with favorable climatic conditions and “speculators throwing vines in the ground,” Marlborough sauv had two extraordinary production years in 2008 and 2009. The first came somewhat as a surprise; the second time around, said one HB observer, “they should have known better.” Meaning … they should have dampened supply; there’s simply too much. HB winemakers anticipate the 2010 Marlborough sauv production volume with some angst.

Thirdly, sauv is the lowest cost wine to produce. The Bay’s red merchants describe sauv almost as the “poor cousin” to reds’ (and chardonnay’s) more demanding and sophisticated pedigree. Reds require “expensive dirt” as Peter Holley put it, oak barrels, vines with lower yields, longer maturation … all adding up to higher cost.

Those higher cost, higher priced reds are destined for the international marketplace, where there are more palates and wallets suited to more expensive red wines. But with the new recession-induced consumer frugality, HB reds – despite their quality and recognition – have suffered the same falling demand and margins as everyone else. “It’s a consumer feast out there now,” said one winemaker.

Where to, then? Given recognized quality, and assuming the recession has bottomed in key export markets (NZ’s top three are Australia, UK, and US), how do HB winemakers find their way to profitability?

Better marketing
The unanimous answer … better marketing. Without doubt, HB winemakers can make a superior product. But the industry, relatively young in NZ, is still “adolescent” when it comes to marketing. Said one winemaker: “We’re sitting on something here in Hawke’s Bay that everyone wants. But we’ve got to tell our story better.”

Each industry leader I interviewed started the marketing conversation by noting the underlying importance of the New Zealand brand. That positive image – largely on the basis of spectacular landscapes and a perceived “clean, green” environment – is seen as a hugely beneficial platform.

But from that point, views differ on how best (or even, whether) to market a wine identity for “Hawke’s Bay.” Marlborough is sauvignon blanc. Central Otago is pinot noir. Hawke’s Bay is …??

Rod McDonald says: “Our curse is our ability to do lots of things well.” He argues that HB must yet establish a primary category like the other two regions. Merlot blends? What about our largest planting … chardonnay?

Steve Smith would agree that “Hawke’s Bay” has branding value: “Hawke’s Bay is the most glamorous wine-growing region in New Zealand.” However, he sees that value more in terms of attracting visitors, including wine aficionados (one winery has built a database of 9,000 or so visitors), than as a regional identity to leverage directly for selling wine … a la Bordeaux.

He too believes “Hawke’s Bay has a problem of diversity.” To him, the region’s ability to produce well a wide range of varieties dilutes the story “Hawke’s Bay” can tell as a region.

To Steve, selling high-end wine is about telling compelling stories unique to the wine’s production. To focus the story, “we (Craggy) associate ourselves more with Gimblett Gravels than with Hawke’s Bay.” Craggy Range has allied itself with eleven other “family” brands from throughout New Zealand – the Family of Twelve – to market collaboratively abroad. What links the group is a philosophy – a personal, authentic style of quality winemaking – as opposed to a region.

Peter Holley at Mission Estate (which certainly gets more than its share of “wine country” visitors) also emphasizes the emergence of Gimblett Gravels as the region’s only true wine appellation. In marketing wine, “big is bad,” he says. “Small and approachable” is better. As he sees it, Gimblett Gravels is a compact, defined area with a distinctive product and story to tell … and producers there are consolidating marketing resources.

Another conundrum facing all wine marketers, not just ours in HB, is what Peter calls the “brand promiscuity” of wine aficionados. Sophisticated marketing aims to identify and build loyalty amongst the specific best customers for one’s product. In most businesses, these loyalists sustain the highest profit margins.

However, high-end wine buyers by nature are constantly on the prowl for new, better, undiscovered. Even if they stick with a winemaker, they need to be re-impressed by each annual vintage. Making loyalty-building even more difficult is multi-tiered distribution, separating winemakers from end consumers. Establishing direct contact with individual customers is difficult, if not impossible. Steve Smith and Rod McDonald agree that online social media will create more opportunities to engage end customers directly and encourage their brand evangelism.

All in all, wine marketing presents some daunting challenges, even in the best of times.

The future
So, are HB winemakers making any money at present from making wine? Each winemaker I asked that question answered first with silence, then with a smile, then cautiously. From what I heard, I’d bet on Te Mata. Of course, all noted that generalizations were impossible, given different business goals (i.e., profitability might not be paramount), level and maturity of capital investments, impact of allied businesses (like restaurants), specific varieties planted, and access to technical expertise.

That said, my takeaway is that all would agree that at present few winemakers in Hawke’s Bay (or NZ) are turning a profit. “It would be the exception, not the rule,” said one. “Most are not,” said another. Is that fatal? As one local expert said: “Everything is cyclical and wine will return to profit. It may take time but it will happen.”

One view was shared by all. As one put it: “If you’re in the HB wine industry, you’ve got to be in it for the long-term … whereas an opportunist can make money in Marlborough.” In other words, if serious winemaking – meaning making a profit from consistently producing high quality wine – is in fact the chief goal, it must be approached as a long-term proposition. Even multi-generational. The founders of Craggy Range were advised to think in terms of building a legacy for their grandchildren.

Or, to paraphrase Peter Holley … The old man labours to establish the first plantings and dies young and penniless. His son continues and, if he does well, builds the business to modest success. The lucky grandson eventually gets to drive the Porsche!

Tom Belford

See this related article from Dec 10 New York Times: “New Zealand Struggles to Keep Wine Prices Up”