Wine industry's future rests on getting its act together
One: there’s universal agreement throughout Australia’s wine industry that its future depends on exports.
Two: there’s strong support for the proposition that securing this future will rely on expenditure on international marketing that equates with competitors’.
Three: there’s a ground swell of opinion that savings from reform of the Wine Equalisation Tax (WET) Rebate, could contribute substantially to fulfilling this pressing need.
So where’s the problem? The problem is the industry can’t expect the government to finance an international marketing campaign from WET reform so long as the industry remains imprecise or divided on what the reform should incorporate.
Macks Advisory’s view is that there’s never been a more propitious time for the industry to get its act together on this issue, especially in light of recent signing of a plethora of trade agreements.
None of what follows is an implication that industry leaders have been sitting on their hands. On the contrary, stay tuned for a subsequent article reviewing some of the industry’s significant recent steps forward.
WET reform recommendations
The Winemakers’ Federation of Australia (WFA) and Wine Grape Growers Australia (WGGA) have responded to the Federal Government’s WET Rebate discussion paper by saying the government could get a $278m revenue boost over four years by reform.
Their joint submission says $44m of this should be returned to the industry to mount a concerted marketing push into the US and across Asia.
It’s also recommended:
- Eligibility for the rebate be limited to businesses making and selling their own wine from premises in Australia – thus eliminating so-called “virtual” wineries and New Zealand claimants.
- Eligibility be removed from bulk, unpackaged and unbranded wine over a four-year period.
The rebate, worth up to $500,000 for wine producers and implemented post GST in a bid to support rural industry development, has been rorted by producers who split entities to make multiple rebate claims, and has also given rise to so-called winemakers who actually don’t make any wine. Such chicanery obviously doesn’t benefit rural communities.
The WFA and WGGA don’t want abolition of the rebate, but they claim $44m of the $278m their proposed “tightening” of the rebate would save the government should be returned to the industry to fund overseas promotion.
Indisputably the timing is right for this proposition; new trade agreements, growth opportunities afforded by an improvement in the AUS/US exchange rate, and some early signs of strengthening consumer interest from the prized North American market.
Some impacts of reform
The WFA and WGGA argue that if Australia could raise premium wine US exports to levels achieved seven years ago, this alone would raise international sales by $159m annually.
However both organisations concede that currently the WET Rebate is vital for the survival of some producers, and its reform would exacerbate difficulties for many.
Similarly, because of loss of supply contracts, the rebate is an important source of revenue for grape growing businesses that have chosen to make wine.
Thus people involved in these businesses would protest loudly should significant restrictive reform seem likely, which might well deter the government from enacting legislation that could result in an electoral backlash.
It’s why the government needs to be sure it will receive unqualified support from the industry before it begins seriously to consider handing back to it part of any savings from reducing rebate claimants under proposed reforms. It’s also why industry organisations must find ways of winning reform support from the disaffected in order to win promotional funding for the good of the industry as a whole.
And so we arrive at the core of the problem, namely a need for the industry to collectively decide not only who should have the right to claim a WET Rebate, but also in what circumstances wine producers might reasonably expect government help with marketing.
Realistic expectations
Is it not reasonable for Wine Australia’s chief executive Andreas Clark to lament, as he did at the recent WineTech 2015 conference in Adelaide, that Australia has a wine marketing budget of about $8m a year compared with the heavily government subsidised annual budgets of France ($400m) and Italy ($480m)? Is it not reasonable for him to expect the Australian Government to do more to support the nation’s wine producers in their unequal battle to compete effectively in a global wine market of unprecedented potential?
There is of course no reason why anyone who chooses to, and believes they can afford it, shouldn’t indulge themselves in the romance of grape growing and wine making -- but only if it’s at their own expense and nobody else’s.
Which seems to suggest two things. First, that taxpayers/governments have a right to expect that before a winery can claim a WET Rebate it should perhaps be able to establish its commercial credibility by proving it either is, or is capable of, earning a certain minimal return on investment (ROI). Secondly, that the industry needs to agree on a recommendation to the government of what that minimal ROI should be.
Mildara Blass legend, Ray King, has long argued that virtually all the wine industry’s fundamental problems stem from an endemic lack of financial discipline. That’s not to say all manner of things over which wine producers have no control can’t make life very, very difficult for them, but he’s adamant it’s the degree of financial rigor that is the main determinant of success or failure.
So what’s a reasonable
ROI Certainly Mr King has practiced what he preaches. In 17 years at Mildara (until 2000) earnings before interest and tax grew at an average compound rate of 27% while the company’s ROI averaged 18.5%.
Since then the industry has suffered the GFC and other trauma, but generally, wine industry capital intensity ( the investment necessary to earn $1 of sales) has been more or less constant at about $1.50.
To get 20% return on $1.50 (that’s 30c) it’s necessary to be functioning at an earnings-before-investment and tax-ratio (EBIT) of 30c in the dollar.
In his memoir King’s Run, Ray King wrote: “Getting to a 20% return is another story of course, because you have to introduce new products and so on. But you have to get your prices right. Unless you do that, you can double your business ten fold, but the ROI will still be the same unless you get your prices and margins right.”
He’s clearly implying that wine producers in a notoriously capital intensive business, should avoid falling for the pea-and-thimble trick of reducing prices to sell more product.
So what do industry leaders believe should be a reasonable expectation of ROI for Australian wine companies operating as genuine businesses? We’re not suggesting it should as high as 20%, but would they agree the figure should be one the government believes is reasonable, before serious talks about an international marketing subsidy can begin?
For more information, contact Macks Advisory on 08 8231 3323 or visit our office on Level 11, 99 Gawler Place, Adelaide SA 5000.
