Wine Industry Benchmarking And Insights 2018

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Growing SmarterWine industry benchmarking and insights 2018New ZealandFebruary 2019

Wine industry benchmarking and insights 2018 Contents and forewordContentsKey findings2Featured insight #1: Innovation impact3Survey insights: Profitability5Survey insights: Balance sheet6Survey insights: Key ratios7Survey insights: Return on assets8Industry insights: Supply & demand9Industry insights: Key markets10Featured insight #2: Customer connections11About and further information12Appendix / Survey benchmark tables14Peter FelsteadPartner, DeloittePhilip GreganCEO, New ZealandWinegrowersIt is with great pleasure to present the 2018results of our annual benchmarking survey inconjunction with ANZ and New ZealandWinegrowers. The New Zealand wine industrycontinues to perform well on the back ofprofitability for wineries of all sizes, strengtheningbalance sheets and a healthy propensity forinnovation. We would like to express our sincerethanks to those who provided data for the surveyand wish you all the best for the year ahead.New Zealand Winegrowers seeks to provide highquality data to assist informed discussion anddecision making about the industry by ourmembers and stakeholders. We are pleased topartner with Deloitte and ANZ in this winerybenchmarking which continues to provide awealth of industry data and insights. Best wishesfor a successful and prosperous 2019.With strong profitability and balance sheets thisreport makes for positive reading. But with plentyof challenges on the horizon, notably aroundenvironment changes and staffing pressure,growing smarter through innovation is particularlyrelevant. We look forward to further discussion onthese themes with businesses in the year ahead.John BennettGeneral ManagerCentral Region,ANZ Commercial &Agri1

Wine industry benchmarking and insights 2018 Key FindingsKey findingsInnovation impactProfitability stable(pages 3 and 4)Survey results indicate a positivecorrelation between innovation andfinancial performance of wineries.Respondents report digital tools areproving most beneficial in terms ofimproving business decision makingand customer experiences.(pages 5 and 15)94%Investing in developingequipment technologiesis important to 94% ofsurvey respondents.Supply and demand(page 9)2018 saw a 1.8% lift in average pricesreceived by Kiwi wineries after salesoutstripped supply in the previous year.Prices per litre ranged from 3.96/l forbulk export wine, 8.47/l for packagedexports and 10.34/l for supply into thedomestic market. 7.33/lThe average sale priceper litre received bywineries in 2018.Return on assets(pages 8 and 17)Return on assets (EBIT/Assets) variedacross the different tiers in the surveyfrom 2.4% ( 1.5- 5m turnover) to8.4% ( 20m turnover).8.1%The combined totalReturn on assets(EBIT/Assets) fromsurvey dataset.#3Vintage-2018In 2018 thecombined turnoverof wineries in NewZealand wasestimated at 2.3billion, with 1.7billion of thiscoming from exportearnings.2018 surveyrespondents accountfor approximately44% of the NewZealand wineindustry by litres ofwine produced and35% by export salesrevenue generatedfor the 2018 year.For only the third time inthe history of the surveyall tiers achievedprofitable results.Positive profitability was achievedacross all tiers but as withprevious years we saw smallerwineries generally achievinglower returns with far greatervariability amongst respondents.Stronger balancesheets (pages 6 and 16)56%Total equity as apercentage of total assetsfrom survey dataset.Equity levels (as a percentage oftotal assets) for the wider surveygroup have been steadilyincreasing over the last 10 years.These equity levels ranged from54% ( 20m turnover) to 72%( 5- 10m turnover).Connecting tocustomers(pages 11 and 18)86%Direct to consumer salesvia cellar door or onlineare undertaken by 86%of survey respondents.Connecting directly with customersis increasingly important to buildtrust, brand reputation andprofitable sales.2

Wine industry benchmarking and insights 2018 Featured insightFeatured insight #1 – Innovation impactKiwi wineries are increasing investment innew plant and equipment technologiesImproving quality in the winerydrives most investmentThis is followed by productivity drivenimprovements in the vineyard. Forlarger wineries, winery productivityinvestments take precedent which isunsurprising given the successful focuson cost of production amongst largerwineries.Stronger returns are beingachieved by wineries thatprioritise innovation spendingSurvey data indicates a positive linkbetween innovation spending andreturns, as illustrated in the followingchart. Are financially strong wineriesable to prioritise investment becausethey have more cash to invest, or dothey have more to invest as the resultof the innovations already applied?3The answer is likely a combination ofboth factors along with other factorsunique to every business.Smaller wineries have thestrongest intentions to increaseinnovation spendingThere are many reasons why smallerwineries may not have invested asmuch into innovative technologies.The most likely rationale is therelatively weaker cash flows andretained earnings experienced bythese companies, which can rendercosts as prohibitive. Furthermore,some types of plant and equipmentbecome comparatively more costeffective as scale increases. This canmake some investment decisionsdifficult to justify for smaller wineries.Problem solvingStrong investment intentions suggestpotentially cost effective andinnovative solutions are on the horizonfor the myriad of challenges wineriesare facing. Such challenges includestaff availability and cost, Health &Safety, and optimising or overcomingbiophysical (including water) factors inthe winery and vineyard.Survey findings supported by otherresearchA 2018 ANZ report, focussed on innovation inthe New Zealand manufacturing sector, founda correlation between investment ininnovation and the achievement ofproductivity gains. The data showed thosewho invested in innovation had a strongerreturn on invested capital than those whodidn’t, and sales revenue grew faster.Innovative technologies in plant andequipment – 2018 Survey questionsRespondents were asked to describe theirinvestment approach and opportunities interms of different parts of the business. Theywere also asked about their investmentintentions and how they prioritise spending inregards to technological advancements inplant and equipment. 94% of respondentsreported that investing in developingtechnologies is important.Linking innovation investment priorities with net profit performance% of respondents prioritisinginnovation investmentLarger wineries are more likely toprioritise innovation spendingEmerging technologies in the wineryare receiving investment priority fromlarger wineries. These samecompanies also tended to generatestronger profits and return on assetsthan other wineries.60%50%40%30%20%10%0% 0%0-10%10-20%20% Net profit grouping (% of total revenue)In the chart above we have grouped responses by net profit (as a percentage of totalrevenue). We then mapped the percentage of respondents in each group that identifiedinnovation investment as a priority. The positive correlation aligns with the earlier findingthat larger wineries, who tend to achieve stronger profitability, are more likely toprioritise innovation investment.

Wine industry benchmarking and insights 2018 Featured insightGrowing smarter with digital tools“By using the latest technology we’re able to make good decisions more quickly, to reduceour environmental footprint and produce the finest quality wines for our customers.”Emma Marris, Marisco VineyardsSurvey results indicate that wineriesare adopting digital tools for a rangeof reasons , the top three being:1. Improving customer experience &engagement2. Improving business decision making3. Improving staff experience andengagementLarger wineries are leading with abroader range of digital toolsThe Internet of Things (IoT) uptake is agreat example of larger wineries leadingthe adoption as they use IoT technologyfar more than smaller companies.Furthermore, across all tiers of digitaltools, larger wineries have the strongestintentions to increase adoption andengagement with digital tools.Cloud based applications, mobile andsocial media are most usedtechnologiesUse of most digital tools appears toincrease with scale, with the exception ofsocial media which appears to be wellused by wineries of all sizes.Smaller wineries are also leveragingtechnologyMany smaller wineries are maintainingcompetitiveness in a tight market byleveraging technology to connect andengage with customers. All for a relativelylow cost investment.Survey findings supported by otherresearchStudies by Deloitte internationally havesupported our findings that a benefit ofdigital tools is an improved customerexperience.Digital tools change the way customersengage with businesses and provide anopportunity to strengthen customerrelationships. They help businesses targetmore customers in new markets.In with the new but don’t throw outthe old just yet!Digital tools are becoming easier to use,and the value of them is becoming betterunderstood. But it appears these tools arenot yet seen as transformative tobusiness. In other words they areprimarily seen as complementary, ratherthan replacements for processes and toolsalready in place.Digital tools – 2018 Survey questionsRespondents were asked about the rangeof digital tools used in their business andthe benefits associated with increasedadoption of those tools. Finally they wereasked about their intentions in relation toadoption and engagement of digital tools.RecommendationFor wine businesses, use this report as aprompt to think about where you are at interms of investing in innovativetechnologies. Remember also thatinnovation isn’t necessarily about financialinvestment. It’s very much about a way ofthinking, of doing things differently andbetter. What can you do to foster aculture which drives innovation?Further reading:Deloitte - Tech Trends 2018: Thesymphonic enterpriseDeloitte - The digital transformation ofcustomer servicesANZ - Innovation & Productivity Report2018You don’t have to reinvent the wheel,think about what you can learn from otherbusinesses who are innovating and usingdigital tools.4

Wine industry benchmarking and insights 2018 Survey insightsSurvey insights – ProfitabilityPositive profit across all tiers of surveyedwineries suggest 2018 was a good yearAll tiers reported positive profitfor only the third time in thehistory of the surveyOn averaging the results for eachturnover category we found they allrecorded a positive profit before taxresult for only the third time in thetwelve year history of the survey(2014, 2016 and 2018).Consistent performance amongstlarger wineriesThe 20m category once againachieved the largest average profitafter tax at 18.7%. Total expenses at19.3% of sales were lowest amongstthis group. This reinforces the resultsof previous surveys showing thatgenerally profitability increases withsize due to economies of scale.Cost challenges amongst smallerwineriesAt the other end of the scale the twosmallest tiers of wineries had thehighest levels of expenses and thelowest profitability as a percentage ofsales.Income diversification andvariability are features of small tomid-size wineriesThe variability of profit marginsamongst smaller wineries is evident inthe bottom two charts. The black lineindicates the median (or ‘middle’)profit margin with the shaded barscapturing the profit margins of the‘middle’ 50% of participants.Furthermore, smaller wineriestypically generate 10-15% of revenuethrough means other than wine sales.Grape and hospitality sales featureamongst other sources of revenue.Impact on balance sheetOne consequence of volatile and weakprofitability generally experienced bysmaller wineries is the inability toaccumulate retained earnings. This isin contrast to larger wineries whichare generally able to build up strongreserves. Retained earnings offerbusinesses flexibility and options.The full survey results and further profit andloss analysis can be found on page 15 of thereport.Profit before tax – All wineries(as a % of sales; average by turnover band)40%30%20%10%0%(10%)(20%)(30%)(40%)2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0-1.5m 1.5-5mProfit before tax - 0- 1.5mturnover(as a % of sales; quartile range) 10-20m 20m Profit before tax - 1.5m- 20m (as a % of sales; quartile range)25%15%5%(5%)(15%)(25%)2013 2014 2015 2016 2017 20185 5-10m2013 2014 2015 2016 2017 2018

Wine industry benchmarking and insights 2018 Survey insightsSurvey insights – Balance sheetBalance sheets strong as equity levelsrise in 2018Equity ratios have strengthenedacross the survey groupIt is also pleasing to see all tiersreporting average levels of equityabove 50% in proportion to totalassets. The chart above right useslinear trend lines to illustrate equityratio improvements over the last tenyears.Smaller wineries most reliant onshareholder fundingFor the purposes of benchmarking,shareholder loans have been treatedas ‘quasi equity’ as they reflectshareholder capital. This has proppedup equity levels for this tier.Another feature of smaller winerybalance sheets is reflected in thechart to the bottom right of the page.Here we see working capital (beingcurrent assets less current liabilities)peaking at the 1.5-5m tier at 50%of assets.This is mostly driven by higher levelsof inventory than the other tiers. Ofcourse varietal mix could well play arole here, with some varietals beingretained on the balance sheetsignificantly longer than the dominantSauvignon Blanc varietal.Larger wineries achieve largestequity lift and apply tight workingcapital processesFrom 2017 to 2018 equity levels liftedmost dramatically in the 10m tiers,off the back of reductions in debtlevels.Total equity(as a % of total 2010201120132014Linear ( 0-1.5m)Linear ( 1.5-5m)Linear ( 10-20m)Linear ( 20m )On the working capital front we cansee that relative levels (includinginventory) tend to reduce as wineryscale increases.Median working capital(as a % of total assets)Aside from the influence of varietalmix (as noted above), this is likely aresult of the larger operatorsmaintaining more sophisticated andefficient processes, and procedures tomanage lower levels of workingcapital than their smallercounterparts.50%The full survey results and further profit andloss analysis can be found on page 16 of thereport.201260%50%44%2015201620172018Linear ( 5-10m)47%40%32%30%21%20%10%5%6% 0-1.5m 1.5-5m9%3%2%0%Working capital 5-10m 10-20m 20m Working capital (excluding inventory)6

Wine industry benchmarking and insights 2018 Survey insightsSurvey insights – Key ratiosTaking a closer look at revenue peremployee and domestic vs export salesThe domestic vs export storyThe revenue per FTE storyAs evidenced by the bottom chart the 0-1.5m category strongly favoursdomestic sales. For the smallerproducers, sales into the domesticmarket often appear more attractiveat smaller scales with generally lowermarketing and distribution costs,shorter cash cycles and no currencyrisk.This is the first year the survey hasasked participants for data onemployee numbers so that we can seethe relative revenue per full timeequivalent (FTE). As expected thesmaller tiers had a lower revenue perFTE reflective of the owner operatornature of many of these businesses.Similarly with NZ wine export valuesgrowing past 1.7 billion, it is notsurprising that larger wineries aretargeting and capitalising on exportmarkets at scalable volumes whencompared to that of the domesticmarket.The domestic/export split is almostdirectly converse when examining thelargest and smallest tiers ofrespondents. With the smallestwineries selling 69% of their wine intothe domestic market. The largestwineries are selling 66% of their wineinto export markets.For purposes of this survey, wegrouped all 20m turnover wineriesinto one tier. Despite a cleardistinction between the number ofemployees for the 20- 100m and 100m tiers, there is a strongsimilarity for the revenue peremployee. This suggests limitedefficiencies (in terms of revenue peremployee) are gained when wineriesexpand beyond 20m turnover.The full survey results and further profitand loss analysis can be found on page17 of the report. 0-1.5m 5-10m 10-20m 20m Per FTE employeeAverage 6,134Gross 50931,83646,470113,999181,822Profit before tax13,90210,60938,07974,470127,965Wine sale dollars by 2.7%31.5%10%17.9%21.2% 20m Total0% 0-1.5m7 1.5-5m 1.5-5m 5-10mDomestic 10-20mExportBulk

Wine industry benchmarking and insights 2018 Survey insightsSurvey insights – Return on assetsResults reveal significant variation, with largerwineries generally achieving greater returnsComparison of returns on assets9%8.4%8%The 2018 Survey shows an averagereturn range from 5.7% for our 01.5m participants to 8.4% for thosewith revenue in excess of 20m.Revenue per litre and RoAA negative correlation exists betweenlevels of revenue per litre and returnson assets as evidenced by the chart(below right). As winery size increases,the revenue per litre tends to decreasedue to the sales mix in terms ofvarietal, and export mix of bulk andpackaged formats. We note largerwineries selling a higher proportion ofbulk wine which is at the lowest pricepoint.6%Conversely we see return on assetsgenerally increasing with winery scale.As noted earlier, larger wineries aregenerally more profitable. Again manyfactors play a role here, most notablyeconomies of scale where resourcecapacity is maximised comparative tosmaller wineries.6.0%5.7%5.2%5%4%3%2.4%2%1%0%Surveyed winery returns comparedto Marlborough grower only modelAs a comparison, we have included inthe chart (above right) the RoA fromthe 2018 Marlborough VineyardBenchmarking Report produced by NewZealand Winegrowers and Ministry forPrimary Industries. The 5.2% RoAfigure is based on EBIT/total assets forthe Marlborough Vineyard Model. Thisis indicative of returns achieved in2018 by Marlborough basedwinegrowers that sell grapes towineries.Winegrowers can access furtherinformation on viticulture benchmarkingby visiting NZ Wine or MPI. 0-1.5m 1.5-5m 5-10mWinery (2018 survey results) 10-20m 20m Marlborough2018 Grower (Collier / MPI)Revenue per litre vs return on assets 169.0% 148.0% 127.0%6.0% 105.0% 84.0% 63.0% 42.0% 21.0% 0Return on assetsWhilst there are a number of ways tomeasure this return, we have opted forearnings before interest and tax (EBIT)divided by total assets.7.0%7%Revenue per litreAn important and usefulcomparative measureReturn on assets (RoA) is an importantmeasure of the performance of anybusiness’ assets, especially capitalintensive businesses such as integratedwineries.Source: Deloitte, NZ Wine, MPI, Colliers International0.0% 0-1.5m 1.5-5m 5-10mRevenue per litre 10-20m 20m Return on assets8

Wine industry benchmarking and insights 2018 Industry insightsIndustry insights – Supply & demandAnother strong export performance from Kiwi wineries saw total wine saleslift again in 2018 with a small uplift in prices to support total earningsDomestic market supplementedby importsWine sales within New Zealand accounted for17% of total wine sold with the remainderexported. The lower volume from the 2017vintage, combined with the lift in wineexports, resulted in a 2.4% increase in wineimported into New Zealand in 2018.Supply shortfalls drive increase in 2018export price to 6.70/lEvery year we analyse the scale of thevintage (in litres) and deduct export anddomestic sales volumes from the followingyear to provide an indicator of the size ofsurplus or deficit carried over. Generally weobserve a lift in export prices in the y

CEO, New Zealand Winegrowers John Bennett General Manager Central Region, ANZ Commercial & Agri It is with great pleasure to present the 2018 results of our annual benchmarking survey in conjunction with ANZ and New Zealand Winegrowers. The New Zealand wine industry continues to perform well on the back of

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