Australia's major drinks companies have tied up some lucrative deals in the last year but there are a host of smaller wine makers that also want to pursue international opportunities but lack the clout. David Robertson reports on their uncertain future.

The brewing companies Fosters and Lion Nathan have reached a stalemate in their domestic market and are both following international wine strategies (Fosters a little more successfully than Lion). The major wine companies Southcorp, BRL Hardy and Orlando Wyndham all look healthy but what will happen to the mid-sized wineries?

"Consolidation within the second tier companies is going to be severe," says one analyst, echoing the feelings of many wine industry commentators in Australia. With a population of less than 20m, many of them die-hard beer drinkers, there is little scope for significant domestic growth in wine consumption, which is why nearly all wineries are considering international opportunities.

But there are concerns that the opportunities available do not match the number of companies seeking them. There can only be a handful of premium wine makers that can survive on reputation alone and the rest will have to fight it out with the heavyweights in attracting the attention of wine merchants in Europe and the US. In particular they will struggle to do deals with the supermarket chains and major liquor retailers who are increasingly demanding a large guaranteed supply.

The assumption is that many of these smaller wineries will merge, go bust or simply make do with small, largely cellar door, sales. McWilliams Wines, the largest family-owned wine maker in Australia, is one of the highest profile mid-sized companies and one of the obvious candidates for consolidation - the rumour mill geared up earlier this year when the group appointed Grant Samuel, PricewaterhouseCoopers and Ernst&Young to look into growth options. But chief executive Kevin McLintock rejects the idea that there is no hope for middle leaguers.

"There is a large area in the playing field for the middle-sized companies," he told the Australian Financial Review.

McWilliams, which has sales 2.5m cases a year, is owned by four parts of the extended McWilliams family and some analysts believe the appointment of advisers possibly indicates some members of the family want to sell up.

Despite McLintock's comments analysts believe the most likely scenario for the private company will be to sell part of its equity to a major drinks giant, Allied Domecq is the most frequently touted partner, in return for access to a global distribution system.

"There is a large area in the playing field for the middle-sized companies"
Kevin McLintock

But McWilliams is in a lucky position to be able to court international partners. For the other mid and small wineries integration is the only way to gain size.

This consolidation is already occurring with Petaluma stalking Wirra Wirra Vineyards and Brian McGuigan Wines talking to Simeon Wines.

Petaluma is well regarded by analysts and was easily able to raise A$28m in May in order to follow up its low-key acquisition plan. It has already added a number of premium brands to its stable and analysts believe it will be one of the future success stories in the Australian market.

"Petaluma is a fantastic brand. It is a well run company," said an analyst.

Cranswick has for some time been considered a mid-sized company that was heading towards bigger and better things but sentiment seems to have shifted against it following Southcorp's deal with Rosemount.

"Cranswick has a lot of business tied up in contract with Southcorp and that will disappear with Rosemount, it doesn't have a lot of brand equity which could cause it trouble in the medium term," said an analyst.

"McGuigan is interesting as a significant proportion of its profits comes
from development of vineyard projects for other people"

Analysts are also edgy about McGuigan Wines despite its processing alliance with Simeon Wines, again, because of its reliance on the success of other vineyards. "McGuigan is interesting as a significant proportion of its profits comes from development of vineyard projects for other people. They provide take-off of the grapes, which doesn't need much capital involvement but makes them dependent on everybody else. They also don't have a great brand awareness, which could work against them in both their seeding work and in retail. I see them as high risk," concluded one analyst.

Another wine maker undergoing consolidation and giving analysts jitters is Normans Wines, which was forced to scrap a merger with West Australian Xanadu Wines and has had its shares suspended from trading. The ANZ Bank is also worried about Normans and has appointed advisers to come up with solutions, including forcing Normans to sell its Monash winery - the bank is thought to have a A$46m exposure to Normans.

As with all sectors undergoing rapid change there will be winners and losers. Already some of the medium sized companies are beginning to alter but fortunately both of the deep-pocketed Australian brewers and a number of international drinks companies want access to Australian wineries.

There is no debate about the quality of the wine coming out of Australia but there is a general perception that the wine makers will be polarised into boutique wineries that sell on premium reputations and the majors like Southcorp and Fosters.

Over the next 12 months both Lion and Fosters are almost certain to make a number of small and not very significant acquisitions, the question then will be whether they merely inherit the problems or can use their size to take Australian wine to an even greater worldwide audience.