In response to export growth, New Zealand has been expanding its wine production capacity. But with new vineyards now coming into production, the country has to ensure that demand keeps up with supply. Olly Wehring reviews a recent report from the New Zealand Winegrowers Association which sets out how the industry plans to go forward.

The New Zealand wine industry has grown in virtually every possible direction in the last ten years, in terms of the number of wineries, the area of land given over to vineyards and, not least, the size of its global market. The country with a population of only 4m in an area the equivalent in size to Great Britain has a wine industry on the rise. However, that growth has brought with it a host of challenges and how the industry deals with them will decide how successful the next ten years will be.

"The story of the past decade has been about growth, achievement, and stunning international accolades," says New Zealand Winegrowers CEO Philip Gregan in the organisation's half-year report for the six months to the end of December 2003. "In my view, our real success is only just beginning. However, there are real challenges facing us."

Among the greatest challenges facing the industry highlighted in a recent report by New Zealand Winegrowers' Promotion Committee, is the need to increase sales of varieties other than the country's big success story, Sauvignon Blanc. The report also stressed the importance of placing emphasis on quality rather than price to secure long-term success. As with all wine-growing regions, the volatility of the growing environment, making forecasting, planning and providing continuity of supply difficult, was isolated as a key problem for the industry, making it all the more important for the industry to work together.

From relatively inauspicious beginnings, the size of New Zealand's wine industry has boomed. Following the trend of the past decade, the report says that the number of wineries in New Zealand continues to grow. As of mid-March this year, there are 460 wineries, of which 422 are small (below 200,000 litres annual sales), 34 are medium-sized (200,000 to 2m litres) and four are large (over 2m litres). This is double the number operating in 1996. The rise in numbers shows little sign of abating, with the latter half of 2003 seeing an acceleration in new winery developments. The resurgent growth has also continued into the first three months of 2004.

The producing area has consequently also grown at a rapid rate during the last ten years. Commenting on this year's vintage, Gregan reports that the producing area is 18,100 hectares, a record vineyard area for the industry, around 2,300 hectares larger than 2003. "This expansion," Gregan says, "reflects the continuing investment in vineyards in recent years." The current producing area is double that of 1999, and nearly three times the 1995 area.

"In line with the record producing area we expect Vintage 2004 will produce the largest ever harvest of New Zealand grapes," Gregan says. A vintage of between 150,000 and 170,000 tonnes is anticipated, although there is the possibility of even higher levels. A 160,000 tonne vintage, which would be mid point in the range, would be 35% above the previous record vintage of 118,700 tonnes achieved in 2002, and 109% above the severely frost affected vintage of last year.

Of course, the main issue this throws is up is where, and how, to sell all this extra wine. The potential vintage production for the vines already in the ground is around 200,000 tonnes. New Zealand's domestic market, given the small population base and the selling price of wine, will not soak up all this extra wine. "Accordingly," says Gregan, "exports need to lift to around 9m to 10m cases per annum by 2007. That is a three-fold increase from the current level!"

The UK and the US are the two biggest markets for New Zealand wine, followed by Australia and Canada. Last year, the UK took 7.2m litres of NZ wine, while the US bought 3.9m litres. Australia accounted for 3m litres, with Canada buying 0.4m litres. "We expect these four markets to take around 80% of all exports in the medium term," says Gregan.

However, with reduced availability of wines following the frost-affected vintage of 2003, export growth slowed dramatically in the second half of last year. Shipments were 16.2m litres for the last six months, just 0.1m litres (+0.7%) ahead of the corresponding months in 2002. This contrasts strongly with the June 2003 year when exports (in volume terms) rose by 18.4%, and the past decade's compound growth rate of 16% per annum.

With its largest ever harvest anticipated for 2004, it would appear that New Zealand will need to begin punching its weight if it is going to keep pace with expanding production. In the UK, for example, there is no space for wines that don't perform to the expectations of the retailer. New Zealand wines are battling for limited room in a crowded and fragmented market. So the industry must now focus on how to move all this wine.

The challenge facing the New Zealand wine industry as it expands its production capacity is illustrated by the comments of Phil Reedman, product manager for New Zealand wines at UK supermarket group, Tesco. "Currently, there is no scope (i.e. room on shelf) to extend the range, so we manage the range turnover on a one-in one-out basis," Reedman told just-drinks. "To grow the sector, the industry needs to take a less fragmented approach and look at what motivates UK customers to try and buy."

Gregan concedes that increasing production creates pressures but believes the expanded industry can prosper with the good generic promotion. "90m litres of wine will not sell itself," concedes Gregan. "Our real point of difference is that our wines are produced in a unique environment - New Zealand - and they reflect that environment. This makes promoting the 'New Zealandness' of our products a vital component of the promotional strategy."

One threat is that prices for New Zealand wines abroad could be squeezed as production volumes rise. "Prices being slashed would not be too popular with New Zealand's wine makers," says Matthew Hudson of Montana Wines. "Although there are likely to be some New Zealand wine bargains going forward, the industry should continue its hard work in educating consumers about the positive points of trading up when buying wines from New Zealand." This education would require the industry to work together as opposed to against each other.

Gregan is in agreement. "The industry has always said that before we can sell individual brands - first we have to sell New Zealand, and then we have to sell New Zealand wine. Generic promotion is important to individual brands," he says.

Such education will cost money, naturally. Based on an assumed overall marketing spend of 5% of export values, the total industry marketing spend by 2007 would be in the order of A$35m-A$40m per annum, Gregan predicts. But he is keen to suggest to the industry that extra funds should be pushed more in the direction of generic promotion than specific brands. Going forward, a revised promotional programme is being developed, and is due for presentation to the board of New Zealand winegrowers in June this year.

In the past, Gregan feels that the industry has worked well together to promote New Zealand wine in export markets. "The success of existing players is the reason that so many new participants have been able to join the industry," he adds. Looking forward, the opportunity and pressures for the industry are great, while time and money is short. Should 2004 produce, as expected, a record vintage, then this should prove the toughest test yet to the New Zealand wine industry. "If the opportunity is great," warns Gregan, "so is the challenge."

Expert Analysis

Wine Watch - New Zealand 2003

This comprehensive Wine Watch country report provides a thorough analysis of consumption trends in all wine categories. Clearly set out, it will help you to understand competitive relationships within the local market, brand dynamics and market structure and trends. It will also assist you in understanding the importance of international wine marketers in the country. .

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