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AUS: Winemakers plight "unsustainable" says report

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The losses generated by a significant number of Australian wineries in 2003 and 2004 cannot be sustained, according to a leading business report.

The 2004 Annual Financial Benchmarking Survey, released today (30 June) by Deloitte and the Winemakers' Federation of Australia has warned that continuing poor financial results will cause many wineries to pursue alternate strategies in order to return to acceptable profitability levels.

Almost half of the wineries that participated in the survey generated a loss before tax.

"Some wineries may choose to merge to achieve cost and/or distribution efficiencies, while others may be forced to exit the market," Deloitte partner and leader of the Deloitte Wine Industry Group, Stephen Harvey said.

The report in particular highlighted the plight of the small to medium sized businesses.

Whilst Australia's large wineries have substantially trimmed their costs to achieve improved financial performance, small and medium sized wineries have not achieved similar cost savings.

Harvey said: "Wineries with greater than A$20m revenue and the large listed wine companies enjoy a cost advantage over small and medium wineries in terms of grape cost, wine cost, overhead cost per litre and packaging costs. They are also better placed in terms of distribution.

"Fierce competition, the high levels of production and greater consolidation within the retail sector are some of the factors that have forced the larger wineries to look at their costs to reposition themselves in a very competitive marketplace.

"Consistent with the results reported in the 2003 survey, wineries of all sizes have recorded losses for the 2004 financial year," Harvey continued. "Almost half of the wineries that participated in the survey generated a loss before tax. However, while many wineries reported losses, there were several wineries in each category which generated excellent returns in excess of 20% of revenue."

Stephen Strachan, chief executive officer of the Winemakers' Federation of Australia, said the survey results are indicative of the difficult trading conditions.

"Some wineries may be able to justify high costs if their sales revenue per case is sufficient to support these costs. However, many wineries will need to re-examine their costs and their brand strategies in order to survive the difficult period ahead and to remain competitive and profitable," Strachan said.

"The Federal Government's recent WET rebate of up to A$290,000 for wineries should help to ease the financial pressures experienced by smaller wineries for the 2005 financial year end.

Wineries turning over up to A$1m generated almost break-even results after reporting average profitability of 6.3% in 2003.

There was a marked turnaround in the profitability of wineries in the A$1m-A$5m bracket generating Earnings Before Tax (EBT) of 8% of revenue, after generating average losses of 7.9% in 2003.

The wineries in the A$5m-A$10m slot, however, performed poorly with an average loss before tax of 4.2% of revenue. A return of only 3.8% in 2003 and a negative return in 2004, indicates that this market segment is becoming increasingly more competitive.

Wineries in the A$10m-A$20m range are also struggling, with average EBT of negative 8.7%.

Harvey said: "These wineries compete with the larger wineries in most markets but do not have similar scale efficiencies in terms of production costs."

Wineries with sales in excess of A$20m generated EBT of 10.3%, well behind that of 2003 (15.3%). Wineries in this category have faced downward margin pressure in both the domestic and export markets. 

Meanwhile, the listed wineries have returned to normalised profit levels and have performed the strongest with EBT of 14.3%.

Harvey said: "A 10% reduction in general and administrative costs caused by the well documented staff and winery rationalisation performed by many of the listed wine companies has allowed these companies to deliver stronger earnings."


Sectors: Wine

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