“Were it not for mendacity and hypocrisy, there would be no discourse at all” – Ambrose Bierce
“The zeal which begins with hypocrisy must conclude in treachery; at first it deceives, at last it betrays.” – Francis Bacon Sr.
“Do not ask for whom the bell tolls, it tolls for thee.” – John Donne
In Bulgakov’s 1930’s masterpiece “The Master and Margarita,” the devil comes to Moscow disguised as a nattily dressed German who delights, outrages and deceives simultaneously. In little old Adelaide, we have to settle for Wolf Blass in a bow tie to provoke simultaneous astonishment and rage.
Mr Blass was not showing his age but his hand when he recently told the American Chamber of Commerce in Adelaide “In this country at the moment we’ve got no finance to promote ourselves overseas in the right direction generically. Hopefully we can enforce a levy on all registered wine companies. They must start contributing. In most instances – I should be careful – there are a lot of parasites in this industry that do not put their hands in their pockets and they try to rely on the major companies to help them get their products on the market internationally.” (reported by Madigan, Anthony TWTW / WBM 24 August 2013)
Oddly, I feel it is important to defend Blass’s intemperate remarks and show respect for him for bringing this situation to light. There are those who don’t pull their weight in the same way as others in our industry and it is appalling. These are the same businesses that skulk under the radar hoping no one notices and / or blame others for their problems. Blass only gets his target wrong.
When Blass says “we’ve got no finance to promote ourselves overseas in the right direction generically” he is plainly incorrect. All wine and grape businesses pay levies to the federal departments who in turn fund Wine Australia and the Grape Wine and Research Development Corporation. The former is responsible for various functions including the promotion of Australian wine overseas and the latter primarily for grape and wine research.
Wine Australia has a statutory responsibility to represent all producers. However, it also has additional funding streams received from export licenses and fees as well as user pays based “Market Programs” where levy payers and regions can pay extra to get Wine Australia’s attention.
Crucially Blass said two things that got little attention. The first was his use of the word “generically.” Simply put, he is saying we need more generic branding of wines from Australia. In this, there is a broad consensus outside of the “major” companies that this is simply wrong. In an online poll conducted earlier this year by The Wine Rules, 96% supported making regions the brand and Australia a sub-brand. Even given the response pool of about 100 people, this is a pretty freaky consensus given the number of major company readers this blog has.
Second, Blass said, “I should be careful.” This is not mistaken. When one is calling people and firms “parasites,” one should be careful if one also wishes to be correct. That he believes non-major wine companies to be parasites isn’t new or a slip of the tongue. As far back as 2008, Blass was quoted saying, “parasitic and idiotic funding systems for overseas promotion mean that overproduced wine from Australian irrigated fruit will hit rock bottom….” (reported by Woods, Catherine, Decanter.com (15 December 2008)).
The other thing that did not get much coverage was that Blass announced that a major review of the Australian wine industry undertaken by an investment bank, to which the Wolf Blass Foundation made a major financial contribution, would be released 27 August 2013. His awareness of its release date and the obvious reputational downside of not being in step with its findings give lie to the observation that this is not likely to be an arm’s length or independent review of the industry. That its release is timed to the federal election cycle should not be considered coincidental either. The part I find most interesting in this was the decision to employ an investment bank and not a marketing firm to figure out how to escape our oversupply driven problems.
Treasury Wine Estates is Australia’s largest wine producer. Think Penfolds, Rosemount, Wolf Blass, Beringer, Lindemans, etc. It is famously disciplined in managing its public image as well as it’s messaging. It is also a public company, responsive to the short-term orientation of the public markets. This isn’t a criticism, merely an observation.
Given this, it was of note that Treasury announced that it was opposed to the current method of alcohol taxation (ad valorem, or, “by value”) in the industry and instead supported volumetric taxation of alcohol last year. Pernod Ricard owned Orlando (Jacob’s Creek, Wyndham Estate, Morris, etc.) quickly followed suit.
Some time after this, Treasury CEO David Dearie announced that he also thought that the WET rebate (a scheme that rebates all wine equalization taxes for small producers) should be abolished and the funds ploughed back into marketing the Australian brand abroad. His rationale was essentially that small producers were getting a free ride and that the system was also getting rorted. He also said that small producers should focus on exporting and “restoring” the Australian wine brand overseas.
For those with corporate amnesia, Treasury (formerly Fosters wine division) has written off billions of dollars of shareholder wealth over the last fifteen years as a result of repeatedly overpaying for assets (e.g. buying other wine companies) when it acquired them (these transactions were undertaken with the encouragement and support of investment bankers like those employed to write Blass’ impending review) and poor management. One of these acquisitions was Beringer Blass.
After a lost decade of strategy du jour (would you like Grange or a VB with your burger?), Mr Dearie seemed to recently right the Treasury ship by getting the business focused on making and selling good wine, re-establishing the importance of the Penfolds and Rosemount brands and getting deadly serious about exporting to China. TWE also started to treat grape growers with more respect and paying them better than they had for most of a decade. These are all very welcome developments for TWE and the industry as a whole.
Then, last month, it came to light that the TWE CFO had left unannounced and TWE made a subsequent announcement of still another $160 million or so in write-offs. It was widely reported that this time it was because TWE appears to have “stuffed the channel” in the USA with inventory to “make the numbers” in prior financial years. The headline was about paying to destroy $30+ million in unloved bottled wine stocks in the USA. In fairness to good folk who work there, it is no middle management error when a half million cases of wine – that’s 8000 or 9000 pallets of wine worth about $5 per bottle – pile up.
None of these decisions occur in vacuums – they are decided at the top.
What was less discussed from this news was that about half of the write-off was to be directed to buying out grower contracts.
Having seen dozens of friends lose Treasury contracts as they expired over the past ten years, I’m surprised Treasury still has big ones to get out of. On the face of it, these must relate to large-scale, long-term supply arrangements at the low-end of the market and TWE chose to use the headline grabber to bury hard news it didn’t know how to tell the market any other way. On Wall Street they call this the “kitchen sink” announcement because management throws in every bit of bad news they can think of in at once. Then, the theory goes, when they later “surprise” to the upside, the stock will outperform.
With the USA in long-term grape under supply, it is unlikely TWE is reducing its contracts there despite its surprising oversupply of wine there. In Australia, where there is still an oversupply of grapes and wine, TWE’s announcement makes more sense. As TWE has been a big buyer of high-end Australian fruit in recent seasons, this leaves low-end Australian contracts as the most likely to be bought out. This also means that there will be a lot of fruit looking for a home in coming seasons.
$80 million dollars is a lot of money when it comes to fruit. It is equal to 150,000 to 200,000 tonnes of $400 to $500 inland fruit. Australia’s oversupply is in the neighbourhood of 400,000 tonnes per year. That in turn is equal to 110 to 140 million litres of wine per year. Those are big numbers even in TWE’s world.
Is this the same “overproduced wine from Australian irrigated fruit” that Blass warned would hit “rock bottom” back in 2008? If so, why didn’t TWE take this charge years ago? Maybe because they were trying to fight wars on two fronts – one at the icon and super premium end and the other to prevent Yellow Tail (or others) from exploiting the oversupply the majors did so much to create in the 1990’s?
You can see how management could be paralysed in such a scenario for years. To his credit, maybe Dearie has just bitten the bullet that should have been bitten years ago. And, Dearie has figured out that volumetric taxation is the only way to dry up the low-end fruit glut and mitigate TWE’s risk in loosing all that unloved fruit on the market at once. (Parenthetically, Yellow Tail was created when TWE consolidated its distribution in the USA leaving a giant hole in the market for distributor Deutsch and winemaker Casella to exploit. Interestingly, Casella and Deutsch have gone from strength to strength while TWE still struggles in the USA.) In any case, the timing and strategy of TWE’s current approach to cleaning up its contracts and the industry as whole do not appear coincidental.
One example of how large wine companies operate in the public sphere to deny competitors oxygen was when the Australian government changed the employment “awards” for vineyard workers, operators and contractors “in consultation with industry” a few years ago. No longer would agriculture workers be treated as such but, rather, they would be treated the same as winery workers. There is no parallel for this in other linked agricultural industries – think wheat farmers and bakers, apple growers and makers of frozen apple pies, beef farmers and butchers, hops and barley farmers with brewers, etc. The extra wages the big wine companies incurred with the award change were more than offset by administrative savings from having just one award system.
Today, if you want to harvest your grapes in the cool and safety of the night when all parties agree it is preferable and safer to work, growers have to pay industrial type penalty awards. No longer can you pay bucket rates or per vine pruning rates to encourage productivity. Unsurprisingly, the productive vineyard labour supply is rapidly drying up. That growers are headed for an unsustainable labour shortage is without question. It is often almost impossible to pick fruit on Sundays now regardless of the urgency or ripeness because the cost is just too high.
In short, the biggest companies saved themselves a bit but made everyone else in the entire industry less productive and less profitable thereby increasing their own comparative operating advantage of capital-intensive machine processes over qualitatively superior people driven processes. (For instance, every block of grape vines in the high value area where we grow is hand pruned except for TWE’s 200+ acre block across the road. There, tractors with cutting bars do most of the work regardless of the conditions or their impact on the wet soil.)
This approach is the most cynical sort of incrementally regressive strategic thinking while the government is only too happy to have another regulated workplace. Small, high value producers and providers never even had serious input in this step change, just the big companies and the industry bodies they dominate.
On still another track, Treasury and other large wine companies have long advocated “consolidating” and “rationalizing” regional and state industry bodies supported by levy schemes as well as the national bodies such as Wine Australia, GWRDC, AWRI, Winemakers Federation (WFA) and Wine Grape Growers of Australia (WGGA). With the impending merger of the GWRDC and Wine Australia, this process is well underway with the government’s blessing.
Perhaps TWE’s recent write-off was the last spasm of a dying monster –Treasury’s low end wine business – or, quite plausibly, it was just more bad news from the gang that still don’t “get it.” Or, it was part of a still bigger game to further dominate the Australian wine market at the expense of everyone else. Each single factor theory has its merits but there is a real possibility that all are equally true.
For the sake of inquiry, let us follow the trail of breadcrumbs TWE and now Wolf Blass have been dropping for those who recognise their influence on public policy in Australia. Mr Dearie has said TWE wants the ad valorem WET tax changed. (I happen to agree but for entirely different reasons.) Treasury also wants to get rid of the WET rebate because a) it is being rorted (sometimes true) b) because New Zealand producers are taking $30 million per year from it under the law and spanking the other big companies silly with their Sauvignon Blanc exports (mostly true) c) because the WET rebate is the only thing keeping many smaller producers in business (also sometimes true). I part with Mr. Dearie and the majors here and will take this up in another blog.
At one regulatory swipe, TWE could see off a) the cheaters, b) more competitive and successful overseas producers and c) quite a bit of the domestic competition (the “parasites”) all while increasing margins on their own high-end wines by tens and sometimes even hundreds of dollars per bottle. If you are Treasury, what’s not to like?
The WET tax is a devils bargain created in the early 1990’s that a) raised tax revenues for the government while b) largely exempting small producers (e.g. voters as well as those most likely to be friendly with the politicians) from the tax while c) simultaneously introducing the disastrous accelerated depreciation scheme for vineyard development. Something for everyone. This depreciation scheme was a handout to the big wineries so they could continue to rapidly grow their businesses while containing prices paid for fruit.
In a reply to a prior The Wine Rules blog, then WFA Chairman Brian Croser laid responsibility for this bargain at the largest wine companies’ feet. While we may never know, his assertion has the ring of truth. Unfortunately for him, it leaves him looking like the big boys’ pawn in this landmark negotiation. The good part for the Croser legend was that he brought home the exemption for small wineries. This contribution is not to be underestimated given the power of the major wine companies.
The vineyard depreciation scheme finally got spiked in the early 2000’s after the damage was well and truly done to the national industry. The WET rebate got badly rorted in the ensuing oversupply and the current government finally closed many, but not all, loopholes to the original intent of the rebate. In any case, the bargain that was is no more.
What is left is a mess where low-end wine producers have a monopoly on the lowest cost production of ethanol for human consumption in Australia. Just witness the destruction in Aboriginal communities where cask wine is the preferred drink on a buzz per dollar scale. That the wine industry fights to protect this “social license” is both hypocritical and indefensible.
The benefits to the majors for the changes floated are pretty obvious – collect millions in taxes from regionally based small producers and spend it on marketing Australian wine “generically” to the world. With “generic” (e.g. superregional, multi-regional or non regional wine which makes up probably 70-80% of a market which is virtually owned by Australia’s top 20 wine companies) wine receiving the benefit of a massive “generic” Australian marketing campaign, you can pretty much kiss goodbye to the high value, high quality and regionally differentiated producers of Australian wine.
This new marketing budget would presumably be governed and spent by Wine Australia. Given that Wine Australia has never managed a marketing budget of more than about $5 million dollars per year and have spent three or four million dollars more than they’ve brought in under the current management team, one can only imagine what would happen if their budget increased six fold.
What is still unclear to me is this – if Treasury and Orlando want to get rid of ad valorem WET tax, do they also wish to get rid of ad valorem levies paid to support the GWRDC, Wine Australia and the regional marketing organisations? Consider me interested in finding out. Maybe Blass and Co. will spill the beans.
While WET taxes and rebates do not apply to exports, Treasury wishes that the small producers would focus on exporting to re-establish Brand Australia. This is fascinating. Dearie and Blass propose to a) financially gut small producers with tax “reform”, then b) to tell these folks to go do the slow, hard and expensive work of exporting in a high dollar environment while c) the money raised from taxing them is used to deliver a “generic” overseas marketing budget to “support” these highly specialized, differentiated regional producers. Really?
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
– Adam Smith, The Wealth of Nations, 1776
Dearie’s investors don’t employ him to think up ways to help the competition. They employ him to find ways to increase TWE’s comparative advantage in the market place. Why do we expect them to offer anything but what is good for them? It is naive to think otherwise.
The unasked questions in this so far one-sided discussion are revealing – who screwed up the Australian wine brand overseas in the first place? (Can I interest you in some Little Penguin or Yellow Tail, Mr. Robert Parker?) Who has perpetuated the oversupply and is now using shareholders money to tear up contracts on possibly hundreds of thousands of tonnes of fruit hoping that a changed tax regimen won’t expose them to disastrous discounting? Who continues to overwhelmingly flog wines whose only claim to geographic provenance is Southeastern Australia, South Australia and Australia?
In Australia, wineries and grape growers pay a bewildering number of levies to support research, marketing, regional promotion and political representation for industry bodies. At the state and regional level these tend to be voluntary. “Voluntary” means that you have to pay but that you can ask for your money back.
The regional associations are the (so far) publicly unmentioned bulwarks in this debate. These widely supported associations were created largely to brand and promote Australia’s wine regions. Given the largest companies’ preference for multi, super and non-regional branding (Jacobs Creek, Grange, Yellow Tail etc.), the regions organised themselves to give their wine and grape producers additional brand equity and awareness in world markets.
The Barossa and McLaren Vale have headed the list of Australian exports by value for this reason for yonks despite the presence of major winemakers making non or multi-regional products in these regions. A recent study undertaken by the South Australian government discovered that every levy dollar paid into the regional association in question paid back eight or nine dollars in value. This must be the best ROI in the entire Australian wine industry bar none. This study was undertaken because an un-named “major” wine company doubted the value of these schemes. Oddly, you don’t hear much about this report from the major wine companies. “Why” you ask, “why”?
When I was the Chairman of the McLaren Vale Wine Grape and Tourism Association a few years ago, we restructured our funding model with the consent of the entire local wine and grape community. Basically, if you make wine in McLaren Vale, you now pay a levy of about $10.50 per tonne. If you grow and sell grapes here, you now pay a levy of about $7.90 per tonne. (This evens up in the end because about 30% of winery production is from their own fruit on which they pay no levy.)
Finally, we put a cap on the total amount any one company would pay of $30,000 per year because Treasury and Constellation refused to pay more. For example, without the cap, TWE would have been assessed at about $70,000 per year at the time. It was made clear to me that the government would not introduce the enabling legislation unless Treasury was on board despite it being the nearly unanimous will of the rest of the community. It’s a funny kind of democracy we live in folks where one company has a veto over an entire region. This “veto” is apparently in place at every level of the national industry – regional, state and federal. As a result, while a major wine company can block progress outside the scope of its business that it believes inimical to its own interest, it is free to pursue any interest it likes on its own without molestation.
To get this new levy implemented required extensive community consultation, numerous letters, mail-outs, emails, open town hall type meetings, one on one meetings, lunches, PowerPoint presentations, etc. When we had all that was required by the government, I wrote to the Minister with evidence of all of our consultation efforts to request that the enabling legislation be introduced.
Then the call came.
One levy payer had requested that we discuss some of their “concerns” before the Minister would consider our request. The levy payer was Fosters’ wine division (now called TWE).
In a one-hour phone call with a still employed TWE senior executive, I suggested that the $40,000 discount they were receiving as a result of having “veto power” was pretty rich but, if they supported the levy, I would consider their concerns. Their first concern was why there wasn’t a (then) Fosters employee on our Board. I explained that we have a democratic system of representation to our Board and that Fosters needed to have a candidate popular enough to get elected. Their other idea was about “rationalising” overheads across regional associations. After listening to their concerns, I asked that if consolidating overheads was such a good idea, how come Fosters / TWE had lost 4+ billion dollars employing exactly that strategy in their own business?
The net of this tale is that every grower and producer in McLaren Vale agreed to pay the same levy rate to market the McLaren Vale brand worldwide bar one – Fosters/Treasury. In a country that worships the “fair go” and hates tall poppies, this is disappointing stuff.
Who is the “parasite” in this collective marketing effort Wolf?
As my much more intimidating mother would say to you, “you should be ashamed of yourself.” And, you would cringe, old boy.
This is also the case in Wolf’s beloved Barossa. There the gap between total theoretical financial obligations and the “cap” is enormous for a number of companies including Treasury and Orlando. I don’t know if the big companies have “caps” with any of the other levy funded bodies but nearly every levy, export charge and rule etc. is somehow tilted against the little guy or tilted in favour of the “majors” that Wolf Blass seems to think provide so much unrequited generosity.
But, for Wolf, the “non-majors” are the parasites.
Given his cavalier disregard for these facts, will the results of Wolf’s “gift” to fund an investment bank run review of the national industry be any surprise? It will be used to give air support to the softening up barrage that Dearie and now Blass have already delivered. Expect the recommendations to be almost exactly what Dearie and Blass have been saying for some time now.
Expect WET tax “reform” to benefit large wineries with high value products while simultaneously hurting small wineries with high value products, demolishing those with only low value fruit and wine, encouragement to consolidate multiple “brands” into fewer companies, “rationalizing” whatever levy and body they feel like rationalising, more Wine Australia funding support for the “generic” brands at the big end of the town, etc.
One final coincidence – the South Australian Wine Industry Association is currently asking for submissions regarding the WET tax closing 30 August 2013. According to Wine Australia, Stuart McNab, Chief Supply Officer of Global Wine Production at TWE has been the President of SAWIA since 2009.
Best of all, there will be lots of “transactions” for investment bankers (such as those who wrote the report) between newly impoverished small producers with high value brands and you know who. Given Treasury’s cash heavy and debt free balance sheet, the only way they can improve their key operating ratios for investors will be to employ debt to leverage their balance sheet. While this is just the nature of markets, is it any wonder TWE has held off splurging so far when the pickings are about to get so much better? And, just as good, if they don’t get better soon, TWE will be none the worse off. It’s a “heads I win, tails you lose” bet against the rest of us. You can expect this.
I, on the other hand, can expect a call (or two) from Treasury. And, there will likely be calls for me to step down from the Board of the MVGWTA and all manner of things. But there will be no libel charges. I’m just connecting existing dots and past behaviour and guessing at the future. The majors have worked for years to deliver the hammer blow they seem to hope for from this report during this federal election. They will not back off sheepishly.
Most wine growers, wine writers and, even, relevant government departments live in abject terror of the major wine companies. Most winemakers just try to stay out of their way while the “major” print media firms would find scratching by that much harder than it already is if they come out against these big advertisers. In fact, it’s nearly a perfect storm – virtually everyone with interests different to the major wine companies are nearly out of business, about to get tossed out of office or hurting badly.
The Blass report will only be about obtaining comparative advantage for large incumbents who believe the pie to be shrinking. It will not be about baking a bigger pie for the Australian wine industry through better thinking, better positioning, better grapes, better wine, telling better stories about ourselves or leveraging Australia’s regional brands requisite to marketplace success worldwide. It will be about shifting the remaining resources they don’t already control into their control. It will be for all the marbles they want in their bag.
While it is obviously a lot more fun for “major” wine company executives to work on takeover deals with investment bankers buying weak competitors than it is to figure out how to tell the world hundreds of interesting new stories about Australia’s great wine regions, amazing personalities and interesting differences, a few executives’ “need for speed” is no way to run an industry.
It bears repeating that the wine consumers that Australia needs to connect with worldwide are highly educated people who presently don’t think much of the generic wine brand Australia. “Generic” campaigns will do nothing to draw them in to a brand they think poorly of. But they will buy quality products with authentic and engaging stories from “somewhere” (not just a country) readily. This means investing in many differentiated regional stories and bodies to promote them, not rationalised top down corporate strategies led by investment bankers and accountants. We’ve already tried that once before. It led us to where we are today.
Treasury’s great Australian stories are Max Schubert and Ray Beckwith. Some considered Wolf Blass one before he revealed himself to be so much less last week.
Stay tuned and get involved. Or, if you are a wine or grape producer with quality assets, start counting how many sleeps are left before the wolf comes to your door.