Wine investment

Today you can either invest in Australian wine businesses, or else in bottled Australian wine...

Investing in Australian wine business

Today anyone can take a slice of the pie that is Australian wine. Recent years have witnessed an extraordinary coagulation at the top of the food chain in Australian wine of single-purpose publicly listed wine producers. Australia's five largest wine makers processed 936,120 tonnes of grapes during the smaller-than-anticipated 2003 vintage, out of a national total of 1,360,601 tonnes. That equates to just less than 69% of the entire crop.

Australia's largest producer, The Hardy Wine Company, is owned by Constellation Brands Inc., which is listed on the New York Stock Exchange. Next comes Southcorp Wines Ltd, listed on the Australian Stock Exchange (ASX). Then Orlando Wyndham, whose parent Pernod Ricard is listed on the Paris Stock Exchange, followed by McGuigan Simeon Wines (ASX) and Beringer Blass Wine Estates, whose parent company, the Foster's Group, is also listed on the ASX. Next up are our two largest family-owned producers, De Bortoli and Casella, owner of the spectacularly successful [yellow tail] brand.

There's also an increasing number of publicly listed smaller and medium-sized producers such as Evans & Tate, Peter Lehmann, Xanadu and the Lion Nathan Wine Group, which is fully owned by the Australasian brewer Lion Nathan Ltd.

The 1990s was the decade of corporatisation in Australian wine. The second half of this decade was also a time of national optimism and prosperity in Australia, resulting in unprecedented returns from publicly listed wine companies as exports spiraled and the domestic market went into overdrive. Sadly, this period also set the expectations for wine industry profits for the longer term at an unreasonably high level.

High expectations, and often unreasonably high ones at that, are often generated by the constantly emerging stream of vineyard and winery investment projects, many of which will do little more than take advantage of primary industry tax concessions. Many people have been badly burned by accepting wildly optimistic cashflow projections as realistic, while others have willingly entered into schemes that leave them with absolutely no stake in anything whatsoever by the time the scheme reaches its maturity. Be warned, read the fine print, and get very good wine industry-based advice before spending a dime on these ventures.

Using EBIT (Earnings Before Interest and Tax) as a measure of performance, most Australian wineries rate around 11% of sales income. Much lower than this, and it becomes difficult for a winery to remain in business. Most wineries target an EBIT of 15%, while the industry's top performers now pull in an EBIT of 30%. In its heyday prior to its reverse take-over of Southcorp, Rosemount is likely to have been pulling in an EBIT of more than 40%.

With the industry's change from a traditional family-owned business model to a corporate one, investors now take a more active role in the process of operating wine companies. Some winery management decisions are being made to please short-term fiscal requirements ahead of the long-term strategic interest of the companies themselves. In particular, funds are being diverted away from necessary long-term capital requirements, such as the inventory of oak cooperage and other infrastructure, in favour profit and dividends. The risk is simple: wine quality, the industry's inherent edge, may actually be compromised. odels and even copying labels. Today however Australian wines are perhaps the most emulated in the world. Local brands like Penfolds, Rosemount, Lindemans, [yellow tail] and Jacob's Creek are amongst the most valuable in the world, but their value is constantly under-estimated.

The market still appears to be concerned over the supposed over-supply of Australian wine, while on the other hand expert industry forecasters are predicting a serious run of smaller than anticipated vintages. There is already a genuine shortage of Australian white wine, and a red wine shortage is likely within three years.

But don't get me wrong. Wine has clearly arrived as a potentially valuable and worthy type of share investment. It just requires more understanding and a different approach from other traditional shares, especially beer, to which it is often compared.

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Investing in bottled Australian wine

It's funny how your perspective on things can change. For years I'd deliver a stock-standard response to anyone telling me they wanted to invest in buying Australian wine. 'Forget it,' I'd say. 'Don't try to profit from it; just buy what you're going to drink, or else going to enjoy owning. That way you'll keep your lifestyle, your health, some of your wealth and much of your sanity. And if all else fails, you should always be able to find something at least half-decent to drink.'

Today it's impossible to give that sort of advice with any confidence that anyone will listen, for wine investment is certainly the latest fad. With a decent wine portfolio you will never be caught short of a conversational topic with your peers and partners. Provided theirs isn't bigger or better than yours, your wine collection will impress those with whom you might wish to do business. You may have to keep its full extent a secret from your wife, husband or partner, but the odd little remark like 'I bought that Three Rivers for only $65, but given I could sell the lot today for over $US1000 per bottle, I'm travelling at over 1500 per cent per year with my wine investments,' should have even the most sceptical people in your life viewing you with renewed and profound respect.

So how should you go about making money from wine?

In honesty, the golden time for investment in Australian wine has passed. It occurred around a decade ago, before the rest of the world had awoken to the value and quality of the wines made in this country. Some collectors, by virtue of the fact that they were there at the right place at the right time, made a killing.

Nevertheless, the secondary market for Australian wine has expanded dramatically, with the favourable outcome that there is more mature Australian wine available for sale than ever before. You can buy it at auction, from cellaring facilities which market the collections they house, or you can buy it from the large number of retail liquor licenses that hover over the deceased estates of wine collectors the way that tow-trucks used to prey over the victims of road accidents.

There has been a plethora of new investment schemes in bottled wines, many of which are unlikely to deliver on their promises. The telegraphed closure of the Australian Wine Exchange, which attempted to trade wine in a fashion almost identical to the share market, simply reinforces this point.

Choosing the right stuff

Unless you're prepared to do the homework and discover for yourself some unknown star performer of the future, there are some basic rules to follow when buying investment wine. These are:

• Stick with established brands, large and small.
• Avoid poor or ordinary vintages like they're carrying a communicable disease.
• If you buy in dozens, unopened boxes are best.
• The market, especially the overseas component, is spending big on older vintages of top labels and good years.
• Just because a currently available wine may be expensive, it doesn't mean that (a) it is any good, and (b) that it will appreciate in value.
• Right now, shiraz is king, and it's unlikely that the overseas buyers who are currently driving up prices will switch their tastes to other varieties with which Australia doesn't have as quite as distinct an advantage.
• Magnums cost more than they should in Australia, but do appreciate quickly.
• Before you buy or sell, check not only the track record of the agent or auction house, but also the selling and buying commissions applicable.

The best Australian investment wines fall into two entirely separate categories, cult and classic. Led by Grange, the classic investment wines are those like Henschke's Hill of Grace, Mount Mary Cabernets - wines that, over the years, have developed a proven track record for quality and investment return. Langton's Classification of Distinguished Wine, a catalogue of such wines developed and maintained by Australia's largest and most influential auction house, is as thorough a listing of these wines as you can get.

On the other hand, recent years have seen the emergence of a number of small wineries whose tiny productions - typically of old-vine shiraz - now sell at stratospheric prices. American wine critic Robert Parker jnr simply needs to allocate a wine a single score above 93 to catapult an unheard of wine into the pricing stratosphere. Wines from makers like Torbreck, Wild Duck Creek, Three Rivers, Greenock Creek, Veritas, Noon's and the Burge Family have become the hottest-performing wines on the Australian auction market, before they are quickly shipped off to the US for resale. It would also appear that a relationship exists between the Dow Jones index and the cost people are willing to pay for the most sought-after Australian wines in the US.

Don't buy just any old bottle

Irrespective of its reputation or price, wine is a perishable thing that is only as good as the way it has been kept or transported. While nobody could seriously deny that many of the wines traded on the secondary market will never actually be opened until well after their earning and drinking peak has passed, the issue of provenance is the dormant volcano beneath the secondary wine market.

A huge and unknown proportion of the wines sold through the various secondary market channels in Australia - by auction, through clubs, private cellars and commercial cellaring operations - are absolutely stuffed, to phrase it as politely as possible. Better customers from virtually all Australia's auction houses have been warned from buying certain lots, or have else been told after discovering that a batch tasted very prematurely aged, that 'Oh yes, we weren't too sure about that lot.' While credits are typically given, it's interesting to contemplate the retrospective nature of much of this advice.

All that glitters…

The last year has seen the hysteria surrounding the release of the 1998 Penfolds Grange. If you were one of the lucky able to buy at $300 and sell at $800, you might think that wine investment was easy. If you were one of those who bought at $800, I want to know what you were thinking. The last time a Grange was released to such a reaction was the 1990 vintage, which rapidly shot from under $200 to around $600. This great vintage of Australia's flagship red now fetches $500, less than it did five years ago.

The big picture

Keep your expectations realistic. Those who make a killing on the stock exchange don't usually do it by accident. With wine, it's no different. You will need to research your purchases, thoroughly learn the system, the margins, the prices and the rules; the good advice and the poor advice. You will have to know how to get hold of the stock you want, which will usually be the stock that everyone else wants. You will need to spend big on cellaring - either for yourself or through a commercial facility

You might also end up doing exactly what a friend of mine did. He built, and then filled, a very impressive climate-controlled investment wine cellar. Then he rediscovered his love for wine. So he drank it instead.

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