If you are considering establishing a vineyard in New Zealand, achieving scale is better for your bottom line according to Vintage 2007, the second annual New Zealand wine industry benchmarking survey released today by Deloitte and New Zealand Winegrowers.

The survey of winegrowers from throughout the country found that larger operations in the local wine industry were in good health and in a strong position on both domestic and foreign shelves. Although the Deloitte analysis showed the wine industry was arguably better positioned than last year, this was tempered by the results of some of the smaller wineries.

Philip Gregan, the CEO of New Zealand Winegrowers said local wineries had a good base to operate from. “We have a quality product and we’re backed up by New Zealand’s clean, green image – these remain excellent foundations on which to grow our industry.”

Paul Munro from Deloitte said larger New Zealand wineries continue to show the advantage of size and economies of scale resulting in high profitability. “Wine companies at the upper end of the size scale demonstrated the highest earnings before tax with those generating in excess of $20 million delivering an outstanding return of 24 per cent,” he said.

One notch below, companies with revenue between $10 million and $20 million also did well, generating earnings before tax of 18%.  Mr Munro said the wineries at the larger end of the size spectrum were making “healthy investments” into fixed assets and using their working capital efficiently.

At the other end of the scale, some of the smaller growers in the $1 million - $5 million category in particular were struggling. The report showed their pre-tax returns were a lowly 1.4%.

Mr Munro said a related consideration was the impact of the economic slowdown. “This could prompt further industry consolidation. Although some smaller operations bucked the trend this year, scale is very definitely a factor behind profitable financial performance and, with the credit crunch extending into 2008, smaller wineries may find themselves wrestling a little harder for their capital.”

From a financial return perspective, New Zealand winegrowers had generally performed better than their Australian counterparts. With the exception of the $5 million- $10 million category, earnings for all categories in Australia were below those generated by New Zealand wineries. The Australian performance is believed to be due to a reduced supply of wine for the 2007 vintage, together with a relatively strong Australian dollar.

Infrastructural capacity in 2007 was not an issue for most wineries in the Survey. Wineries with revenue of over $1 million delivered utilisation rates between 77% and 91% meaning there was certainly production capacity available within existing facilities in 2007. However, Mr Gregan said the larger 2008 harvest had given rise to capacity issues in some regions, and increased capacity would be needed in the future.

Mr Gregan said the future for the industry looked positive, particularly in export markets. “Demand for our wines remains strong, and so long as the industry does not fall into an oversupply trap, there was a great opportunity to grow exports further.”