Time for wine producers to diversify income

Trade wars, falling wine sales and global uncertainty. Everything points to the need for wine producers to find more baskets for their eggs, says Robert Joseph.

Photo by Robert Anasch on Unsplash
Photo by Robert Anasch on Unsplash

Wine businesses are no different from any other commercial enterprises. Strip away the mystique, and winery or cuverie is a posh name for factory or usine: raw materials – grapes - come through one door and processed goods – wine – goes out the other. If you sell enough of the stuff you’ve produced for more than the process has cost, you will, in theory, survive and prosper. If you don’t, you won’t.

Of course, it’s not that simple. Wine is an agricultural product. Anyone in this industry has always had to be ready to sustain the vicissitudes of an uncertain climate. Nowadays, however, thanks to all of the carbon dioxide and methane we have been and still are pumping into the atmosphere, that uncertainty has become far, far greater. Fire, flood and drought are no longer occasional disasters; for a growing number of producers, they have to be included in the ‘threats’ section of a business plan. 

But there are other unpredictable hurdles. At the beginning of 2019, European wine producers couldn’t have predicted that a US president would slap a 25% tariff onto their wines as a reprisal for EU subsidies to Airbus. Still less could anyone have foreseen that the same administration would seriously propose a 100% tariff in reaction to French government attempts to get tech giants to pay their taxes.

The 25% tariff has had the effect of moving a wine from the $10-12 price bracket to the $15-17; a very different place where sales volumes will almost certainly shrink. 

Multiplying that tariff by four would simply make these, and a host of other wines, frankly unsaleable in the United States. Hitherto regular shipments across the Atlantic and Pacific will simply stop. And the impact of that happening could be devastating.

Peter Lehmann was a great, family-run producer of admirable wines in the Barossa Valley when a UK supermarket on which it was heavily reliant abruptly cancelled a big order. That decision led directly to the Lehmanns having to sell their business. They were lucky. For plenty of others, similar situations have ended with bankruptcy. Despite the old saying, when one door closes, another rarely opens quickly or widely – especially in a global wine market that is flat.

The most obvious advice to take from this, is to avoid focusing too heavily on specific markets. If, for whatever reason, President Xi Jinping took against Australia, the impact on Treasury Wine Estates would be dramatic.  Asia is responsible for nearly $300m of its annual profits, and most of that is attributable to sales of Penfolds in China.

If greater diversification of markets is a wise move, so may be broadening one’s activities beyond wine production. For many, this would involve tourism, but a growing number of wineries have discovered the appeal of producing other alcoholic beverages such as beer and gin and pushing them through the same routes to market.

The advantage of these kinds of drinks is that, unlike wine which sits around in tanks and barrels until it is ready for sale, they can often be sold at higher margins and become 
reliable generators of regular and immediate cash. And cash reserves are what every business needs to tide them through hard times.

Tellingly, diversification has been more of a New World trend. European wineries may make a little brandy from their grapes – or the left-over solids from their vinification – or the occasional fruit liqueur, in regions where that’s traditional, but even in Germany, the idea of running a brewery alongside a wine cellar as is now increasingly common in the US is an anathema. When you pause to think about it, the notion of a pink gin from Provence is almost too obvious, but it took Britons Chris Rogers with Terres de Mistral and Seven Cronk with Mirabeau to turn it into a commercial reality.

I understand and sympathise with producers who respond to these kinds of suggestions with a “Why should I?”. If they’d wanted to run a restaurant or a hotel or a make gin, they reasonably argue, that’s what they’d have done, instead of dedicating themselves to wine. 

But business diversification is simply the corporate version of what human beings will have to be doing in any case, thanks to automation. 

As Justin Tobin, founder of the innovation consultancy DDG, told the Guardian in 2017, “More and more independent thinkers are realizing that when being an employee is the equivalent to putting all your money into one stock – a better strategy is to diversify your portfolio. So you’re seeing a lot more people looking to diversify their career.” Another leading futurist, the wonderfully-named Faith Popcorn agrees, foreseeing people having up to eight different jobs and several employers rather than “one big corporation.” 

That may be an exaggeration, but if Deloitte is correct in predicting that 100,000 legal jobs may disappear in the next two decades and that IBM Watson programmes are already being used by tax preparation businesses and insurance companies to replace human employees, it’s probably worth a moment or two of consideration. Along with the fact that making good wine, or anything else, simply may not be enough.

Robert Joseph
 

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