Department of Agriculture and Food

Investment opportunities in ’s industry Contents

Investment highlights...... 3 Executive summary...... 4 Industry overview...... 6 The market...... 15 The proposal...... 19 Case study: Ferngrove Wine Group...... 23 Financial analysis...... 24 Other benefits for an investor...... 28 Other important information...... 28 Key risks and mitigants...... 29 How to progress...... 31 Investment opportunities in Western Australia’s wine industry | 3

Investment highlights

This document describes the business case to invest in fine wine production in Western Australia. There are a number opportunities for investors, principally in joint ventures or equity partnerships with established successful and wine businesses. Capital investment will enable the businesses to grow to the next level of operation and profitability. These businesses include: • growers of high quality that make fine • and wine producers of high quality fine wines • producers who are able to establish a niche brand, markets and/or methods of distribution • medium-sized wine producers with competitive costs and high quality established and desired brands • small high quality wine companies, including ‘icon’ wineries, mostly selling direct to loyal customers • companies able to create and/or capture unique market opportunities using other growers and winemakers’ resources. Projected returns to investors include: • The opportunity to be part of a wine industry with an established and growing reputation for its fine wine regions. • Capitalising on the growth in fine wine markets, domestically and internationally, and the booming tourism industry for fine wine, food and lifestyle experiences. • The opportunity to be part of the most profitable sector of the wine industry where returns are expected to grow over coming decades. Other benefits to investors in Western Australia include: • dedicated supply chain for wine to both international and domestic target markets • access to production in climatically diverse regions within Western Australia for a range of wine varieties and wine styles to suit consumers in target markets • suitable grape growing land that is readily traded in Western Australia. Executive summary

Western Australia provides a range of opportunities to invest profitably in fine wine production for international and Australian domestic markets. Western Australian is the pre-eminent fine wine producing state in Australia. Its fine wine regions are recognised as some of the best, most distinctive and diverse in the world. The strategic investor would capitalise on the significant competitive advantages of the Western industry which include: • ability to produce high quality grapes and world class fine wines • excellence in and • production of internationally renowned regional fine wines such as Margaret River , and -Semillon, and Great Southern Shiraz and • strong domestic market distribution and direct sales networks • freedom from major pests and diseases of grapevines • a pristine, ‘clean and green’ growing environment. Western Australia’s competitive advantage is strengthened by the climatically diverse regions which provide ideal growing environments for a range of high quality wine varieties, wine styles and blends. Production is based predominantly on cool and maritime viticulture of the classic wine varieties such as Cabernet Sauvignon, Shiraz, Chardonnay, Sauvignon Blanc and Semillon. The nine wine growing regions in the south-west provide a choice of climates ideal for a range of newer varieties suited to high value niche markets and changing consumer tastes. Two major market opportunities stand out for growth in business returns and profitability over the next few decades: • growth in consumer demand for fine wine in national and international markets • growth in tourism, particularly in destinations which offer fine wine, food and lifestyle experiences. Fine wine is the fastest growing and most profitable segment of the global wine market. The demand for fine wine at higher price points is growing in key Australian markets, China, North America and emerging Asian markets The growth in tourism is having a positive impact on the demand for regional fine wines from Western Australia. Tourism Australia invests significant resources to promote wine, food and lifestyle to high-end international consumers searching for authentic experiences. The industry has many different business models with wide ranging opportunities for profitable investment. The supply chain is diverse, highly integrated and marked by a high level of engagement by industry participants. New investors would be able to partner with existing successful business to provide the capital needed to capture the growth opportunities in fine wine over coming decades. Investment opportunities in Western Australia’s wine industry | 5

These businesses include: • growers of high quality grapes that make fine wines • wineries and producers of high quality fine wines • producers who are able to establish niche brands, markets and/or methods of distribution • medium-sized wine producers with competitive costs and high-quality established and desired brands • small high quality companies, including ‘icon’ wineries, selling mostly direct to loyal customers • companies able to create and/or capture unique market opportunities using other growers and winemaker’s resources. Areas where profitable investment could be made with a wine industry partner include: • Increasing the scale of operations through integration, acquisition or consolidation to expand grape and wine production, shore up supply and gain better control of quality for fine wine production. • Upgrading production techniques and technology in and wineries to improve grape and wine quality and production efficiencies, for example berry sorting, winemaking facilities, tank storage and cool barrel storage. • Improving access and better routes to international markets such as China where investors can bring local knowledge about their home and other markets, and the ability to build strong distribution and retail networks. • Vertical integration to enable better control of supply and quality from the through the to the market. • Diversification of wine products, for example, capacity to craft wine styles to consumers in target markets, expand the range of wine varieties by taking advantage of Western Australia’s diverse production regions. • Cellar doors, fine wine and food, and other facilities to capture the increase in tourism in the state’s south-west. • Development of new vineyards or restructuring of established vineyards to varieties in demand, elite clones and new varieties. • Innovation in grape production, winemaking, management systems and marketing. Financial returns will vary with the size of the business, region, wine varieties and styles, and market channels. The financial scenarios described in this business case focus on the production of high quality grapes and fine wines of regional ‘flagship’ varieties by small and medium businesses. Fine wine production has a gross margin per case (9 litres) of A$76 (48%) and A$43 (57%) for Cabernet Sauvignon and Chardonnay respectively for the China market, and A$43 (35%) and A$30 (34%) for the Australian domestic market. Vertically integrated operations that grow grapes and make wine have potential to be more profitable than those concentrating on one aspect only. Industry overview

Wine in Western Australia Western Australia is the pre-eminent fine wine producing state in Australia. Its wine regions are recognised as some of the best, most distinctive and diverse in the world. Wine has been produced in Western Australian for 180 years. After being established in the Swan Valley in the 1830s, the industry grew steadily until the boom years of the 1970s, 80s and 90s when it expanded rapidly into the cooler Great Southern and South-West Agricultural Regions. production began in the 1960s when it was recognised that premium table wines were in greater demand than the excellent fortified wines that had dominated production until then. Wine quality in Western Australia has never been better. The maturing of vineyards, the pedigree of vignerons and winemakers, our ‘clean and green’ environment, the diversity of our regions and climates and the exceptional run of strong in recent years have all combined to enhance Western Australia’s fine wine reputation. Extraordinary international and domestic accolades for many of our regional fine wine brands are evidence the industry is focusing its energy correctly with the right varieties and clones in the right regions. This focus on regions will enable the Western Australian industry to reap the benefits of the expanding fine wine markets in the coming decade. On an international scale, Western Australia’s 65 000 tonne wine grape crush is a drop in the ocean of global supply. Most production is high price point wine which remains profitable and competitive with long established distributors. Innovation in grape and wine production, markets and managing businesses will benefit the industry in the long term. The evolving maturity of our vignerons and winemakers working to achieve excellence with new clones and the right selection for the region and site will pay dividends over coming decades. The projected growth in tourism in Australia will have a positive impact on the demand for regional fine wines from Western Australia. Tourism Australia invests significant resources to promote the wine, food and lifestyle of Australia to a world of high value consumers searching for authentic experiences. It will represent Australia as cosmopolitan society strongly connected to its food producers focusing on our unique expression of food and wine. The success of Margaret River Gourmet Escape, an international fine food and wine event, indicates how Western Australia will continue to interact with its wine and food ambassadors in the future. Medium and large producers continue to expand export markets. These developing markets offer the best opportunities to grow production at sustainably profitable margins. The emerging markets in Asia and more specifically China offer the best prospects from growth over the coming decades. Western Australia sends more than half of its exported wine to Asia and about a third of this into China. Investment opportunities in Western Australia’s wine industry | 7

Asia takes about 60% of Australian wine valued above A$10 per litre free on board (FOB), a category that is profitable and sustainable. As China’s middle class continues to grow, so should its demand for premium products, including quality wines that cannot be produced in bulk. The opportunities presented are significant and need to be realised through increased strategic investment in the industry.

Regional profiles Western Australia’s competitive advantage is strengthened by the climatically diverse regions in which wine grapes are grown. There are nine climatically diverse regions (Margaret River, Great Southern, Pemberton, Manjimup, Geographe, , Peel, and Swan District) and six subregions (Mount Barker, Frankland, Denmark, Albany and Porongurup in the Great Southern; and Swan Valley in Swan District). Varieties suited to each region produce high quality wines with distinctive regional characters. This climatic diversity enables the production of a range of high quality wine varieties, blends and wine styles. The fine wine regions of Western Australia (Figure 1) such as Margaret River and the Great Southern are equivalent to world renowned wine regions such as Bordeaux, Napa and Barossa (Table 1) in terms of climate and wine quality. Western Australian production is based predominantly on cool climate viticulture of premium wine varieties for the fine wine market. The main varieties are Cabernet Sauvignon, Shiraz, Chardonnay, Sauvignon Blanc and Semillon. The diversity of the wine regions of the south-west provide ideal climates for a range of newer varieties suited to high value niche markets and changing tastes of consumers. These include and Vermentino from Spain; , Nebiollo, , Brucceta and Lagrein from Italy; Gruner Veltliner from Austria; and Saparavi from Georgia. Western Australia is considered to have a boutique wine industry with mainly small to medium-sized wineries, a few large wineries and no major wineries. Wineries are grouped according to their crush capacity as micro (up to 100 tonnes), small (100 750 tonnes), medium (7 505 000 tonnes), large (500 020 000 tonnes) and major (more than 20 000 tonnes). The wine industry is actively investing in emerging Asian markets such as China, Hong Kong, Japan and South Korea and repositioning itself as a supplier of high value wines in the domestic, USA, UK, and European markets. The industry is on track to more than double exports to A$100 million in the next three years. Total industry value is expected to increase from A$659 million in 2010 to A$790 million in 2015. The wine industry’s mostly small private/family-owned businesses are dynamic, pro-active, value chain-focused, responsive to market signals and adaptable to change. The industry has the potential to expand production of high quality grapes and wine. Figure 1 Wine regions of Western Australia Investment opportunities in Western Australia’s wine industry | 9

Table 1 Western Australian wine region statistics

Mean Heat degree Vineyard area Annual rainfall January/July Region days (growing (ha) (mm) temperature season) (˚C) Western Australia Margaret River 5960 1690 1177 20.4 Great Southern 3424 1467 798 19.0 Pemberton 971 1497 1255 19.6 Swan District 897 2340 865 24.1 Geographe 869 1700 975 22.0 Blackwood Valley 435 1578 856 20.7 Manjimup 393 1492 1055 20.0 Perth Hills 168 1770 1069 23.3 Peel 108 2325 897 22–23 Other famous regions Bordeaux (France) 115 000 1409 778 20.5 Burgundy (France) 29 500 1189 750 19.6 Barossa (South 10 356 1487 506 21.0 Australia)

The south-west of Western Australia has a Mediterranean climate with cool wet winters and relatively warm dry summers. Average annual rainfall can vary considerably within some regions. For example, rainfall in the Great Southern ranges from 650 millimetres in Frankland to 1012 millimetres in Denmark (Source: Wine Australia; ‘Viticulture & Environment’ by J Gladstones). Grape and wine production Western Australia Western Australia produces about 5% of Australia’s wine. However, it is focused on the premium end of the market where it accounts for more than 20% of Australia’s top wines. Western Australian grape and wine production peaked at nearly 88 000 tonnes and 56 million litres respectively in 2004 (Figure 2). Since 2010 grape production has stabilised at around 68 000 tonnes and wine at 45 million litres.

WA grape and wine production

Wine production

100 000 Wine grape production

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60 000

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0 Grape production (t) and wine volume ('000 litres) Grape production 1997/98 1998/99 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2007/07 2008/08 2008/09 2009/10 2010/11 2011/12 1999/2000 Figure 2 Western Australian grape and wine production 1998–2012 (Source: Wine Australia) Investment opportunities in Western Australia’s wine industry | 11

Wine grape plantings are about 13 000ha. Around 70% of the vineyard area is in the Margaret River and Great Southern Regions (Figure 3). Blackwood Swan Valley Perth Hills District 3% 1% 7% Geographe Peel Pemberton 7% 1% 7%

Manjimup 3%

Great Southern 26%

Margaret River 45%

Figure 3 Proportions of total vineyard area in Western Australian wine regions (Source: DAFWA)

The Western Australian industry is complex and multi-layered with many different business models. It is dominated by small, mostly privately-owned and family-operated businesses comprising more than 500 grape growers, 400 wine producers and over 300 wineries. The largest three wine businesses together produce nearly 40% of total wine production while the next five largest businesses account for about 15%. The major companies are Accolade Wines Holdings Australia, Fogarty Wines and Ferngrove Estate. Other major producers include , Burch Family Wines, Cape Mentelle, and . The wine production supply chain is diverse and highly integrated with a high level of engagement by participants. Distribution and marketing channels are diverse. World Although the world-wide area under vines tends to be stable, it has decreased in recent years to about 7528 million hectares in 2012 (Figure 4). The reduction has mainly been in Europe due to vineyard removals and subsidised conversions in the face of falling prices and over-production.

World area planted to vines

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7900

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7500 Area (’000 hectares) Area 7400

7300 1 2 201 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201

Figure 4 World area planted to vines (‘000 hectares) 2000–12 (Source: International Organisation of Vine and Wine, OIV)

Spain, France and Italy, the three countries with the largest plantings of vines, have reduced areas planted. In the southern hemisphere and USA new vine-plantings have continued at a moderate rate (0.3% increase in 2012 from previous year). European countries account for about 58% of the world’s vineyards. World wine production increased during the 1970s but declined during the 1980s and 2000s. Wine production was expected to fall to 25 200 million litres in 2012, a decline of about 11% since 2000. About 62% of wine comes from Europe, primarily France, Italy and Spain. In the ‘New World’ the USA, Argentina, Australia, South Africa and Chile predominate (see Figure 5). Investment opportunities in Western Australia’s wine industry | 13

World wine production

6000 2012 5000 2005

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Wine production (million litres) Wine production 0 a Italy USA Chile Spain Brazil China France Greece Portugal Australia Romania Germany Argentin South Africa Figure 5 The world’s major wine producers (Source: OIV)

Exports World Three European countries, France, Spain and Italy, supplied 74.2% of global exports by value in 2009 (Table 2). Wine exports have been successful for Australia with exports doubling to A$1.8 billion in the decade to 2009. Australia was the world’s fourth largest exporter (in value) in 2012 with 5.9% of global trade by value and 7.6% by volume. Other ‘New World’ producers such as Chile, South Africa and New Zealand have seen stronger growth in exports over the same period (Figure 6). Table 2 Top world wine exporters in 2012

Value Volume Country (A$ million) (million litres) France 10 109 1499 Italy 6051 2120 Spain 3044 1947 Germany 1256 396 Portugal 913 339 Australia 1966 735 Chile 1805 752 USA 1390 401 New Zealand 989 176 Argentina 918 365 South Africa 730 413 Rest of the world 3453 762 World total 32 624 9903 (Source: OIV)

Top ve wine exporting countries 2012 12 000 2009 10 000 2000

8000 1990

6000 1980

4000 1970

2000 Wine export value (US$ million) 0 France Italy Spain Australia Chile

Figure 6 The top five wine exporting countries by value in US$(Source: OIV and FAO) Investment opportunities in Western Australia’s wine industry | 15

Western Australia Australian wine exports fell from A$53.2 million in 2006 to A$34.5 million in 2010 but bounced back to A$45.2 million in 2013. China is now WA’s largest export market representing 35% of exports by value. Western Australian wines are exported to more than 60 countries. The top 10 destination countries by value are shown in Figure 7. Value of WA wine exports to major markets

France 0.7 Denmark 0.8 Japan 1.0 UAE 1.2 Canada 2.9 USA 3.0 Singapore 3.3 Hong Kong 4.4 United Kingdom 6.0 China 16.0 0 24681012141618

Value ($A million) Figure 7 Value of WA wine exports by destination in 2013 ($A million) (Source: Australian Bureau of Statistics, Wine Australia)

The average free on board price of WA export wines in 2012/13 was A$6.48 per litre compared with A$2.61 per litre for the rest of Australia. The average price across WA’s top five export markets was A$7.29 per litre.

The market

Global wine trade was valued at more than A$32 billion in 2012. While production has declined slightly over the past four decades, the quantities traded have increased markedly.

Wine consumption World consumption of wine increased to 24 300 million litres in 2012 (Table 3). After eight years of growth, consumption fell in 2008 and 2009 as a result of the world economic crisis. Consumption was expected to increase to 25 200 million litres in 2013. The European Union decreased its demand, which was partially compensated by increased demand from North America and Asia. Countries that are historically large consumers and producers, such as France, Italy and Spain, have reduced consumption. The USA is becoming the largest market in terms of volume (2900 million litres in 2012). Wine consumption is rising sharply in Asia, particularly China (1780 million litres in 2012, up 67% since 2000).

Table 3 World wine consumption per capita in 2012

Total Per capita Country consumption consumption (million litres) (L/y) France 3000 48 USA 2900 9 Italy 2300 37 Germany 2000 24 China 1800 1 UK 1300 20 Russia 1000 7 Argentina 1000 24 Spain 900 20 Australia 500 24 Portugal 500 43 Canada 400 South Africa 400 World total 24 300 (Source: OIV) Investment opportunities in Western Australia’s wine industry | 17

Wine imports Northern Europe and the USA are traditionally the largest net importers of wine. The UK and USA each represented about 11% of global imports by value in 2012 (Table 4). Imports into Asia have increased, particularly over the past two decades, reflecting growing populations with capacity to pay. Japan, China, Hong Kong and Singapore are now among the global top 20 countries for wine imports. Despite its increasing local production Australia imports major quantities of wine worth A$604 million in 2012. The top 26 world importers of wine by value accounted for 93% of world imports in 2012 (Figure 8, next page). North America, non-EU Europe and Asia showed the most dynamic growth.

Table 4 Top 29 world importers by value (A$ million) in 2012

European Union North America UK 5127 USA 5121 Germany 3112 Canada 2002 Netherlands 1070 Mexico 193 Belgium 1253 Total North America 7316 France 821 Sweden 703 Asia Denmark 648 China 1599 Italy 397 Japan 1593 Austria 270 Hong Kong 1049 Ireland 321 Singapore 481 Finland 240 Total Asia 4721 Poland 233 Czech Republic 223 Other major importers Lithuania 212 Australia 604 Total EU 14 695 Brazil 305

Rest of Europe Rest of world Switzerland 1205 Other importers 2171 Norway 414 Russia 1063 World total Total other Europe 2682 All importers 32 494 World wine imports by region

Other top importers 3% Rest of world Asia 7% 15%

North America 23% Rest of Europe 8%

EU 45%

Figure 8 World wine imports by region based on value in 2012 (Source: OIV)

China market China is an increasingly important for wine because of its large population and rising consumer incomes. There are potentially 248 million wine consumers in China. From 2007 to 2012 wine exports to China rose 144% (26 million litres) by volume and 333% (A$186 million) by value, over half of which was fine wine. Continued growth is predicted, particularly the fine wine category. China is now Australia’s third largest and Western Australia’s largest wine export market. The sale of is expected to increase 50% between 2013 and 2016. By then, wine sales in China are expected to overtake France, which would make China the second biggest wine consuming country in the world. Opportunity lies in the first and second tier cities. Growing demand is for imported bottled wine. Imports account for 12% of the wine market, with France (45%) and Australia (20%) the leading importers followed by Italy, Chile, the USA and Spain with much smaller volumes. As competition intensifies, a clear value proposition among countries- of-origin will become ever more important. Even at the ‘high-end’ and ‘premium’ price segments, Australian wines are perceived as having ‘the right quality at the right price’. Australia specialises in the premium end of the market with RMB300–400 (A$54–72) per bottle accounting for half of Australian wine sales. Investment opportunities in Western Australia’s wine industry | 19

Price is an indicator of quality Fine wine in this document is based on the Australian wine industry quality segmentation of grapes and wine developed by the Winemaker’s Federation of Australia (Table 5). The five segments (A, B, C, D, E/F) are defined on price.

Table 5 Fine wine definition

Wine quality Grape price Domestic retail Export FOB Quality code segment* (A$/t) price (A$/bottle) price (A$/L) A Icon and ultra- >2000 >30 >10 premium B Super-premium 1501–1999 1530 7.50–9.99 C Premium 601–1500 1015 5.00–7.49 D Popular-premium 301–600 710 2.50–4.99 E/F Commercial <300 <7 <2.50 Bulk wine is allocated to its own quality segment, under A$1/L to E/F, over A$1/L to D. * Adopted from Lokshin, Rabobank The definition of fine wine includes the A and B grade quality segments which make up icon, ultra-premium and super-premium wines.

The proposal

Foreign investment in the Australian wine industry has a long history. In recent years investors from China, the USA, France and other countries have successfully partnered with a range of wine businesses in several wine regions and states. Examples include: • Ferngrove Wines in Western Australia • Gemtree Vineyard, Belvedere Wines, Yangarra Estate, Bleasdale, Stonehaven Winery, Lane Vineyard and Loxton Cellars Winery in South Australia • Sunshine Creek Vineyard and vineyards in Coldstream in Victoria. The types of investments have included joint ventures, partnerships and ownership of vineyards and wineries. After a period struggling with the high Australian dollar and oversupply there is increasing confidence in the Australian wine industry. The time is right for investment in the Western Australian industry. Strategic investment is now needed to take advantage of two major opportunities for growth in business returns and profitability over the next few decades: • growth in consumer demand for fine wine in national and international markets • growth in tourism particularly in destinations which offer fine wine, food and lifestyle experiences. Fine wine is the fastest growing and most profitable segment of the global wine market: • The demand for fine wine at higher price points is growing in key Australian markets, and in China, UK, North America and emerging Asian markets. • China is the fastest growing wine market in the world. The higher price point fine wine is the strongest category. • Wine consumers in the USA, one of the world’s largest wine markets, are turning to fine wines. • Fine wine price points are solid in other key international markets such as Scandinavia and Canada. • Wine Australia projects an undersupply of quality grapes for fine wine to meet future demand in these markets. • There has been a significant increase in the consumption of quality wines in Australia. From 2007 to 2012 wine selling above A$15 per bottle increased by A$268m (64%) in value terms. The fine wine regions of Western Australia are perfectly placed for investors to take advantage of these opportunities.

Strategic investment The Western Australian wine industry has many different business models with wide ranging opportunities for profitable investment. The supply chain is diverse, highly integrated and marked by a high level of engagement by industry participants. There are many opportunities for investors, including joint ventures or equity partnerships with successful grape and wine businesses. Buying land to develop new vineyards and/or wineries is another option. Due to current excess grape production and winemaking capacity the investor should seek further advice from industry experts before proceeding. Western Australia is a relatively easy place to access land and expertise, and to develop a new business. Strategic investments which combine the synergistic strengths of the investor and Western Australian wine businesses offer the best prospects for long-term future profitability and mutual benefits. Capital is in short supply in the Western Australian wine industry and partnering with an investor is key to making wine businesses successful. Strategic investment will enable Western Australian grape and wine businesses to focus on their strategic advantages: • ability to produce high quality grapes and world class fine wines • excellence in viticulture and winemaking • production of ‘flagship’ regional fine wines such as Cabernet Sauvignon, Chardonnay and Sauvignon Blanc-Semillon in Margaret River, and Shiraz and Riesling in the Great Southern • strong domestic market distribution and direct sales networks. Investment opportunities in Western Australia’s wine industry | 21

Strategic investment will enable the investor to: • ensure supply of wine to China and expand into other markets • develop styles and marketing programs more directly suited to demands of markets such as China • provide routes to the China market with improved control of distribution and retail exposure • increase the international and consumer focus of the business • introduce a level of discipline to where effort and resources are best spent • develop brand awareness and reputation in Australian and international markets • develop new channels to markets such as USA. A number of successful grape and wine businesses may be interested in partnering with an investor and include: • growers of high quality grapes that are used to make fine wines • wineries and producers of high quality fine wines • producers who are able to establish a niche brand, markets and/or method of distribution • medium-sized wine producers with competitive costs and high quality established and desired brands • small high quality wine companies, including ‘icon’ wineries, selling mostly direct to loyal customers • companies able to create and/or capture unique market opportunities using other growers and winemakers’ resources. Areas for investment include: • Increasing scale of operations through integration, acquisition or consolidation to expand grape and wine production, shore up supply and to gain better quality control for fine wine production. • Upgrading production techniques and technology in the vineyard and winery to improve grape and wine quality and production efficiencies, for example berry sorting, winemaking facilities, tank storage and cool barrel storage. • Improving access and routes to international markets such as China, where the international investor can bring local knowledge about their home market and others and ability to build strong distribution and retail networks. • Vertical integration to enable better control of supply and quality from the vineyard through the winery to the market. • Diversification of wine product, for example, capacity to craft wine styles to consumers in target markets and expand the range of varieties by taking advantage of Western Australia’s diverse production regions. • Cellar door, fine wine and food dining and other facilities to capture the increase in tourism in the state’s south-west. • Development of new vineyards or restructuring of established vineyards to wine varieties in demand, elite clones and new varieties. • Innovation in grape production, winemaking, management systems and marketing.

Purchase of vineyards and winery properties A number of vineyards and wineries are for sale in different wine regions of the south-west. Prices range from about A$750 000 to more than A$3 million for properties of less than 10 hectares to more than 60 hectares. The price depends on the size of the vineyard and winery business, region, location within the region and wine varieties produced. Other factors that determine price are cost of the land, water supply, winery, cellar door, storage facilities, plant and machinery, and other improvements. Winery assets normally include grape receival facilities, crusher and destemmer, chillers, fermentation tanks (refrigerated), maturation equipment (barrels, temperature controlled rooms), laboratory, bottling plant (optional, as may be contracted), cellar door/visitors area, and sales office. It is a good time to invest in vineyards and wineries. Demand and prices for high-end wines are expected to increase in the short and medium term. The current purchase prices are significantly lower than the cost of setting up the vineyard and winery. Chinese demand for wine is growing so investors can enter the market at a good time to supply future growth. Wineries in Western Australia can be grouped according to their grape crush capacity as micro (up to 100 tonnes), small (100–750 tonnes), medium (750–5000 tonnes), large (5000–20 000 tonnes) and major (more than 20 000 tonnes). Western Australia mainly has small to medium sized wineries, a few large wineries and no major wineries. When deciding to purchase a vineyard or winery business the investor should: • determine the wine varieties and wines styles they want to produce for their target markets • select the regions that can produce these wines • determine the capacity required • contact the appropriate government department, viticulture or wine advisors, and real estate offices for assistance • conduct due diligence by appointing an experienced viticulture or wine advisor and an accounting firm with wine industry knowledge. Investment opportunities in Western Australia’s wine industry | 23

Case study: Ferngrove Wine Group

Anthony Wilkes, Managing Director/CEO Ferngrove Wine Group, in Frankland River about 360 kilometres south of Perth in the Great Southern region, is one of the world’s most isolated, cool climate wine estates which was established in 1998. In February 2011 Mr Xingfa Ma from Hangzhou took a controlling investment in Ferngrove Wines as he expanded his business interests to focus on a growing market opportunity for China’s rising middle class in food and wine. After an initial investment of A$10 million, Mr Ma has increased his shareholding (via some shareholders choosing to exit) and injected additional capital (A$7 million) into the business to purchase new wine tanks, equipment, nearly A$1 million in solar power (to become the second largest solar-powered winery in Australia), and purchase two additional vineyards. With a total of over 300 hectares of vines, Ferngrove is now one of the largest premium vineyard owners in Australia. Ferngrove has been able to shore up its balance sheet, and enable the winemaking and viticultural team to take greater control over more of the fruit to focus even more on producing the best possible wine quality from the estate’s vineyards. The sales and marketing team can now enter the marketplace with greater confidence knowing they have the backing of a ‘generational investor’ where patient capital is required to invest and build a global wine brand in an industry that needs considerable working capital, is highly competitive and moves with changes in market demands and agricultural influences from year to year. The Hangzhou Ferngrove Food Company has opened more than 50 retail Ferngrove wine shops and employs over 100 sales people to build a distribution network throughout China which continues to grow. Connecting a fine wine producer to this exciting market had previously proved challenging, but with local market intelligence, a drive to make sales and build distribution, and educating each other about the challenges and opportunities, has enabled Ferngrove to be well on the road to success in this exciting marketplace. Proudly Australian-run with the benefits of international ownership, the Ferngrove story is one of deep respect for the land and the time and care involved in making outstanding wine which reflects where it comes from, but now able to access one of the most exciting growth markets in the world with confidence and knowledge of the market. Capital is always in short supply in the wine industry and partnering with capital, but more importantly gaining market access or distribution is key to making a wine business successful, particularly given our ability to produce world class, premium beverages in greater supply than our domestic market can consume. Financial analysis

The Western Australian wine industry has many different business models with a wide range of opportunities for profitable investment along the supply chain. The supply chain is diverse, highly integrated and marked by a high level of engagement by industry participants. The financial information presented here focuses on the making of fine wines for the export (China) and Australian domestic markets (Tables 6a and 6b). The wine production costs and returns are compared for two ‘flagship’ wine varieties from the Margaret River Region, Cabernet Sauvignon (ultra-premium) and Chardonnay (super-premium). The wines are produced in a small winery (100–750 tonnes).

Table 6a Export market costs and returns for China

Cabernet Sauvignon Chardonnay China (A$) (A$) Retail price per bottle1 44.71 (RMB 300) 29.81 (RMB 200) Retail price per case2 536.51 357.68 Wholesale price per case3 320.99 213.99 Winery sale price per litre 17.36 11.22 Winery sales price per case4 156.29 101.02 Production costs Grape cost per tonne 2500 1700 Extraction rate (litres per tonne) 700 600 Cost of juice per litre 3.57 2.83 Wine cost per litre 6.20 4.50 Wine cost per case5 55.80 40.50 Packaging cost per case 25.00 17.00 Total cost ex winery per case6 80.80 57.50 Gross margin Winery gross margin per case7 75.49 43.42 Winery gross margin (%) 48.3 56.92 1 Retail price: Cabernet Sauvignon RMB300 and Chardonnay RMB200 per bottle 2 Case: 12 of 750mL bottles, total 9 litres of wine 3 Wholesale price: retail price less sales tax and retailer margin 4 Winery sales price: wholesale price less distributor/agents/importer commission, excise/duty/ taxes, sea freight and Australian domestic freight 5 Wine cost: cost of juice plus processing costs, costs, holding costs and wastage 6 Total cost ex winery: wine cost plus packaging cost 7 Winery gross margin: winery sales price minus total cost ex winery Investment opportunities in Western Australia’s wine industry | 25

The gross margins reflect the returns from sales minus variable production costs. Profit is the gross margin less other costs such as sales and marketing, administration, interest payments, repairs, maintenance and capital depreciation.

Table 6b Domestic market returns in Australia

Cabernet Sauvignon Chardonnay Australia (A$) (A$) Retail price per bottle1 35.00 25.00 Retail price per case 419.88 299.88 Wholesale price per case2 207.13 147.93 Winery sale price per litre 13.77 9.74 Winery sales price per case3 123.97 87.68 Production costs Grape cost per tonne 2500 1700 Extraction rate (litres per tonne) 700 600 Cost of juice per litre 3.57 2.83 Wine cost per litre 6.20 4.50 Wine cost per case4 55.80 40.50 Packaging cost per case 25.00 17.00 Total cost ex winery per case5 80.80 57.50 Gross margin Winery gross margin per case6 43.17 30.18 Winery gross margin (%) 34.8 34.40 1 Retail price: Cabernet Sauvignon A$35 and Chardonnay A$25 per bottle 2 Wholesale price: retail price less GST, retailer margin, wine equalisation tax (WET) 3 Winery sales price: wholesale price less distributor/agents commission, domestic freight 4 Wine cost: cost of juice plus processing costs, oak costs, holding costs and wastage 5 Total cost ex winery: wine cost plus packaging cost 6 Winery gross margin: winery sales price minus total cost ex winery

Other investment options not considered in detail here include the establishment and development of new vineyard plantings, production of grapes from existing mature vineyards and establishment of new wineries. Information on these investment options is available on request. The establishment cost of a new 40ha vineyard is about A$40 000 per hectare which includes development to commercial grape production in five years. This does not include the price of the land which varies considerably between regions. The production costs and returns from an existing mature vineyard will be determined by the size, scale of operation, varieties grown, grape quality and region. Grape prices are a good indicator of quality and production costs. Table 6 provides an example of prices for high quality grapes from the Margaret River Region. Further information on grape prices and production costs is available on request. The prices received for Western Australian wine are about 80% higher than those received by other parts of Australia (Figure 9).

FOB prices by state

8

7

6

5

4

3 Price in A$/litre 2

1

0 SA NSW VIC WA Australian average

Figure 9 FOB price of bottled wine from major wine producing Australian states (Source: Global Trade Information Service, GTIS) Investment opportunities in Western Australia’s wine industry | 27

Western Australia specialises in premium quality bottled wine at significantly higher prices than most other exporting countries (Figure 10).

Export prices by country

8 7 6 5 4 3 Price in A$/litre 2 1 0 Italy

USA Chile Spain France bottled Portugal average Australia Germany Argentina WA WA South Africa New Zealand Rest of the world

Figure 10 Export prices for wine from Western Australia and major wine exporting countries Export price is averaged over bottled and bulk wine. The Western Australian bottled wine price is shown separately. The bottled wine prices for other countries were not available (Source: OIV, GTIS). Other benefits for an investor

There a number of additional benefits for an investor including: • dedicated supply of wine to target markets, both international and domestic • better control of quality and supply • improved access and better routes to international markets such as China • improved control of distribution channels and market exposure • increase the international and consumer focus of the business • introduce a level of discipline to where effort and resources are best spent • developing brand awareness and reputation in international and domestic markets • developing new channels to markets such as the USA • access to production in a range of climatically diverse regions within Western Australia for range of wine varieties and styles to suit consumers in target markets • benefit from synergies by focusing on the strategic advantages of the Western Australian business and the investor • proximity to China and in same time zone • established brands, wineries and vineyard infrastructure • existing strong local distribution systems in independent retail outlets and from premises • highly profitable direct sales through cellar door, emails and mailing lists.

Other important information

It is extremely important that all applications for regulatory approvals are underpinned by a clear and concise intent to achieve full disclosure based on a properly developed project proposal. This is because regulators need full disclosure of all required information for quick and efficient processing of an application. A comprehensive, integrated development application could be used to attain concurrent development approval from the Local Government, the Department of Environment Regulation, Department of Transport and Department of Water. This could result in the time required for a total approval process of three to six months. The Department of Agriculture and Food, Western Australia is skilled in assisting proponents to seek approvals and will work closely with proponents for the inception of the project. The time period for all regulatory bodies to access a proponent’s application commences from the point at which they receive all the information required to make a decision in an appropriate format. This time period should not be confused with the point at which the proponent makes first contact with the regulators. Proponents from overseas also need to comply with the requirements of the Australian Government’s Foreign Investment Review Board (firb.gov.au). Investment opportunities in Western Australia’s wine industry | 29

Key risks and mitigants

The key threats facing the wine industry in Western Australia are in the areas of biosecurity, concentration of retail power, imported wines, climate change and taxation burdens.

Biosecurity Western Australia has a significant competitive advantage in biosecurity. The state has fewer pests and diseases than most other wine producing countries and regions of the world and is free from most major pests and diseases of grapevines. Industry and government recognise the need to be more diligent to maintain and advance this advantage. The main biosecurity threat is the introduction of exotic pests and diseases currently not present. These threats are managed by the state and national quarantine introduction and border protection services. There is a National Viticulture Industry Biosecurity Plan which addresses the threat of exotic pest and diseases not present in Australia and a Regional Viticulture Industry Biosecurity Plan (Hortguard) which also addresses pest and diseases which are present in eastern Australia but not present in Western Australia. The industry is currently improving its surveillance and diagnostic systems for the early detection of incursions. Western Australia is free of the following key pest and diseases of grapevines:

Common name Scientific name Insects Grapevine phylloxera Daktulsphaira vitifoliae Diseases Pierce’s disease Xylella fastidiosa Black rot Guignardia bidwellii Dead arm disease Phomopsis sp. Viruses Fanleaf virus Grapevine fanleaf nepovirus Red blotch virus Phytoplasma Flavescence dorée Flavescence dorée phytoplasma

Retail power The consolidation of national retail power in the hands of two major retail chains is considered a significant threat. Coles and Woolworths account for about 70% of all domestic sales. Private labels account for 16% of domestic sales. This is adversely affecting avenues to market for smaller producers and providing unfair competition from house brands and imports. These threats are being managed by industry and government at the national and state level. The Winemakers Federation of Australia is working with the national wine retailers and competition regulator on fairness, transparency and equity in the domestic wine market to create a domestic marketplace for industry where companies can grow share through quality, innovation and investment. The Western Australian wine industry is working with the State Government to give producers greater access to direct sales to end consumers, the most profitable marketing channel. The industry is implementing a strategic plan to boost the share of exports from 12 to 40% of production over the next 10 years thus reducing reliance on the domestic market.

Imports The volume of imported wine doubled from 2007 to 2012 from 8.9% to 15.7% of market share by volume and 16.3% to 18.6% by value. This includes the import of cheaper commodity wines as well as quality wines from South America. The Western Australian wine industry is implementing two strategies to maintain and grow market share against imported wines: • maintain and improve the quality and competitive advantage of our fine wines • market promotion programs to ensure Western Australian regional wines to become the wines of first choice by Western Australian consumers.

Climate change The wine industry’s special dependence on unique regions is strongly related to climate. Western Australia’s nine wine producing regions and five subregions span cool to warm climate viticulture and high to low rainfall. Each region produces wine varieties, styles and blends with distinctive characters. While temperatures are projected to increase and rainfall to decrease under a future climate the Western Australian wine industry is resilient to these changes. In the cool and maritime wine regions the late maturing classic wine varieties such as Cabernet Sauvignon, Shiraz, , and are expected to have more frequent high quality vintages. Newer varieties such as Tempranillo, Sangiovese, , and Nebiollo will perform better and be adopted in more regions. Elite clones of existing varieties and new varieties are being introduced, researched and developed to improve wine quality and increase the industry resilience to climate change. Vineyard management practices to protect grape production and quality against the occurrence of heat waves and heat spikes during the growing season and efficient irrigation practices to reduce vineyard water use continue to be adopted and improved.

Land and water resources The lack of availability of land with suitable soils and access to quality water supplies may restrict expansion opportunities in some regions or drive proponents to unsuitable sites with higher risks. Industry is working with government to ensure access to limited natural resources, such as suitable land and water, and facilitate the adoption of practices that lead to sustainable use of natural resources. Investment opportunities in Western Australia’s wine industry | 31

Taxation Wine tax arrangements have a significant impact on wine industry profitability and licence to operate in the community. WET (Wine Equalisation Tax) is a value based tax payable on the last wholesale sale. Effectively there is a 29% WET charged on the wine consumed in Australia (both domestic and imported). Export is exempted from WET. As WET is calculated on the value of wine, high value producers pay more. Wine produced in WA is of high value even at the production end, making it more costly at the wholesale level itself. When 30% of the wholesale value is added to the retail price, wine becomes more costly at the retail end. The Producer Rebate Scheme enables producers to claim back the WET charged. The maximum rebate an Australian producer can claim in a financial year is A$500 000. The rebate scheme helps Western Australia’s small winemakers to partially offset the disadvantage from WET. The Western Australian industry is working with the Winemakers’ Federation of Australia during the WET rebate review to ensure any changes do not diminish the profitability of the regional wine industry.

How to progress

Interested parties can contact: Mr Terry Hill Executive Director, Irrigated Agriculture and Diversification Department of Agriculture and Food, Western Australia Phone: +61 (0)8 9368 3405 Email: [email protected]

Services available from the Department of Agriculture and Food to assist investors in the agrifood sector include: • providing detailed information on opportunities • assisting with pre-feasibility plans to assess opportunities • assisting an investor to seek the Government approvals required • supplying contacts such as project managers, joint venture partners, financiers, immigration specialists, accountants etc • access to relevant research and development information • information and advice on Western Australian government natural resource management and biosecurity legislation and regulations, and the responsibilities and obligations • Information on Australian government quarantine and export regulation requirements. Department of Agriculture and Food, Western Australia 3 Baron-Hay Court, South Perth, Western Australia 6151 Telephone: +61 (0)8 9368 3333 Email: [email protected] agric.wa.gov.au

Disclaimer This business case provides indicative modelling on a fine wine supply chain for small to medium-sized grape and wine businesses in Western Australia. The business case and any additional information or documents that the State of Western Australia through the Department of Agriculture and Food, Western Australia (DAFWA) may supply, are to be used only as preliminary and indicative information, to be considered and used by prospective investors in the Western Australian wine industry in conjunction with other information and appropriate financial, legal, industry and other expert advice tailored to their individual circumstances and intentions. Prospective investors should conduct (or engage appropriate professional advisers to conduct) their own analysis and due diligence on any proposed investments, including the process for obtaining approvals. No part of this business case or any additional information or documents that DAFWA may supply constitutes or should be relied on as financial, investment, legal or other advice. The Chief Executive Officer of the Department of Agriculture and Food and the State of Western Australia accept no liability whatsoever by reason of negligence or otherwise arising from any use or release of material (which in this disclaimer includes this business case, any information in it or other part of it, and any other information, advice or material, oral or written, DAFWA may supply in relation to any aspect of the Western Australian wine industry, regulation of it or investment in it) or any error, inaccuracy or omission in the material. Although reasonable care is taken to make the material accurate, the Chief Executive Officer of the Department of Agriculture and Food and the State of Western Australia do not make any representations or warranties about its accuracy, reliability, completeness or suitability for any particular purpose. Copyright © Western Australian Agriculture Authority 2014. ABN: 86 611 226 341