New Zealand wineries may be well aware of the dangers of oversupply, but a new study has revealed they also need to keep a close eye on their debt levels.
With the 2008 vintage producing a bumper crop that led to fears of a wine glut, the third annual De
New Zealand wineries may be well aware of the dangers of oversupply, but a new study has revealed they also need to keep a close eye on their debt levels.
With the 2008 vintage producing a bumper crop that led to fears of a wine glut, the third annual Deloitte financial benchmarking survey for that vintage – released this week – unsurprisingly focused on oversupply concerns.
But it also said there was a “worrying trend” in the general increase in wineries’ debt to equity ratios.
It found that many wineries, particularly smaller ones, have current ratios of less than the generally accepted benchmark of 2:1, suggesting that the potential for cash flow issues lay in the future.
Deloitte corporate finance partner Paul Munro said the high levels of short term debt observed in the results posed a “significant problem” for those smaller wineries that may also be experiencing cash flow difficulties as the oversupply issue saw revenue per case decline and inventory levels increase.
“While ‘cash is king’ from a trading perspective, for long term solvency access to debt financing is likely to become increasingly important.”
Overall, the report found that New Zealand wineries generally outperformed their Australian counterparts for the 2008 vintage in terms of profitability, but it did note that the results were not as positive as the prior periods survey
The larger wineries recorded respectable earnings, with the $20m+ in revenue category recording a rise in earnings before tax of 21%, while the $10-$20m category saw a 17% rise.
The export market remains the key for local wineries, according to the report. With annual exports now over the $1 billion mark, all revenue categories surveyed generated at least 39% of their sales from exports.
But the report’s authors warned that this left the industry more vulnerable to international consumption trends and the possibility of bulk wine being dumped into the global market place.
“If supply is not carefully matched with global demand and care is not taken to protect New Zealand’s brand, our exporters could find that they are unable to obtain the premium prices they require to remain profitable,” said Mr Munro.
