4 February 2016 – Changing landscape

The National Australia Bank’s January Business View has a focus on state economies and how the movement of economic activity towards the non-mining states is continuing, while conditions in mining states have become tougher as commodity prices have fallen further.

The report says that though the dollar is acting as a stabiliser we should be aware that the disturbed global backdrop presents downside risk to all states and territories. There is mention of the dollar falling to 66 cents to the American dollar, which will “continue to improve the competitiveness of export-oriented and import-competing firms to varying degrees”. 

How the bank views the dollar remaining above 70 cents since January 21 remains unknown. The lower the dollar the better the exports is the tenor of the report but the exports NAB mentions are those in the  services sectors, such as tourism and international student arrivals. The upside may be increased tourism but it’s balanced with this warning: “A sharper global slowdown could lower demand for travel to Australia, education exports and Australian property, particularly if the household sectors in China and East Asia come under stress.”

NSW and Victoria are said to be the go-ahead states in the coming year. South Australia is predicted to continue to underperform. If SA is underperforming it seems strange Aldi is planning to open 50 stores across the state, which will change the matrix of food and wine retailing there.

The company opened four stores on February 3, at Parafield Gardens, Seaford Heights, Hallett Cove and Woodcroft. In an ABC interview, Roger Drake, chairman of the rival Foodland Group, said:

“We’re not the low, cheap, bottom end of the market. We’re a premium market, we’re about range, we’re about fresh foods.

“I think it definitely will affect Woolworths and Coles a lot more than it will affect Foodland. They’re chasing them down and it’s almost who can get to the bottom in a hurry.

“Aldi will get a hell of a shock when they come up in stores in Adelaide. Adelaide has some of the best independents in the world… and I think that we pride ourselves in making sure that we give that service, quality and range.”

TKR thinks Mr Drake is in for a shock.

Aldi is also upping its marketing spend while Coles and Woolworths are reducing theirs. Aldi is also taking on the pair in the drinks department, releasing what has been described as “cheeky adverts” with phrases such as,“Pay peanuts, get moscato”.

Aldi looks to be getting established before the arrival of Lidl, which, it is said, is looking at the Masters store locations that Woolworths is pulling out of. It’s also said Aldi is looking at these sites. Other reports say Lidl may not arrive for another couple of years.

Right said Fred

Bronco Wine Company CEO Fred Franzia’s speech to the Unified Wine & Grape Symposium caused a stir last week. Franzia is the producer of the Charles Shaw brand (two-buck chuck), which, according to him, has sold more than 1 billion bottles.

Franzia recounted the history of the Bronco Wine Company, saying it started out as a large-scale negociant with no interest in owing vineyards. This changed in the late 1970s, early ’80s. Franzia said:

“Some wine grape growers in California’s San Joaquin Valley are learning a tough economics lesson, causing them to pull out vines that are not economical to grow and are not in demand by wineries.

“I predict today’s overvalued land prices are heading south and will be substantially lower in the next five to 10 years. The grape market will continue to remain strong for the right varieties as sales will be steadily growing and there will be no rush to overplant grapes without a contract.”

Franzia says he believes in free market competition and consumer choice, and likes to offer consumers competitive prices on good quality varietal wines. He also believes restaurants should offer at least one US$10 bottle of wine. This was an interesting statement: “Our company opposes government subsidies, including getting government money for research.”

His message appears to be: stand on your own two feet, do not look for handouts and learn to read the market.

“Our family is a strong believer in free markets, competition and consumer choices. Bronco’s ability to adjust grape supply sourcing from our own vineyards is one of the reasons we have been successful in growing our wineries. Bronco will graft their vineyards – 1000 to 1500 acres per year to get the necessary supply aligned to what is in demand.”

Franzia is supportive of the San Joaquin Valley and got stuck into Rob McMillan, executive vice president and founder of the Silicon Valley Bank Wine Division.

Working for a coastal bank that makes loans to high end wine producers may be crying wolf too loud about the San Joaquin Valley. If he [McMillan] has not noticed, it is the San Joaquin based and sourced wineries that are buying the coastal wineries. I will stand on our belief and not be misled by Mr McMillan’s doom and gloom.”

Franzia believes wine from the San Joaquin Valley can attack the 40 per cent of the wine market now being supplied by non-Californian foreign wines. He reckons there are too many appellations in California, and they will do damage:

“In my opinion, the appellation system caused the downfall of French wines and will do the same in California. California should be the one and only appellation to promote our home grown best quality wines.”

Franzia quotes Mel Dick of Southern Wine and Spirits: “The United States consumes 327 million cases a year. If the US drank (per capita) as much as the United Kingdom, instead of consuming 327 million cases, it would be 740 million cases per year. If we drank as much as France, per capita, we would be 1.6 billion cases. My prediction is we will be selling over 1 billion cases of table wine by 2040!”

There is a lot more but we will move onto the reason this all-American story is in TKR’s domestic section.

In our opinion Franzia and John Casella share similar philosophies. They have both built large volume brands that hold wide appeal for consumers. Both these brands, Casella’s Yellow  Tail and Charles Shaw, get little recognition from the wine-wise consumer. In truth, TK is not warmhearted towards the brands from a taste viewpoint, but we respect them enormously for having set many a novice wine drinker on the vinous path.

Franzia and Casella see the need for a style and fill that need. Both are family oriented and both stand on their own two feet. The wine industry needs people like these to balance the overbearing arrogance of the many pompous people the wine business attracts.

The news that Casella has acquired the Howcroft Estate Vineyards, which is in the Bordertown GI but can use the better recognised Limestone Coast zone, came as a surprise. The surprise was not that Casella bought it, but that he bought it so soon after acquiring the Brand’s Laira brand from McWilliams and Peter Lehmann.

The Howcroft Estate covers a total land holding of about 537 hectares and is divided into two planting areas. About 412ha are planted to vines. Howcroft 1 covers 222.58ha and Howcroft 2 covers 189.41ha.

The asking price was $9 million, and it’s reported Casella paid this amount, though the company has not commented on the price. The sale was via Colliers International Australia on the instruction of Sandhurst Trustees, a wholly owned subsidiary of Bendigo and Adelaide Bank, which in turn was acting on behalf of a group of investors. About half the crop is contracted to Australian Vintage. It is believed this arrangement will continue.

The Howcroft Vineyards scheme was set up by Brian McGuigan Wines on behalf of a group of Melbourne investors looking for tax breaks. At the time, 1998-2000, the estimated cost would have been in the region of $65,000-$70,000 a hectare. Deduct from this the $15,000 tax break of the time and the cost would have been in the region of $40,000-$55,000 a hectare. How much profit the investors have managed to make selling grapes to McGuigan and later Australian Vintage is not clear, nor are details of the continuing tax breaks they have managed to engineer over the years, but they have taken an almighty hit on the original set-up costs, as the selling price was about $22,000 a hectare.

What next for Casella? Increasing the presence of Peter Lehmann in the US is the first priority. As to Brand’s and Howcroft, we will have to wait and see.

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