Withering on the vine?
Advisory
As the gloss comes off the Australian wine industry,
shrewd producers are embracing new business
models and strategies to stay ahead of the game.
Winemakers must make difficult business decisions
as they grapple with unfavourable market conditions
and an uncertain industry outlook.
Beneath a certain surface glamour,
winemaking has always been a
difficult business.
Yet conditions in the Australian
wine industry today are perhaps
tougher than they have been for a
very long time.
For a start, structural oversupply
in the local market has eroded
prices and margins. A global wine
surplus estimated to exceed one
year’s production exacerbates the
problem. At the same time, Australian
production costs have continued to
rise, reflecting drought, increasing
energy and water prices and a tight
labour market.
Growth in domestic wine consumption
still lags behind production. Export
markets are under pressure with
demand for Australian wine in the
key UK market falling by 18 percent
in 20081. In the UK, the buying power
and promotional discounting of leading
retailers are further compressing
already tight margins. The relative
strength of the Australian Dollar
is compounding the problem for
Australian wine exporters. In addition,
Australian winemakers are finding it
1
The Guardian, 27 November 2009
© 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All
rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
increasingly difficult to compete with
low production cost countries such as
Chile and Argentina. Domestically, an
even more concentrated liquor retailing
sector is making it harder for many
wine producers to find shelf space and
keep control of their pricing.
Australian wine producers are also
suffering from the perception that
they are low cost producers, which
is a difficult market to play in given
Australia’s high cost structure relative
to other global producers and it
also makes it extremely difficult
for premium Australian wine to be
recognised and respected on the
global stage.
Vine plantings and wine production
patterns struggle to keep up with
changing consumer preferences.
At the same time, competition from
alternative alcoholic beverages is being
felt at both the premium and budget
ends of the wine market. Finding
effective branding and distribution
strategies remains an ongoing challenge
for many producers, particularly given
the glut with back vintages.
 In a notoriously capital hungry
business, the global financial crisis
and its effects on business credit
have put many wine producers under
additional financial pressure, curtailed
their freedom to manoeuvre and called
into question their longer-term viability.
Funding each new vintage becomes
progressively more difficult.
To further complicate matters, at the
time of writing there were reports that
the federal government is considering
the introduction of a standardised, flat
rate of tax for all alcoholic beverages
based on the existing excise rate for
full-strength beer and abolishing the
wine equalisation tax rebate. The
potential effect of such a change
would be to increase the retail price
of cask and other cheap wines while
easing the tax burden on premium
labels. The proposal has the potential
to divide the industry.
As always in these circumstances,
successful, aggressive producers
will seize on unfavourable business
conditions and use them to their
advantage. They’ll use changing
competitive relativities as opportunities
to initiate profitable growth,
streamline operations, strengthen
their brands, consolidate distribution
channels and position themselves
to take advantage of an eventual
improvement in market conditions.
© 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All
rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
How we can help
KPMG’s Advisory practice helps
management solve problems that can
threaten a company’s value and viability.
We work alongside management,
lenders and other stakeholders to
develop financial and operational options
to deal with critical issues concerning
cash flow, profit and loss and the
balance sheet.
Engaged at the early identification of
performance issues, our services can
also assist with the achievement of
performance targets, to prevent the
onset of financial stress.
Our work involves assisting
management to stabilise the business,
maintain control, reorganise borrowings,
rebuild performance and enhance
profitability, improve competitiveness
and build a stable platform for
sustainable growth. Our Advisory
professionals draw on a portfolio of
financial, operational and management
services experience.
Specifically, we can assist you in areas
including:
Cash and working capital
Identifying opportunities to preserve
and generate cash, a vital consideration
in the present environment. We
review working capital needs and cash
management practices to improve short-
term liquidity and free up cash on a
more permanent basis.
Cost optimisation
Introducing strategic cost optimisation
measures that achieve sustainable cost
reductions and free up cash. We advise
against ‘slash-and-burn’ approaches to
cost cutting that weaken the business in
the longer term.
Capital management
Reappraising borrowings and debt
structures, clarifying ongoing funding
requirements and exploring alternative
sources of capital. We help renegotiate
credit facilities and interface with lenders
and potential investors.
Strategic alliances
Taking initiatives to secure grape and
bulk wine supplies, rationalise marketing
and distribution channels and develop
new markets domestically and/or
internationally. We assist in finding
potential business partners and allies
and assessing innovative arrangements
to improve production efficiencies, trim
overheads and bulk-up marketing and
distribution muscle.
Industry consolidation
Locating and evaluating acquisition
targets and potential joint venture
partners. We work with clients
on valuations, due diligence, deal
documentation and negotiation. We
support integration planning and post-
deal rationalisation activities.
Why select us
KPMG’s Advisory professionals have
a deep and intimate knowledge of
the Australian and international wine
industries. We deliver core capabilities
and qualities to support our clients in
obtaining successful outcomes. Our
focus is on assisting management to
improve performance and manage
through situations of stress without
moving into formal insolvency
environments.
Our professional advisers combine
high-level analytical, technical and
financial skills with a practical, hands-
on understanding of client needs
and concerns together with actual
commercial experience in the wine
sector.
We draw on our extensive local and
international resources and operate
across traditional professional
disciplines in search of optimum client
outcomes. Our advice is clear, jargon
free and results oriented.

Green initiatives
Reviewing the climate change,
sustainability and water implications
of planned business transactions and
initiatives such as the sale of water
rights to release capital. We assist in
identifying climate and carbon related
risks and assessing the cash flow
and tax implications of carbon-related
transactions.

© 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All
rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
kpmg.com.au

Contact us
Adelaide Sydney
Mark Watson Marcus Derwin
Partner Executive Director
Advisory Advisory
+61 8 8236 3308 +61 2 9455 9162
markwatson@kpmg.com.au mderwin@kpmg.com.au

Melbourne Perth
David Willis Matthew Woods
Partner Partner
Advisory Advisory
+61 3 9288 6058 +61 8 9263 7515
davidwillis@kpmg.com.au mwoods1@kpmg.com.au

Brisbane
Anthony Ibrahim Simon Vertullo
Director Director
Advisory Advisory
+61 3 9288 6707 +61 7 3233 3107
aibrahim@kpmg.com.au smvertullo@kpmg.com.au

© 2010 KPMG, an Australian partnership

and a member firm of the KPMG network
of independent member firms affiliated with
KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights
reserved. Printed in Australia.
KPMG and the KPMG logo are registered
trademarks of KPMG International.
Liability limited by a scheme approved under
Professional Standards Legislation.
Februaury 2010. WAN05222ADV.