Keeping it in the family

There is a category of Australian producers which are neither niche, nor large corporations. They represent an important middle ground, with enviable flexibility. By Penny Boothman

EVER HEARD of middle child syndrome? The unconventional, creative, independent sibling who’s both a follower and a leader? Well, it bears more relevance to the Australian wine industry than you might think.

At one end of the spectrum there are the mega-corporations, the "Big Four" as we know them, while at the other end there are the vast numbers of small-scale "boutique" wineries, but what of the chasm in between?

This area is occupied by a number of companies – neither massive nor minute – that between them make up a significant portion of the market.  Are they stuck between a rock and a hard place, or exactly where they want to be? In this large, grey, area of middle ground, there is no clear definition, no obvious "second tier", but they seem have one thing in common – they keep it in the family.

Australia’s oldest family run winery is Yalumba, and with over 150 years of history the family has seen the Australian wine industry change and grow around them.  "The gap between the massive corporations in wine and the family owned cluster of medium sized wineries is getting bigger and bigger, and the gap between (us) and the next level down is getting bigger and bigger.

So you’ve got this real separation of size," says Robert Hill Smith, proprietor of Yalumba. "20 years ago it was far more amorphous, there were a lot of family-owned businesses of the same size, and not too different in the way we managed businesses or saw the future."

It’s difficult to get a sense of perspective in this mid-sector, does size even matter? "Some people look at Yalumba and say "that’s a big company," Hill Smith continues, "but Yalumba’s crushing about the same tonnage of grapes that it did 25 years ago – and that’s 10% of the grape crush of any of the Southcorp or Orlando- Wyndham type organisations."

Low pressure

There seem to be distinct advantages to holding the middle ground. "People think that mid-size companies will get lost, but we have the ability to respond.  We don’t have the significant pressure from shareholders and can react quickly," says Séan Shortt, general manager sales and marketing of the Wingara Wine Group.

And it is precisely this flexibility that sets these companies apart. "All decisions are made between the four siblings and mum and we’re flexible in what we do," says Leanne De Bortoli. "I guess that’s where it’s different with a family-owned company rather than one of the larger corporates where you’re looking at buying for the short-term benefit of having to satisfy shareholders.

When we plan something it might not be for our lifetime."  The lack of money-hungry, profit- riven shareholders seems to be a major benefit of keeping it in the family.  "We’re a family company in a strong position, having no shareholders," says Ross Brown, CEO of Brown Brothers who produce around 1 million cases annually, 40% of which reaches export.

 "It might take us five years to make a decision, and people expect quicker returns from a public company."  That’s the beauty of working for yourselves – doing what you want, when you want. "We should be able to implement more quickly and be more flexible.

You live on raw nerve and energy, but at the end of the day it’s what you put in the glass, and whether that justifies someone going and buying it again," Hill Smith believes.  This flexibility encourages creativity and can result in different products that might otherwise give the boardroom or accounts department a headache.

"A family company looks at the overall picture, some wines may slightly subsidise others, but we get to play more as winemakers," says Martin Cooper, group senior winemaker at McWilliams.  "We’re not run by a bunch of shareholders demanding instant profitability.

If that were the case this wine (bottle aged Hunter Semillon) would not exist" Controlling what you do can become a way of life and Yalumba has its own distribution network, export and import, under the name Negociants (in Australia) or Negociants UK over here.

This has grown from being a net import business to having an export majority.  "It’s not so much economies of scale, it’s more to make what we do more interesting, people we network with say that we’re a regional one-stop shop.  If you want McLaren Vale we’ll show you Wirra Wirra, if you want Clare we’ll take you to Jim Barry, Margaret River: Vasse Felix, etc.

It looks like some sort of grand vision, but it all makes sense," says Hill Smith.  In the current climate of strong branded wines, an obvious choice for making some fast volume sales would be to produce a hard brand with a pre-destined shelf life.

Tyrrells indeed used to own the successful Long Flat brand, but sold this off to Cheviot Bridge in May 2003 and now all its wines are represented as Tyrrells own.  Brown Brothers also decided to keep the brand name their own.

"An investment of 100 years of history is pretty important for the power of the brand," says Brown.  For all the family history and involvement, this is a marketing led company and the branding of the Brown Brothers umbrella covers everything they do. Similarly all De Bortoli’s wines are branded with its logo.

Yalumba’s Oxford Landing is perhaps the strongest stand-alone brand, but even this is still  very clearly a Yalumba wine.  After all, in a family company, you are what you make. 

Capital investment

One obvious drawback of not having shareholders is the loss of their financial support.  Capital investment is a huge issue in the wine trade, and middle size companies have come up with different ways to work round it.  Vineyard land is a particular burden, after all it’s basically sitting there doing nothing and draining resources for half the year.

Brown Brothers buy in the majority of its fruit from contracted growers. Currently they own just 25% of its own vineyards, but hope to see this rising to 40% to give themselves a greater level of control. 

Running sidelines in connection with the wine production industry is another way of putting some of your eggs in another basket.  Nepenthe manages its large viticultural management consultancy separately to "keep the vineyards off the balance sheet."

The viticulture operation finances the employment of top viticulturalists, who they couldn’t justify paying for the own vineyards alone.  Yalumba’s vineyards are all part of the business, but they also have a rootstock and vine nursery, which produces around 1.2 million grafted vines annually.

As many as 40 years ago the nursery was started to provide vines for its own vineyards, but now 80% of its grafting work is commercial production, and finances its own replanting programmes and clonal research.

Smart financing

Tyrrells, with an annual production of around 600,000 cases, make the best use of the facilities they have, performing contract lab-work for wineries all over the Hunter region.  They also have a smart way of financing stock by using a "futures" system.

"Vintages are sold on a ‘pay half now, pay half in four years’ time’ basis," explains Steve New, export regional manager for Tyrrells.  "If, at four years, you decide not to take the wine, your first installment is refunded with 6 or 7% interest."

In the mean time, of course, the money is at Tyrrells’ disposal, and this has been proving such a smart investment opportunity for money-savvy clients that they’ve had to limit each customer to 50 dozen.

Tyrrells also have an unusual standing order system that automatically sends out repeat orders of each vintage to previous private customers within Australia.  "People are free to send it back, but they rarely do," says New.

"This helps to build a loyal following and we also do roadshows around the country with dinner and a wine tasting." 

Marketing as an opportunity

However clever you are at managing finances in-house, you’ve still got to sell the wine at the end of the day, and although the budget may be considerably lower than that of the big players, marketing is an area in which the middle ground companies can really fight back.

Wirra Wirra Vineyards, with a production of 130,000 cases a year, takes a considered approach to marketing.  Exhibiting at trade/consumer shows is central to their strategy and vital for getting the company name noticed.

"You’ve got to be here to get the wine to the consumer," says Andrew Tierney, sales and marketing manager at Wirra Wirra.  "It may cost A$10,000 to exhibit, but you’d only get two ads for that – just one in the UK market."

In the same pattern as many other middle sized companies, Wirra Wirra deal directly with the large multiple retailers, but use a dedicated importer to deal with independent retailers and the on-trade.

With the economies of scale available to the big boys the playing field is hardly level, so how do the mid-size brands compete? One way to create routes to market is by forming a merger or JV with an international company.

"You have to have a strong brand proposition, and to support that you fundamentally need a route to market," says Wingara’s Shortt.  "The route to market is a key issue for mid-size companies, and Freixenet offer that."

Although administered by the Yunghanns family, Wingara is majority owned by Freixenet, hich provides them with networks in countries they would otherwise be too small to reach. "You can bundle brands together, but we’re not tied to their distributors, everyone takes a pragmatic view," Shortt explains.

"We have regional managers based in key sectors – local reps for local people.  Export has to be very carefully thought through."  Wingara exports nearly 65% of its 650,000 case production and are aiming for 75% in the future.

Sights set on the on-trade

McWilliams are already at the larger end of the family-owned scale with 3 million cases, but until they formed a JV with Gallo in the US, export was a minor part of their business.  Now they co-own the Hanwood Estate brand, which is driven by Australian winemakers, but distributed via Gallo’s channels in the US, along with all the rest of the McWilliams brands.

 Other producers prefer a more independent approach.  "We have 40 full-time people on the road, and they pretty busy, all they do is sell our product and that’s it, so we’ve got our own trucking and distribution," says Steve Webber, manager and winemaker at De Bortoli.

"We have always relied on service, that’s been one of our biggest selling points.  The rep comes around and takes your order, and then the next day the truck delivers the product.  It’s not rocket science."

De Bortoli has also had its own dedicated office in the UK since 1996 to handle distribution here, even though 85% of its production is sold domestically.  Even with improved distribution networks and good capital management, price points put these wines into the premium sector and most producers consequently have their sights set on the on-trade and independents. 

"Oxford Landing is very strong and it sort of dominates our landscape a bit," says Hill Smith. "We’d like to do better with our premiums.  The future for us is making what we do outside the supermarkets stronger, making more of our brands more quality-oriented."

With the innovation and flexibility apparent in this sector, we could soon see middle ground become centre-stage.