AUSTRALIA/DAVID CLARKE: Aus Clarke

As chairman of McGuigan Simeon and owner of Poole’s Rock, David Clarke sees the market from opposite ends of the spectrum, says Julie Sheppard

You really have to wonder when David Clarke finds the time to drink wine. The executive chairman of Australia’s Macquarie Bank since it was founded in 1985, he is also chairman of the Wine Committee of the Royal Agricultural Society of New South Wales, the Sydney Advisory Board of the Salvation Army, the Opera Australia Capital Fund and the Sydney University Football Club Foundation. Not to mention chairman of McGuigan Simeon Wines. Then there are his own vineyards and Poole’s Rock Winery. Perhaps the term “workaholic” was actually invented for this dynamic Aussie.

Born in 1942, when Australia’s wine industry was in its infancy, his vinous links were already taking root. “My father was a chartered accountant and before the war he used to do the books for Maurice O’Shea [a Hunter Valley pioneer and founder of Mount Pleasant winery],” explains Clarke. “My father would get the train on a Monday morning and go up to the Hunter Valley. He’d do all the auditing, then come back on Friday and bring some wine with him.” Although that was before Clarke was born, he grew up in a household where wine was an accepted feature, long before it was a part of other Australian households.

Educated at Sydney University and Harvard, at a time when “the Mondavi story was pretty famous”, Clarke met winemaker
Brian McGuigan a few years later. “My son’s godfather was Brian’s lawyer and he introduced us,” says Clarke. “We were
friends long before I became involved in the business. I’ve known him for 25 years and if I’m a workaholic, he’s a complete workaholic!”

Brian McGuigan Wines was founded in 1992, and grew rapidly with sales now standing at over 1.2 million cases. In 2002 the company merged with Simeon Wines, followed by the acquisition of Miranda Wines in 2003. Today McGuigan Simeon Wines  manages over 5,000 hectares of vineyards and crushes over 245,000 tonnes of grapes – that’s more than 15% of the total Australian annual production. McGuigan approached Clarke to become chairman of the company after the merger in 1992.

Counting the costs
Last August at an emotional AGM McGuigan stepped down as company CEO to be replaced by Dane Hudson. At the same AGM the company reported its first ever loss, of A$11.5m for the 2005–6 financial year, after being forced to write down the value of its existing stocks by A$29m. Clarke points to several reasons for this.

“When we bought the Simeon business we inherited a whole lot of grape contracts, which have been onerous, particularly in the market conditions that have existed in the last year or two,” he says, referring to Australia’s surplus, particulary of bulk wine. “Up until two or three years ago the bulk wine business always made quite a lot of money but it’s the main thing that’s being affected by the oversupply and our stock write-down was entirely in that end of the market.”

At the same time the Australian dollar was depreciating. “I don’t think that would have mattered too much if it had happened a bit more slowly,” says Clarke. “But it went down too quickly and it came back up too quickly. So producers essentially took all the advantages when the Australian dollar was 50 cents against the US dollar, but they weren’t terribly well prepared when it went the other way. At McGuigan we did quite a lot of currency hedging, so we were protected for a while – which is probably why the bad news didn’t hit our results as early as it did some other people,” he adds.

Such forward planning highlights Clarke’s pragmatic approach to the wine business. “The wine industry has a very big investment in fixed costs. Wineries are very expensive to build, vineyards are expensive, so the fixed cost element is high,” he says. “Therefore, when there are business cycles, the wine industry will tend to do very well in the upswing and quite badly in the downswing. A 5% change in sales translates itself into maybe a 25% change in profit, both up and down.”

Clarke believes two types of companies are best suited to this business model. ”I think there’s a place for the big companies, the big brands, and there’s a place for the boutiques,” he explains. “The people who have really got troubles are the ones in the middle, who don’t have the marketing dollars to spend, like the big companies; but on the other hand find it very hard to give the individual attention to wines that a small boutique company can. McGuigan is at the bigger end – and I think that’s viable. While Poole’s Rock is on the boutique end, which is also viable.”

Boutique ambitions
Poole’s Rock was founded some time before Clarke became involved with McGuigan Simeon. “I first bought the land that Poole’s Rock vineyards is on in 1985, I planted the first grapes in 1988 and I then bought Cockfighter’s Ghost vineyard in 1994.” The Hunter Valley winery currently produces about 50,000 cases a year, of which about 15,000 are exported. But Clarke has ambitious plans for expansion, following the acquisition of a 2,500-ton winery from Southcorp.

“The plan for Poole’s Rock is simple and clear; we want to double where we’re at now as quickly as we can. We’re currently using probably about 60% of our capacity – either through growth in sales of our own products or contract winemaking. When we get to the point where the winery is full, it wouldn’t require very much expenditure to increase capacity substantially past that point. I’d like to see both a healthy winemaking contracting business and a healthy business with our own products,” he says.

Clarke’s role at the winery is directional. “I’m very involved in the product range and deciding stylistically where I think the various brands ought to be,” he says. “Poole’s Rock gave me a chance to use all those marketing theories I’d learned at business school, which I hadn’t had a real chance to try before!”

Exports play a key role in Clarke’s plans for Poole’s Rock. “My vision is 100,000 cases, half export, half domestic. We should be selling about 40,000 of those to the US and UK. Export will be alright if we can get the US and the UK right. Domestically we’ve got to go from 35,000 to 50,000. Part of that will come from a small extension of the number of SKUs and the rest will come from organic growth,” he explains. “If the supply and demand does get back into balance I think we’ll go back to much healthier growth rates than we’ve seen for the last year or two.”

Surplus slowdown
Like others in Australia, Clarke is optimistic that the oversupply situation is starting to change. “It really does look like this year production is going to be down quite substantially, as a result of the drought, the extreme heat last year and also some very bad frosts that have occurred in at least two or three areas. I think there’s a fair chance that supply and demand will be pretty much in balance for the year. That doesn’t do much about the surplus carried forward from previous years, but at least it doesn’t make it any worse,” he states. 

He also points out that the surplus isn’t universal. “The so-called wine lake certainly exists,” says Clarke, “but there are some varieties, such as Sauvignon Blanc for instance, that have a shortage rather than a surplus. Pinot Grigio and Pinot Noir are the same.

As particular varieties get into balance, I don’t think we’ll see the excesses again in a hurry, because people have been burned and they will be much more cautious about planting additional capacity.”

Clarke is vocal in his criticism of government policy regarding the oversupply. “The thing that I think is really important – and I’ve been urging this whenever I can – is for the government to stay right out of it this time.” He believes part of the reason for the present position is that government subsidies for a vine-pull scheme were put in place when over-production first occured. “No sooner had the vine-pull scheme finished than the government was then introducing accelerated depreciation provisions to encourage people to plant more vines!” he exclaims. “I think the idea that governments should even be offering incentives or disincentives is really bad. They shouldn’t be doing anything to boost or curtail production. The sooner they just decide to stay out of all that, the better.” 

Big business
Given the comparative sizes and different nature of the two companies it’s not surprising that the surplus has caused more problems for McGuigan Simeon than Poole’s Rock. “At Poole’s Rock we don’t sell any bottles that retail for under A$11. McGuigan is more in the sub-A$10 category, going right down to A$5. We’ve got products that are up against Jacob’s Creek, and that’s the end of the market that’s been very affected,” explains Clarke.

He describes McGuigan Simeon as four businesses in one. “We’re our own branded wine business. Then we do a lot of contract winemaking – we make half of Jacob’s Creek under contract and do a lot for Tesco private label. We’ve also got a series of businesses which are ancillary: we’re pretty well the sole producer of concentrate in Australia and we do quite a lot of management of other people’s vineyards.” Clarke believes there are “no real problems” with these three parts of the company.

As mentioned earlier, the fourth business, bulk wine, has not been going as well, thanks to those grower contracts inherited after the Simeon merger. “It’s a business that has been helpful in keeping production costs down. But being dumped with a whole load of grapes that we didn’t want and a whole load of wine that we couldn’t sell, that’s a business that doesn’t have much to recommend it,” says Clarke bluntly. “So I think over time we will be seeking to get out of the bulk wine business.”

That’s easier said than done when existing contracts need to be honoured – a situation which has already caused friction between the growers and McGuigan Simeon. “Wherever we’ve had the ability to terminate contracts, we have,” says Clarke. “At the moment if we’ve got binding contracts, we’ll honour them. But if we have the ability to cancel them, we’ll exercise that ability. We are without any doubt, being forced to accept more grapes under those contracts than we would like to accept.”

He believes that the situation isn’t going to get easier for the growers in the short term. “Last June the market price for bulk wine was pretty much at the bottom. It seems to be off that bottom now. But there will be a lag before that is reflected in grape prices. So I’m sure that in the upcoming vintage grape prices will be down,” he says.

“I’m a bit surprised that there haven’t been more people prepared to put vineyards into mothball,” he adds. “I’m also surprised that some of the farmers who can’t even be covering their cash costs, aren’t ripping their vines out and doing something else. I think we ought to see a decrease in the number of growers over the next five years – but whether we will or not is another question. I assume that the banks must be carrying them more than I thought they would because a lot of the growers can’t even be covering their cash costs, let alone earning anything on which to live,” he adds. 

Looking ahead to the future for McGuigan Simeon, Clarke believes, “The key thing is to either grow our own brands organically or find some brands to buy. We really don’t need any more winemaking capacity! But that’s not to say we wouldn’t buy extra capacity if we had the chance to buy brands at a reasonable price as part of a deal.”

Although Clarke thinks that by the standards of many other industries, the wine trade isn’t very consolidated, he admits that it has become much more so in the last four or five years. “And I think we’ll probably see more mega-mergers,” he says. “Either big will merge with big, or big will buy brands or make other acquisitions. Lion Nathan has done that. It bought quite a number of boutique brands and tried to make a larger operation, though I’m not sure whether the strategy has really come together yet,” he adds.

Clarke believes a key challenge for the Australian industry going forward will be premiumisation. “I think we’ve established the proposition that in the middle price range Australian wine is very good value for money. Now we should be trying to get more icon brands and promote them better,” he says.

But what of the future for Clarke himself? “I’m probably going to go from being executive chairman to non-executive chairman at the bank next year,” he says. This will give him more time to focus on Poole’s Rock – with a helping hand from an old friend. “I’ve decided to outsource the growing of some of my grapes,” explains Clarke. “I woke up the other Sunday morning and went down to get the papers from the local store. I came back and found a tractor – and there was Brian McGuigan ploughing between the rows at 8am on a Sunday morning!” For workaholics like McGuigan and Clarke, there’s clearly always a job to be done.

CV: DAVID CLARKE

Date of birth January 3, 1942

1948-1958 Knox Grammar School, Sydney 
1959-1962 Sydney University, B.Econ (Hons)
1964-1966 Harvard University, MBA
1959-1964 Ord Minnett, T.J. Thompson & Partners, chief accountant
1966-1971 Darling and Company Ltd, director in charge of Banking
1971-1977 Hill Samuel Australia Ltd, joint managing director
1977-1984 Managing director
1984-1985 Executive chairman
1985-present Macquarie Bank Ltd, executive chairman
1992 Officer of the Order of Australia, for service to business and the community
2001 Centenary Medal for service to Australian society through business and the community

INTERESTS: skiing, golf, bridge, opera, ballet, wine

© db January 2007