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An AIWPA delegation was to meet the deputy chief minister Ajit Pawar in Mumbai a couple of days ago. It is a matter of conjecture whether the producers find themselves closer to the solution by a notch after the meeting. Government officials are known to be too careful in any out-of-the box solutions and it may not be simple to convince them to get the producers a low-interest soft loan of Rs.200 crores (Rs.2 billion). The association is reportedly planning to approach the central government next month for the soft loan package for the wine industry.
One hopes and wishes them success. The state has a total of 74 wineries, of which 50 are reportedly facing the crisis-especially Nashik district where almost 30 of the 37 wineries in the district have stopped crushing for the past few years, says the report in TOI. A few months earlier the Association had reportedly blamed Maharashtra government for giving licenses freely to all and sundry under their one-window scheme thus felicitating wine production but without committing any help in marketing. One of the rare cases where the government was pro-active and helpful and where one needed to applaud its pro-farmer and pro-wine policy vision went awry!
The reason given then and again now, is that these troubled wineries are unable to sell the stock due to lack of funds for marketing. AIWPA claims the wineries have a stock of 1.8 million liters of unsold wine-equivalent to 200,000 cases of 9-liter each. This is about 3 months stock if one takes the average production/sale of ‘premium’ wines of over Rs. 250 a bottle, at 800,000 cases a year. (Additionally, 1.2 million cases of fortified, Goan or other Port and low-end table wines are estimated to be sold every year and are presumably not a part of the wineries in financial crisis).
The quality of these stocks lying in the tanks for years can at best be suspicious. In the best of storage conditions, the young wines start deteriorating after a couple of years. It would be very difficult to maintain the low storage temperature with electricity breakdowns and its not being available 24 hours-besides being very expensive to maintain the low fixed temperatures. It would be a matter of conjecture whether these wines of deteriorated quality (which are presumably sold as bulk or low-end wines or mixed in blends) will come under the radar of FSSAI which is mandated to keep the food and wine safe for our health.
Marketing Woes and Recipe for Disaster
‘Although there has been 30-40% growth in the sale of wine in the domestic market, around 50 small wineries are facing financial trouble and have stopped crushing. They need financial booster for their revival. We had asked the central and state governments for assistance, but they did not respond,’ said Shivaji Aher, president of AIWPA, according to the news Report.
One of the biggest problems with Nashik producers has been that the farmers turned entrepreneurs naively believed that the grapes costing Rs. 25-30 a kg would cost them about Rs. 40 to produce a standard bottle of wine that would retail at over 12 times that amount and fetch them a windfall. After all Sula had successfully led the way, after Indage buckled down, they reasoned! Unfortunately, they overlooked the ground reality- that wine was a product like any other and the quality was important and not as simple to produce consistently as they assumed. They ignored the importance of hygiene of the winery. They overlooked the marketing cost and expenses for branding, publicizing and creating the market. It didn’t help that the supply got the better of demand and retailers wanted not their pound of flesh but kilos of it.
It is interesting that Shivaji inadvertently admits the error they all might have made. ‘It took almost three years from construction of wineries for the sales to begin. After constructing plants, the crushing could start in second year, following which it had to be preserved for at least a year. These things were not considered while preparing the loan proposals. Hence, there was no sale for the first 2-3 years,’ he says. One needs to look at the recent example of Chandon to see the financial folly in their scheme of things.
It takes guts to admit the mistake made by the producers as Aher admits that their Chartered Accountants who prepared the loan proposals, did not take into account funds required for marketing. It is easy to blame the chartered accountants who were perhaps engaged primarily to make stereotype reports to enable the growers and producers get the loans instantly. Although it is an inherent problem in small scale sector not to account adequately for working capital when the factory is ready to produce, and the marketing costs including the accounts receivables to be financed, it is not easy to digest that the Chartered Accountants engaged were so incompetent that they did not account for marketing expenses which is a key component in any product cycle.
The wineries took loans in the range of Rs 10—50 million depending on their capacity and had assumed that sales would take place immediately. Any naïve person would understand that wine is a food product that would require canvassing, tasting, cajoling, experimenting and whatever else it takes to establish the brand image and when one is not even talking about the quality yet. Cost and the time taken for trade tastings, amount receivables are a few of the important factors that the producers and the chartered accountants strangely overlooked, if the statement of Aher is to be taken at face value.
Investors not impressed
It’s not that everyone in Nashik is choking. The leading and highly successful producer of India with an annual combined sale of 650,000 cases is based in Nashik. 15 years ago Sula was a small fry in front of Indage Vintners that had practically a monopoly. From day one, Rajeev Samant understood that branding and marketing would be the key factors besides introducing varietals, worked as its Brand Ambassador and never looked back. Zampa in Nashik was the creation of marketing savvy entrepreneurs who took the prudent route of a tie-up with Grover when they were in a financial straitjacket and when the opportunity arose. York has been able to sustain itself only because of its quality and marketing strategy and consistent growth that had Chandon tie-up with them a couple of years ago. They are open to work with brands like Turning Point which is again, a market oriented project.
Nine Hills has been chugging along out of Dindori but it has a strong support from its parent company and the daddy of all alcohol beverage- Pernod Ricard. Fratelli is not in Nashik but has been pumping money to bring out quality wines and focusing on marketing and brand building and despite cynicism by some, have charted a successful course for themselves; crossing the production of 50,000 cases last year they are already one of the Top Five and if they were willing to accept outside investment, they would be flooded with enquiries.
Investors who have recently invested huge amounts in wineries like Sula and Grover Zampa, taking their valuations sky-high, are not impressed by the smaller wineries that have come up and are not willing to invest in them although some of these Private Equity investors are actively scouting around to add more wineries to their portfolio. They are very bullish about the industry in the long term. Some of these wineries would perhaps do better by getting the outside strategic investment instead of looking for soft loans which presumably have to be paid back eventually even if the interest rate is low.
One hopes that the efforts of AWIPA to revive the wineries of the members are successful- a lot of their hard-earned money has gone into the ventures and our hearts go out to them for venturing into the unknown. Indian wine industry does not get much support from the government unlike in Europe, Australia and several other countries. But with every day that goes by and the Top Five wineries getting bigger, their branding getting stronger, their market share going up, the governmental help may not be able to save them all and at least some of them might have to face the reality and check out-better sooner than later. Only time will tell which ones don’t make the cut. Our good wishes are with them.
Subhash Arora
Tags: All India Wine Producers' Association, Nashik, Sula, Indage Vintners, Rajeev Samant, Zampa, Grover, Nine Hills, Fratelli, AWIPA |