Volume is not a moat for a mid-sized winery

For most of my working life the received wisdom in Australian wine has been that a company needs volume. Volume fills wineries, spreads overheads, gives a supplier weight in negotiations with the large retailers and offers a home for fruit that does not make the premium blends. A mid-sized producer without a commercial tier, the argument goes, is a boutique with a share price.

I believed a version of that argument when I joined Tarrowin in 2012, and I helped defend it for several years. I now think that for a company of our size, in an industry growing more warm-climate red grapes than the world will buy at a decent price, volume has become a liability. In 2024 we sold our Riverland commercial business, which made more than half our cases and well under a tenth of our profit. This essay explains why, and what I think a board takes on when it makes a decision of that kind.

The case for staying big

The argument for volume deserves a fair hearing, because people I respect made it. Our chief financial officer pointed out that the Riverland winery absorbed A$9 million of central costs that would not disappear with a sale. Our domestic sales team argued that a supplier able to fill a retailer's whole wine aisle, from cask to flagship, was harder to delist than one selling only premium bottles. Our winemakers valued the flexibility: in a poor Barossa vintage, inland fruit could support blends that would otherwise be short.

Each point was true. The question was whether they were worth what they cost. Central costs can be removed, slowly and painfully, and ours were removed within eighteen months. Weight with retailers turned out to be much less than our sales team believed. In the 2023 range review, the chain that bought most of our commercial wine removed nine of our premium listings anyway, after we had declined two of its exclusive labels. It valued our cask wine as a commodity it could buy elsewhere and gave us no credit for it when deciding where to put our best wines. And flexibility in blending can be bought in the bulk market, which in an oversupplied industry belongs to the buyer.

What the inland business really earned

In FY2023 the Riverland business sold 5.6 million of our 9.9 million cases and produced A$176 million of revenue. Its EBITDA was A$6 million. Over the following five years it needed A$38 million of investment in refrigeration, tank storage and wastewater treatment simply to keep operating. On any measure of return after capital it was destroying value, and the oversupply offered little prospect of change within a planning horizon a board could defend.

The figures had never been hidden. They sat in our segment reporting. What had obscured them was the way the business was discussed: as part of a whole, contributing volume, scale and security of supply to the rest. Every argument for keeping it concerned its effect on other parts of the company, and none concerned its own economics. When we asked each part of the portfolio to stand on its own contribution after the capital it would need, the conclusion was hard to avoid.

There was also a quieter reason the business lasted as long as it did. The Riverland was where Tarrowin had expanded in the 1970s, and several directors and long-serving executives had worked there early in their careers. Nobody claimed that sentiment kept it in the portfolio, and I do not think it did on its own. But it meant the business was always discussed by people who remembered it at its best, and a review that would have taken a month for a recently acquired brand took the better part of a decade. A board should notice when a business is protected by its history, and ask for the evidence it would demand of a stranger.

The sale removed A$176 million of revenue. Our EBITDA margin rose from 11.4 per cent in FY2023 to 18.3 per cent in FY2026, and our net debt fell by about half. We are a smaller company with a clearer purpose: premium wine from regions where we can command a price, sold to customers who choose it. Our position in negotiations with retailers is, if anything, stronger, because we no longer depend on them to move volume we cannot sell elsewhere.

The obligations that go with an exit

I do not want to make this sound tidy. A portfolio exit in agriculture is not the sale of a product line. Our Riverland winery bought fruit from 186 growers under contract, and I grew up on a block that supplied a winery like it. A company that sells such a business decides who will buy those growers' grapes, on what terms and for how long.

We chose the lower of two bids partly for that reason. The higher bidder already bought heavily in the region and would have controlled a large share of its contracted grapes. The lower bidder, Brackenlea, had no winery there and agreed to honour every grower contract through the 2027 vintage. That choice cost our shareholders A$14 million on the day, and our board accepted it on the record. I think it was the right price for a transaction the competition regulator had no reason to examine, and for the standing of brands that carry South Australian regions on their labels.

Even so, 27 of those 186 growers have since left the industry, because nobody can promise a warm-climate grower a profitable price while the oversupply lasts. A sale does not end a company's connection with the communities that supplied it. Directors considering a similar exit should ask management to describe, in writing, what will happen to suppliers and employees in the three years after completion, and what the company is willing to pay to make that transition orderly. If the answer is nothing, they should at least know that it is the answer.

For other mid-sized producers my conclusion is easy to state and hard to act on. Scale in commercial wine belongs to the very largest companies and the very cheapest producers. A company that is neither should ask whether its volume is buying anything it could not obtain more cheaply another way. Ours was not, and we are better for having admitted it.