What I learned about the wine industry in New Zealand

1) My wife Susan and I thoroughly enjoyed riding along with Rob the retired farmer as he led us on a bike tour of the wineries and vineyards of his native home...

Cruising along the rows of vines in his reflective vest and orange helmet, our guide stopped to show us how grape vines need to be cut and culled carefully. He wrapped them around wires to maximize the quantity and quality of the grapes they produce. It requires very specialized knowledge and skill to do properly.

The grapes themselves won't be ready to pick until March, which is the end of the summer here in New Zealand in the southern hemisphere.

Rob has been growing wine grapes in Marlborough, New Zealand for about as long as there has been a wine industry there... He has owned a family farm in the area since he was young. He's now retired, and two of his adult children (roughly age 50) run the farm.
Rob was gracious enough to serve as our tour guide. And it was quite an education...

Marlborough is a scenic area in the northern part of the South Island of the country where Susan and I are spending two days as part of a two-week trip – I've circled it on this map:

The area is also home to a remarkable entrepreneurial story. A globally acclaimed wine industry has developed over the past 50 years in this sparsely populated area of one of the most remote countries on Earth.

And I'll share why a bit of extra insight like this is helpful for my investing angle...

Rob shared with us the history of the wine industry in the area, which only began in 1973 when the first large-scale vineyards were planted by Montana Wines, at the time New Zealand's largest producer (now Brancott Estate, which is owned by global spirits giant Pernod Ricard).

Rob said that many folks were initially skeptical that the region was well suited for vineyards. But when local wines – nearly all of what is produced here is sauvignon blanc – started winning international awards, he converted his daily farm to vineyards, as did everyone else.

The region now produces 360,000 tons of grapes, roughly three-quarters of the country's wine, and 85% of its wine exports.

The largest operators are divisions of global, diversified spirits giants. They grow the grapes, make the wine, and market it all over the world. But there are also hundreds of small vineyards like Rob's who just grow the grapes and sell them to larger operators.

We got an in-depth tour at a small winemaker named Huia Vineyards, which specializes in wines made from organic grapes, which means they are grown without any "-cides" – pesticides, insecticides, herbicides, etc.

Huia is a small player – accounting for less than one-tenth of one percent of the region's production – but has developed a niche, high-end business that primarily exports to the U.S.

It was fascinating to see the production process. After the grapes are picked (mostly by a big machine that shakes the vines and catches the falling grapes), they are crushed by another machine and the juice flows into the metal vats shown in this picture (for sauvignon blanc):

The red wines go into oak barrels like these below, which must be imported from France (even the small ones cost $1,600):

Over the next six months or so, the grape juice ferments and becomes wine, at which point it's put in bottles that sit upside down on this rack for 22 days, being rotated by hand every day:

The purpose of this is for the sediment in the wine to sink to the bottom – in this case the top of the bottle.

Then just the tops of the bottles are frozen. When the bottles are opened, the frozen part – in which the sediment is trapped – is removed... leaving pure wine behind.

Here's what the final product looks like – this is everything Huia produces:

Overall, this a knowledge-, capital-, and labor-intensive business, with investment cycles that can stretch for years (or even decades). And the final product can be affected by impossible-to-control factors like how much rain or sun there is during a growing season.

While at first glance, these might seem to be negatives... they're also positives in that they create substantial barriers to entry.

And there are huge economies of scale, both in production as well as developing global brands, so it's no surprise that the industry is dominated by the giants – similar to much of the food production industry, in fact (think meats, grains, eggs, etc.).

And there's a twofold answer for why I'm discussing an industry halfway around the world like this...

First, there are more than a dozen publicly traded winemakers – most notably diversified spirits giants like Constellation Brands (STZ), Diageo (DEO), Brown-Forman (BF-B), and Paris-based companies LVMH (MC.PA) and Pernod Ricard (RI.PA). These are all high-quality businesses with strong global brands, so this is also an opportunity to take a look at their stocks.

For example, a quick look at Brown-Forman – best known as the maker of Jack Daniel's whiskey – shows that the stock has been cut in half since hitting an all-time high four years ago. Might this be a good time to finally own the stock of one of the greatest businesses and stocks of all time? I'll return to this question in a future e-mail...

And second, I would argue that it would be worth my time – and yours – to look at the industry here even if there were no publicly traded companies at all. Here's why...

If you want to be a successful investor, you need to be able to understand, think sensibly about, and predict the future of various businesses and industries – and the more, the better.

To develop this body of knowledge, it's critical to be curious and become a "learning machine" – to read the Wall Street Journal and other business publications... devour books about successful companies (like the two dozen I recommended in my December 13 e-mail last year)... and, critically, to seize every opportunity to visit companies and meet with management teams. I can't even begin to describe how this has helped my investing career.

So looking ahead to future e-mails, I'll take a look at these global wine and spirit companies with some extra insight I learned on the ground here in New Zealand... stay tuned!

2) Below are some more pictures from our excursion to the wine region...

Susan and I had spent three hours riding bikes to three wineries – here's a picture of us in front of the sign for one of them:

And here's a picture of Rob showing us how he carefully cuts, culls, and wraps the grape vines around wires, as I mentioned earlier:

Next is a picture of the grapes just starting to grow – as I said, they won't be ready to pick for another few months:

And here's what a vineyard looks like:

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.