Examination of Witnesses (Questions 679
- 699)
WEDNESDAY 16 MAY 2007
MR PHILIP GREGAN
Q679 Chairman:
Good morning, Mr Gregan, and thank you very much for finding the
time to come and talk to us. We are virtually at the end of our
inquiry into the reform of the EU wine regime. I suppose it would
be fair to say that the New Zealand industry has been a beacon
that we have been looking towards as a model of something rather
different from what happens across the Channel. It is very kind
of you to come along and give us a briefing on how your industry
is developed and what you think the challenges and opportunities
are. Let me just explain how these sorts of things work. The first
thing I have to tell everybody who sits there is that the proceedings
are being webcast. That raises a slight possibility that somebody
might actually listen to it. We have never actually found anybody
who has but you never know; the theoretical possibility exists.
Also, afterwards you will get a copy of the transcript and the
opportunity exists to correct it for the record. The way we tend
to work is that, if you would make an opening statement, then
we will just carry on with a question and answer session.
Mr Gregan: That sounds fine by me. Perhaps I
can introduce myself first off so you know who you are speaking
to. I am CEO of New Zealand Winegrowers, which is the Trade Association
for New Zealand grape growers and wine makers. I joined the industry
in 1983 directly out of university—at that time the industry
was bankrupt—and I have been there ever since. In the Trade
Association I took over as CEO in 1991 and I suppose I have lived
through the trials and the tribulations of the 1980s and the successes
of the past 10 or so years. I have sat in front of many select
committees in our own Parliament talking about the issues facing
the New Zealand wine industry, so I do not feel completely uncomfortable
here. I suppose the thing that we have learned coming from what
was a fairly protected market place is that the market is a wonderful
thing. If you have faith in your product and your product is good,
you will see through and you will succeed. I can assure you that
in the New Zealand wine industry in the 1980s, when we were loosing
millions of dollars virtually every month, there were plenty of
people who thought we should shut up shop, go home and forget
about making wine for ever and a day. However, we did not; we
went on and we worked out what we were good at—which was
producing high quality wine and not producing cheap wine—and
the day we made that decision was the day we knew the path forward.
We have responded to a lot of challenges. I come to Europe once
or twice a year and I have a look at the European industry and
what is going on. I see many things that are similar. There are
many things that are different of course—the scale is much,
much greater—but I think at heart the issues are the same.
The issues are about how you respond to the market place, and
there are all sorts of questions about timing and the period over
which you need to adjust to change. In our case it was one short,
sharp intervention from the government and we have received not
one ounce of assistance in the past 20 years. That one intervention
made all the difference from our perspective and we have succeeded
because of it. We then moved forward off our own bat and essentially
that is what the submission that you have in front of you says
and that is what we have done.
Q680 Chairman:
You say you come over to Europe once or twice a year and see similar
issues and challenges. What is your rough assessment of the mentality
of the wine industry in Europe? You made a strong point about
the importance of the market and getting your product right and
interacting with the market. Do you pick up that sort of feel
about the European wine?
Mr Gregan: There is a huge divide in Europe
between those people who are succeeding—they can come from
all different regions throughout Europe—and those who are
not. Those who are not tend to be very wedded to the status quo
and high levels of regulation. Those people who are succeeding
in the market place, whether it is producers from Champagne, Bordeaux,
Burgundy, Rioja, northern Italy or wherever, tend not to be wedded
to the highly regulated model that the European industry has had
to live with for a long time. That model from my perspective is
aimed at addressing the lowest common denominator, trying to help
those people who are not succeeding and, up until now, keeping
them in the industry, keeping them going. However, they are producing
products that nobody wants, so it is very difficult to keep them
in the industry. I think the refreshing thing about some of the
reforms that have been proposed now is that they are going to
be shown a way out of the industry and I think that is very positive.
There is no doubt there are two camps in Europe in the industry,
and then there is a third camp which is all the bureaucrats associated
with the current system. They have a huge investment in maintaining
the system as it is because that is what their livelihood depends
upon.
Q681 Chairman:
What would you say would be the role of the state in the regulatory
framework?
Mr Gregan: The role of a state is to provide
a level of regulation necessary to ensure fair play in the market
place so that there is no fraud taking place, that products are
honestly labelled; it is that level that the New Zealand Government
has largely adopted in New Zealand. If you go beyond that, you
get into questions of favouritism or how many places are you going
to intervene to try to achieve some noble goal which a group of
bureaucrats or a group of politicians have deemed to be the noble
goal. I am not sure that that is the right way of doing things.
Q682 Lord Moynihan:
Can we focus for a moment on the economic factors behind the industry
in New Zealand? Your memorandum states that wine production has
only been subsidised on one occasion (we will come to that, because
I think the Committee would like to explore it in greater detail)
but, apart from that programme, is the lack of subsidy a function
of the underlying economics of the industry? Or is it a failure
on your behalf not persuading the government to subside the industry?
In other words, have you on regular occasions made pitches to
government and made the case for subsidy? Or do you receive any
indirect support from the government? It would be quite helpful
if you could run through the history of any attempts that you
and your colleagues have sought in terms of support or whether
the underlying economics now are so robust that there is no case
to be made and logically there should be no case to be made internationally
by other governments.
Mr Gregan: In general terms, we have not made
any approaches to the government in the past 15 years for direct
support of any kind. The philosophical position in the industry
is that we do not think that is the right thing to do and most
people in the industry would say that, if they are going to take
money from the government, then the government is going to start
to want to intervene in the wine business; and that is the last
thing they want. Having said that, taxation on wine is an issue
in many countries around the world. New Zealand is no exception
and from that we have sought relief unsuccessfully, particularly
for some of our small producers, and we continue to do that. There
are models of relief for small wine makers in Australia, Canada,
United States and we would like to see a similar thing in New
Zealand.
Q683 Lord Moynihan:
What percentage of the market is supplied by New Zealand wine?
Mr Gregan: By volume, 55% of the market is New
Zealand produced product; by value it would be higher than that.
45% from offshore, 80% of that from Australia, with France being
our number two foreign supplier, Italy, Spain, the normal list
of European countries.
Q684 Chairman:
Are you importing the reds?
Mr Gregan: Reds and Champagne; port, sherry
and white wine to supply to the bottom end of the market, because
we cannot produce wine cheaply. We had a bulk wine industry in
the 1980s and we got rid of that because that is not where we
are competitive. If you want to produce wine at a price, do it
in a hot climate country, such as Australia or Spain.
Q685 Lord Moynihan:
So it was a straightforward economic decision?
Mr Gregan: Yes, absolutely.
Q686 Lord Moynihan:
The return on capital employed for the quality wine producers
is satisfactory, it does not require subsidy?
Mr Gregan: That is correct.
Q687 Lord Plumb:
You will be aware of course that one of the Commission's proposals
at the moment is to take 400,000 hectares of vines out of production.
That is one of the proposals which of course does not go down
too well with some of the wine growers in various parts of Europe.
You did talk about a programme where you were taking the vines
for sweet wine out of production. Was that done with a stick and
a carrot? Or was it just the stick saying "We've got to do
it"? How long did it last? And was any encouragement given
to replant after that? By encouragement I mean incentives in any
form to do just that. The ban on new planting, for instance, is
seen differently in different countries. Italy said they are not
worried about that; they will presumably find their own way. It
does vary throughout various parts of Europe. We are a European
Union Committee looking at the situation in Europe, conscious
of the fact that a lot of people who are grubbing-up their vines
say, "That's fine, we grub-up our vines and all we are doing
is letting in the New World wines". What you said earlier
almost proves the point. You took advantage of that over a 10
year period—you might say "Why not?"—and
you are doing all that without subsidy. These are the sorts of
things we want to get at to make the comparison.
Mr Gregan: The last intervention by the New
Zealand government in any form of agriculture was in 1985,. They
made a one-off payment for the grubbing-up of 1500 hectares of
grape vines in New Zealand. That was 25% of our vineyard area.
I think the total payment was about 20 million New Zealand dollars
at that time. There was no ban on replanting. In fact in some
vineyards the chainsaw went through one day and a gang of people
planting new grape vines came through the following day. There
was no incentive to replant but there was no disincentive.
Q688 Lord Plumb:
Planting in the same areas?
Mr Gregan: Yes, the same vineyard. What happened
was that they took out grape varieties that were legacies of the
past and planted grape varieties that people thought were the
future. We pulled out Muller-Thurgau, which is a grape variety
from Germany, and Chasselas, which is from Switzerland, and we
planted Pinot Noir from Burgundy, Merlot from Bordeaux, et cetera.
Q689 Lord Plumb:
You mentioned just one disincentive and that is taxation. What
is the level of tax on New Zealand wines?
Mr Gregan: We have a VAT tax of 12.5% on goods
flat-rated across everything. In addition, we have a flat tax
on wine of 2.30 dollars per litre. It is not a percentage ad valorem
tax. If you like, you can characterise that as being an incentive
towards quality wine production because, if you are selling a
wine for 20 dollars, the tax rate is the same as if you are selling
one for eight or 10 dollars. That is actually one difference between
Australia and New Zealand; they have a percentage tax, we have
a flat rate.
Q690 Lord Plumb:
Would you want to change it? What sort of figure would be acceptable?
Mr Gregan: That is what the government keeps
asking us.
Q691 Chairman:
I do not think we want to intervene in the internal politics of
New Zealand.
Mr Gregan: Our response to that is that we think
there needs to be a targeted intervention providing some assistance,
or relief of the burden if you like, on the taxation of small
wineries. We see that as being, if they are selling wine through
their cellar door, then they would not pay any tax or there would
be a refund of the tax. We do not see the overall rate changing
and that would only cover 3 or 4% of New Zealand's wine sales.
Q692 Lord Palmer:
What is the rate of exchange of the New Zealand dollar at the
moment?
Mr Gregan: Currently from our side, the UK pound
is about 0.36, so that would be about 2.7 (or something like that)
New Zealand dollars to the pound.
Q693 Baroness Jones of Whitechurch:
You said that you took out about 25% of the land, was it?
Mr Gregan: The vineyard area.
Q694 Baroness Jones of Whitechurch:
Then some people started to replant. What we are being told in
the European equivalent of that when the scenario is put forward
is that there would be wide scale poverty, people would find it
very difficult to find other activities once they pull out of
that market. What happened to the people who did not replant?
Was there a crisis of poverty amongst rural farmers in New Zealand?
Mr Gregan: No, because they switched to other
forms of agriculture or they replanted. They may have gone into
kiwi fruit production or apples or other alternatives available.
I do not know whether that is the situation in Europe but certainly
it was in New Zealand. It hurt people; there was a lot of pain,
but there were other alternatives.
Q695 Viscount Ullswater:
Did they change the geographical disposition of where wine is
grown through that grubbing-up?
Mr Gregan: It changed it in that in some of
the longer-established areas there were more grape vines that
were grubbed up because they had more vines that were unsuitable
for the market as we perceived it in the future. So yes, it did,
in a relative sense.
Q696 Viscount Brookeborough:
You are obviously in favour of letting consumers decide what is
the quality wine and providing them with more information by the
labels in particular. Why do you think that the GI system has
acquired such a hold in the EU wine market? And is it not the
case that some of the third countries are even introducing that
to a certain extent?
Mr Gregan: Geographic indications are very important
to us. For us the term Marlborough on a label is important and
it means something to consumers. We do not buy into everything
that goes along with the concept of GIs in terms of the European
system of appellations which is to impose production controls
that are specific to a particular area and limiting the types
of grapes you may grow. That is the part we do not buy into. I
think it has taken such a hold because they believe their own
back labels. Back labels on wine are full of flowery language
and they say, "These grapes were harvested on 7 May as the
sun rose over the misty hills" et cetera, et cetera. That
may well be true, but what does it mean? With the appellation
system in Europe what they are doing is prescribing a set of rules
which says, "We know this is the best way to produce quality
wine in this place" and that is based on history largely.
In New Zealand for a start we do not have the history, so that
is very difficult for us to do. But in this age of global warming
do you change the rules because the climate is changing? Do you
say that you can no longer grow Pinot Noir in Burgundy but you
should in fact be growing the Bordeaux varieties because the climate
has changed? The climate now is simply not what it was 50 years
ago or a hundred years ago. It is a very prescriptive regime and
we do not buy into it because we are young, we are new and we
believe that innovation is the key to success, not abiding by
a set of rules that some committee has come up with.
Q697 Viscount Brookeborough:
Therefore you would use the GI system purely as an aid where you
think it suits. You promote the GI system where you think it is
suitable to do so?
Mr Gregan: Yes.
Q698 Viscount Brookeborough:
Otherwise you use varieties?
Mr Gregan: Yes. We use the GI with the variety.
The length is important because then you develop a name which
becomes associated with particular grape varieties. The two things
are important but one is not more important than the other.
Q699 Viscount Brookeborough:
If you had too many such names it would become confusing.
Mr Gregan: Yes. We are having this exact debate
in New Zealand at the moment.
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