Excise Tax – Managing the Impact on your Winery (Spring 2011)

Recent changes to wine excise legislation are an industry sore point. Designed to curb New Zealand’s binge drinking culture, excise tax is actually paid by producers and in the current economic environment these costs are seldom passed onto consumers. The tax is an eye-watering $2.70 per llitre and the new excise tax thresholds, effective 1 July are:

  • $100,000 or more, excise to be paid monthly
  • $50,000-$100,000 excise to be paid six-monthly
  • $50,000 or less, excise to be paid annually.

Previously, only wineries with a tax liability of less than $10,000 were exempt from paying excise tax monthly.  Excise is payable by the winemaker in the month after removal from a Customs Controlled Area i.e. the point at which wine is released from the winery or licensed storage facility. This has the potential to create cashflow problems for wineries, as in the majority of cases the excise must be paid before payment is received for the wine.  Whilst impossible to negate excise tax, here are some strategies to increase your profitability:

Shop around

Get the best prices for various supplies. Wineries that require bridging finance to offset excise prior to receiving payment on sales, need to be selective in their finance partner to determine the best interest rates and terms.

Review costs on an ongoing basis

Review pricing and service levels regularly on freight and storage, and be prepared to negotiate. Consider cooperative arrangements with neighbouring wineries to collectively purchase cheaper rates.

Set a written budget

Preparing a budget sets a blueprint of what you would like to see your business achieve in the next 12 months.  Forecasting sales is imperative to setting a realistic budget including all commitments.

Due diligence

Do your groundwork and credit checks before negotiating shipments to new clients or ones who make infrequent purchases. In the case of a bad or doubtful debt, a winery must still pay the excise as well as the cost of financing the excise.

Discount with caution

Concentrating on increasing sales or the ‘top line’ does not always lead to increases in profitability. Discounting stock to secure cashflow and working capital versus the need to maintain profitability over the long-term is a constant juggle for smaller and medium sized wineries. Discounting stock may alleviate immediate cash deficits, but it can lead to a vicious discounting spiral trap with few winners.

Expand your reach

Wineries need to be clever to survive in a challenging environment, becoming innovative with distribution and marketing. Consider direct marketing to your customers, selling direct to restaurants, expanding on your cellar door experience, website sales, loyalty benefits, and other creative initiatives.

Know the system

A cost reduction strategy that will not work is transferring products to regions with cheaper warehousing and distribution costs. Wine may be transferred between storage facilities within a Customs region, but excise is generally payable when wine is transferred to a licensed storage facility in a different region.

Be original

To stand out in the sea of competition, you need a strong point of difference. Think carefully about what makes your products unique. What can you do to get noticed?  Innovative marketing is the answer to preserving margins.

Make time work harder

Under the new system, smaller domestically orientated wineries are able to reduce administration costs and are now more able to better balance cashflows. Effectively this puts money in wine producers’ pockets for longer. The challenge is to harness the power of this longer timeline by reducing debt or committing the funds to savings, taking advantage of compound interest. Timing is everything.

Staggering marketing activities balances outgoings and allows time for analysis of results to ensure marketing is growing your business.

Planning remains crucial to smart cashflow management and meeting commitments. Knowing how to best utilise longer timelines will give your business valuable breathing space.  Contractual arrangements are an important aspect to business so it is recommended that you seek independent advice.

Published in WINE Hawke’s Bay Spring 2011.

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