Cultivating wine and truffles in the Margaret River

Watershed Wines in Western Australia is passionate about making wine and growing truffles, but the company is equally enthusiastic about making money.
The idea of owning a 170-hectare vineyard and producing award-winning chardonnays and merlots can be an alluring prospect. It isnÆt uncommon for people to have romantic notions about strolling through rows of grape vines and inviting their friends around to taste the latest vintage. Unfortunately,
however, many of these ventures come unstuck from an investment perspective because the people behind them havenÆt understood the business of winemaking. But in AustraliaÆs Margaret River district, there is a relative newcomer that is showing the countryÆs wine industry how to do it better.

When you turn into the long driveway leading to the Watershed Premium Wines estate, you are greeted by a sense of style and attention to detail that suggests nothing has been left to chance. The plants in the lush garden beds have been chosen to tie in with the colour of the Watershed label and the architecturally designed buildings are made of local stone and wood. The fact that the infrastructure has been built in three phases isnÆt obvious because the project has been well thought through. Additions to the visitor buildings, the winery, and the vineyards have been well orchestrated.

The name Watershed has two meanings. The property sits on a high area between two bodies of water, which in geographical terms is known as a watershed. But the word also means an important event or factor that serves as a dividing line, which the wine company has interpreted to mean that it is taking winemaking to a new, higher level of understanding û an awakening that distinguishes it from other Australian vineyards.

The managing director behind the venture is Geoff Barrett, a former lawyer and banker who, before turning to winemaking, was a specialist in managed investments. His years in the finance world have taught him how to learn from other peopleÆs mistakes and given him an ability to recognise the next best thing û which is why his latest project involves the wide-scale cultivation of French black truffles. Barrett clearly has a passion for quality wines and
gourmet foods, but it his nose for business that is making his venture a success.

Watershed Premium Wines is structured as a managed investment scheme where investors can purchase units in a company that owns the land and also participate as a premium wine producer. Shares in the land company can be held in a separate name to the wine business, and returns are based on wine sales, annual share dividends and increasing vineyard values. The wine
project has exceeded forecast returns every year since inception. ôWe wanted
to create an opportunity for investors to own shares in the underlying assets û
the land and the infrastructure û rather than restricting them to taking a
position on the harvest,ö says Barrett, who still has units available to
sophisticated investors with about A$250,000 ($210,000) to spend.

The assets at Watershed consists of: 80 hectares of land under vine; a 200
megalitre dam, a small Diemme press and a larger Pera press with the capacity
to crush 1,200 tonnes of grapes; an award-winning cellar door open daily; a
170-seat restaurant and cafT; and an 80- seat seminar facility located below the restaurant. The estate has come a long way since Barrett cut the ribbon on the cellar door in September 2002. The next phase of the project will give Watershed a total of 227 hectares under vine and allow it to produce between 160,000 and 170,000 cases of wine a year, generating revenues of A$20 million. Plans are also underway to build a large packaged wine storage facility on the site.Meanwhile, Watershed is lining its mantelpiece with trophies and awards. Its 2004 Margaret River Shiraz won a gold medal at the 2007 Sydney Royal Wine Show, a gold medal and a listing in the Top 100 Wines in the 2007 Sydney International Wine and Food Show, and a gold medal at Mundis Vini. Its 2005 Margaret River Awakening Chardonnay won a silver medal at the 2006 Royal Wine
Show and also the Western Australia Qantas Wine Show. This year James Halliday, who publishes AustraliaÆs ultimate wine companion, rated Watershed Premium Wines with five-stars.

The winery is currently the fifth largest producer in the Margaret River area which lies 270km south of Perth in Western Australia. The area is known for its chardonnay and cabernet sauvignon varietals. And while the Margaret River only accounts for 2% of AustraliaÆs entire annual crush, its climatic conditions are similar to those of the Bordeaux region in France, allowing it to produce premium wines. Other top-end brands in the area include Vasse Felix,
Cape Mentelle and Howard Park. WatershedÆs head winemaker is French national Severine Logan who has also worked for Brown Brothers and South Corp, and was a lead Reserve winemaker for Rosemount.

BarrettÆs strategy is to produce only top-end wines. ôSome other Australian wine brands have run into financial difficulty by trying to cater to both the high-end and the mass market,ö says Barrett. ôThe input costs in the Margaret
River are so high that it makes sense for us to occupy the high-end niche only.ö His marketing strategy includes aligning the brand with charitable organisations such as the Variety Club, the Heart Foundation and the Western
Australian Arts Festival. ôBy attending the events run by these institutions, we can put our brand in front of the wealthy benefactors who frequent them,ö he says. ôWe also align ourselves with premium products like luxury cars, watches and entertainment systems. The people who spend on luxury items like these also have a taste for good wine.ö

It is clear that WatershedÆs marketing and distribution strategy has been carefully conceived. ôThe other thing we do is market our wine to the younger generations û the 30-year-olds who have a lot of disposable cash. These people could be drinking our product well into old age,ö says Barrett.

WatershedÆs distribution network includes in excess of 2,400 bottleshop
and restaurant outlets in Australia. Barrett says he is considering using this
network to distribute products for other companies. ôWe might distribute a
premium New Zealand wine,ö he says. ôAnything that doesnÆt directly compete
with our own product.ö Watershed was recently appointed the Australian
distributor for the NSW-based premium beer producer, St Arnou.

Watershed recently started to sell its wine overseas through individual
distributors in 14 countries, including China. The company is sticking with its high-end niche and selling through restaurants and premium wine stores only, not supermarkets. Ultimately, Barrett says he wants to sell 60% of his wine to the overseas market.

The latest project in BarrettÆs long-term plan is to become AustraliaÆs largest producer and distributor of French black truffles, through a new venture called Oak Valley Truffles. Oak Valley is located in Manjimup about
100km southwest of the Margaret River and Barrett is the chairman of the project. His partners are Dr Nick Malajczuk, an ex-government agricultural scientist and fungus expert, and Wally Edwards, the former opening batsman for the Australian cricket team, and Oak ValleyÆsmanaging director. Edwards and Malajczuk have been growing truffles at their Hazel Hill property in Manjimup
since 1999, and have spent considerable time and money developing a cultivation technique that maximises the truffle harvest.

Oak Valley has signed a joint venture with Hazel Hill and now owns the intellectual property surrounding the cultivation techniques. These techniques are being applied to the Oak Valley project which is a new plantation of 37,400 oak and hazel trees on a nearby plot covering 75hectares. The climate in this region is Mediterranean which is ideal for truffle growing and the plantation surrounds a dam that stretches for one kilometre and holds 300
megalitres of water. The first truffles from this plot are likely to be harvested in 2010.

Meanwhile, Oak Valley is making money on its investment in Hazel Hill, where truffle production has gone from 4kg in 2004 when the first truffle was found, to more than 330kg in 2007. Hazel Hill has recently been given an A$750,000
grant by the Australian government to continue its research efforts.

French black truffles are the fruiting body of the tuber melanosporum fungus which grows symbiotically with the roots of oak and hazel trees. Global demand for this gourmet food grossly outstrips supply, so much so that the market price for truffles has reached as high as $2,500 per kg in recent years. The current price is around $1,500 per kg. The reason that supply is so limited is
because most of the French producers rely on random harvest techniques in
established oak forests. The Oak Valley project removes this ôhit and missö
element from the production process. The roots of the oak and hazel trees
that were recently planted have been inoculated with millions of truffle spores. The trees are then irrigated to make them grow faster, and pests and
rogue truffle species are kept at bay in the controlled environment. Nutrient
and soil management techniques are then applied to create the best growing
conditions for truffles.The truffles are harvested in winter using specially trained dogs, such as labradors and weimaramas, to sniff out the fungi. The projectÆs chief dog handler used to work with sniffer dogs for the Australian Customs Service. The harvest process is painstaking and requires a certain flair. The dogs are trained to locate a truffle by the smell of the earth on the ground underneath the trees. The handler then tags the site, rewards the dog and moves on to the next site. After tagging about 20 or so possible locations, the dog is taken back to its kennel to rest, while the handler returns to the tagged sites and digs the earth by hand. Once a truffle is uncovered, the handler smells the surrounding earth to determine whether the truffle is ripe or not. If the earth doesnÆt smell right, the truffle is covered over again and left to mature. The trick is not to disturb the truffle from the root, otherwise it will stop growing. Each mature truffle is bagged and labelled to keep
track of how well the trees are bearing.

ôThis is a very exciting project,ö says Barrett. ôBefore World War I, total world production of truffles was about 1,000 tonnes a year and now this is down to 20 tonnes a year owing to deforestation, acid rain and disease. At the
same time, demand from gourmet restaurants around the world has skyrocketed.ö Hazel Hill sells its valuable crop to restaurants in AustraliaÆs capital cities and to buyers in the US, France and Germany. ôWe have also had a lot of interest from topquality restaurants in Singapore and Hong Kong,ö says Barrett. He has recently signed a deal with French company Pebeyre to distribute the truffles worldwide. Pebeyre manages the distribution of some 70% of the world truffle market.

Barrett is managing the Oak Valley project in a similar way to Watershed Wines where investors are given the opportunity to buy truffle lots for a term of 20 years. Oak Valley maintains the trees and then markets and sells the truffles on behalf of the investor. The total truffle harvest is pooled and distributed to investors so that the risks to the individual truffle lot owners are reduced. Barrett says that once the trees at Oak Valley start to produce, they will bear truffles for over 100 years. ôThis is a long-term investment, and if our cultivation techniques work, the project will produce an IRR of 22.9%
generated from truffle sales,ö he says, adding that by-products like the annual
hazelnut harvest and the mature oak timber will produce further returns. ôEven if we donÆt sell a single truffle, the oak timber and the hazelnuts alone will provide an IRR of 10%.ö

Oak ValleyÆs aim is to control the truffle business in Australia. ôWe are
already talking about going into business with other growers where we provide them with inoculated seedlings and then instruct them on the optimum care procedures,ö says Barrett. ôOnce their trees go into production, we will then market and distribute the end product.ö Being in the southern hemisphere gives the company an advantage in terms of seasonal supply.

ôFrench black truffles grown in the northern hemisphere are only available as fresh produce during the winter months of December, January and February,ö says Barrett. ôIn Australia we are in a great position where we can supplement supply during the European summer months of June, July and August.ö

This story first appeared in the Private Capital supplement that was distributed with FinanceAsia's November issue.
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