Australian outlook

Australian wine producers are discovering that, like any other commercial operation, past performance is no guarantee of future results, writes Penny Boothman

THERE’S only one thing more satisfying than looking back at the past year, and that’s looking forward to the year ahead.  After sitting back and taking stock of another successful year, it’s time for the Australians to take action.

But what action? Where? And why? Australia is looking at new markets, as well as new ways to approach the old ones.  Opportunities abound … On the home front, the grape supply and demand see-saw continues to rock as red wines are now in oversupply, especially from cool-climate fruit.

This puts many growers, and indeed the industry as a whole, in a slightly precarious position as cool-climate fruit, being more costly to grow, requires a price premium.  The problem began when growers realised they could get a higher price for cool-climate fruit, and planted accordingly.

All of them. At once.  And now, with exchange rate and margin pressures pushing litre prices ever downward, it’s cheaper, higher-cropping warm-climate fruit that the producers want. "It’s an interesting scenario that hasn’t really emerged at this stage in the public arena," explains Jim Humphrys, international trading manager of the Hardy Wine Company.

"70% of wine sold on the export market goes for under $5 in FOB terms, but production growth (half a million tons) has mostly come from cooler climate regions that are more suited to higher price point wines.  The industry is growing on (grape) intake at 40%, but in market terms at 8-9%.  It is not a very pretty picture for a lot of the growers in coolclimate regions."

Along with this increase in cool-climate fruit, there is a strong leaning towards some more unusual varieites, and quirkier blends.  These more original offerings are another way to rekindle consumer interest and encourage trading up.

"We need to keep pushing the envelope in wine styles, packaging and marketing to maintain interest and positive sales momentum," comments Toby Hill, regional export manager at Angoves.  "Possibly the largest single challenge for Australia is in the £5 and above bracket where we are thin on the ground.  We must extend our price range." 

Targeting the market

All this means that the current promotional focus of Australian wineries needs to be addressed, and the industry is pretty clear about where they’re all going wrong.  "We’re preaching to the converted at the moment," comments David Woods, managing director and CEO of the Hardy Wine Company. 

"Promotions are confined to the sniff and spit brigade, we’re educating the educated.  If this doesn’t change we’re at risk of losing a generation, we should be promoting in nightclubs and shopping centres," he believes.

"Current research is too focused on the production end, it should be targeting consumers." Bruce Tyrrell of Tyrrell’s Wines agrees, "We have to step past the retailer angle and get to the consumer.  If you go into a store and ask the manager which baked beans are the best, he’ll point to the ones with the best margin."

There is also a renewed focus on the domestic market, which is the industry’s single largest market for wine.  Domestic consumption is pretty much static, but that said, at 21 litres per capita the average Aussie drinks more wine each year than the average Brit, so the market is certainly there.

One very interesting point to remember is that supermarkets in most of the Australian states are not permitted to sell wine on the grocery shelves.  They may have a separate, specific alcohol section within the same building – indeed most of the major liquor retailers are already owned by the major supermarket chains – but the alcohol has to be purchased at a separate and designated cash register.

The UK wine industry would be in a very different state today if we were not being tempted to drop a few bottles of wine into the trolley with the weekly shop.  However, this restriction is likely to be relaxed early next year, and Australian wine producers are watching with eager anticipation.

From the other perspective, there is an urgent need to train account managers and sales people to deal with large retailers.  There are also implications for wine companies that are used to retailing in a "hand-sell" situation – there will be no sales team in the supermarket aisles.

As exchange rates become increasingly unfavourable, the domestic market is looking like an ever more attractive option.  That said, 50% of domestic wine sales are in cask (ie not bottled wine), and with exports making up 59% of total Australian shipments producers need also to look to exports for growth – but exports to where?

Wine Brand Australia is re-grouping this year and clarifying its focus to specifically target four different market profiles: embryonic markets, such as China or India, and are seen as a medium to long-term goal; emerging markets, such as Japan and Germany, in which Australia is currently under-performing; developing markets, like the USA and Canada, where Australia is seeking individual category status, and maturing markets, characterised by the UK where Australia is already well established.

This year exports are up another 17% (MAT to 9/04) to A$2.6bn in export income, and the target to reach A$5bn by 2010 seems realistic, but one increasingly thorny issue for Australian wine producers is their dollar per litre price.

Everyone talks about value for money, but are they getting the money for their value? "None of us should be planning for profitless prosperity," comments Woods.  "It’s perfectly possible to make less profit from a A$8-10 wine than from a A$6-8.  Lower average litre prices don’t necessarily mean lower profit." 

American dream

Following what can be loosely termed the Yellow Tail revolution, the USA is seen as an achievable goal for many Australian producers.  However, there is also the voice of caution whispering that their competitive advantage is being eroded as US growers regain strength.

"This is not the time for the Australian industry to rest on its laurels," comments Neville Calvert, partner in KPMG’s Wine Industry Group, who have been researching export opportunities for Australia.

"Australian imports have traditionally been extremely strong at US$8-10 but have lost ground following the recent spate of discounting," he continues.  "There’s been a 17% increase in the growth of the US$14-20 price point, as consumers drift back to known brands and consistent quality after a flirtation with extreme value wines, such as the Charles Wells brand, Two Buck Chuck."

Tim Adams Wines export 75% of their 35,000 case annual production, and although Tesco makes up 30% of their sales, they have plans to expand to other markets.  The USA market has "really ired, big time" says Adams.

But there are still obstacles to overcome, "It’s really 5 tiers if you count the Australian exporter as well.  We’re working on cutting out the first step."  The convoluted import system is seen as an obstacle to many producers and even some brands that are well established domestically have difficulty in the complicated American market.

"We went straight into  the US (some years ago) but found it a difficult market to control," says Ross Brown, CEO of Brown Brothers.  "Eventually we pulled out because we felt it was becoming damaging to our brand.

The USA is too resource hungry.  We’d rather do one thing well than two things badly."  If not the USA, then perhaps somewhere else with a huge population but currently underperforming wine sector?  The Asian market has been considered a long-term goal for many years, but this could be the year that sees Australia make concerted inroads into this potentially lucrative sector.

China represents a huge opportunity, especially with the tourism increase in the run-up to the Beijing Olympic Games in 2008.

Asian promise

The rural to urban drift of the population is resulting in higher incomes and increased discretionary spending, and alcohol consumption is significantly higher in urban areas – Tokyo’s per capita consumption, for example, is 2.7 times greater than the national figure.

Apart from the obvious financial opportunity, Asia makes a good target for Australia due to the geographical proximity of the two continents, and the fact That Australia is a prime location for Asians to emigrate, travel, study and do business.  In short, Australia’s cool.

The timing would seem to be perfect and China is indeed showing strong market growth for wine.  The domestic wine production industry is flourishing and the top two Chinese brands, Great Wall and Dynasty, sold 2.5 and 2.1 million cases respectively in 2003.

During the same year wine imports grew by 17% to reach 437,000 cases.  This was predictably led by France, with 40% of the market, but Australia held 15% and overall New World wines are showing the stronger growth rate of 30% against 20% for the Old World.

However, as tempting as these new opportunities may seem, it’s vital not to lose focus on existing markets, and in the UK the search continues for a solution to that age-old problem of trading up. 88% of Australian wine sales in the UK are under the magic £5 mark, and the inexorable rise of the Australian dollar can only impact margins further.

"The UK market is a very mature wine drinking market and thus Australia must continue to diversify so that we keep pace with trends that develop within this market," says Craig Thomas, commercial manager of McGuigan Simeon.

High interest

"We have to inject some more interest into the high-end category and break out of where we are being pigeonholed, in that perceived ‘manufactured/confected- Alcoholic Beverage at £4-7’ sector," says Séan Shortt, general manager sales and marketing at Wingara Wines.

"Australia has a huge diversity of styles and qualities, we have to stimulate greater interest in the super-premium category and not just drive the quick wins."  As true as this is, branded wines are still at the core of the market. In fact an increased consumer awareness of brands has meant that there are more labels on the market than ever before, but has it yet reached saturation point? "Yes," says Bruce Tyrrell.

"The consumer is totally bloody confused, we have way too many labels for the size of the  market."  It would seem that some streamlining is in order and it could be time for Australia to lose some weight if it is to be fit enough to compete in new and emerging Markets.

But this is a strength of the ever innovative Aussies and for another year we’ll all be watching with interest to see what they come up with next.