Under valued

Growth in the Australian wine sector is still looking strong, says Chris Orr. But with price per litre for export plummeting in many markets, where’s the value in that?

DESPITE continuing oversupply, and a worryingly strong dollar, the Australian wine industry continues to expand. It is almost as if Australia’s wine makers have seen the trouble ahead and responded accordingly.

Have they? "What’s amazing is that despite having been given that wake up call, we haven’t actually lost market share," says Brian McGuigan of McGuigan Simeon in Australia.

"I can’t figure out whether that makes us smart or lucky – but it certainly has woken us up."  Take, for example, the number of wineries that have sprouted up.  In 1999-2000 the country had 1,197 wineries.

Figures for the 2003-2004 period show that has burgeoned to 1,814, despite a negative economic climate for exports from Oz, tighter margins and increased costs.  The wine game in Australia is clearly one to be in.

Last year, exports for the country grew 19% in volume terms and 10% in value terms.  The end result was 623million litres of wine shipped globally with a value of A$2.67bn.  With volume growth significantly higher than value growth, it has meant, of course, a depreciation in the average price paid per litre, but that hasn’t stopped a fairly relentless push up the ladder in terms of the price paid for wine by consumers.

Take the UK market as the perfect example. MAT ACNielsen figures to July 2004, show that in the first reported half of last year, Australia grew value by 4.6% and volume by 3.7% in real terms.

That meant that consumers, on average paid £0.05 more per litre in the UK than they did the previous year.  It’s not much, but multiplied by the 134m litres of wine sold in the UK by Australia during the same measured period, it’s more than enough to buy in a round at the local pub – and illustrates an achieved growth in the value of the market, despite the tough times that have hit them in recent years.

However, when you look more closely at the export figures, it becomes apparent that the growth in the value of sales to the consumer has not been passed down the chain to the producer.

Market leaders

The US and the UK remain the markets most likely to compete for the number one spot for global Australian exports.  The UK remains the top of the charts in pure volume terms, with 225.3m litres exported to the UK to October 2004 compared to the US equivalent of 171.7m litres.  Importantly though, both showed positive growth on the figures for the same period in 2003.

Exports to by 21% in volume terms, while exports to the UK increased by almost 8%.This indicates buoyancy in terms of growth, but also shows that it may not be all that much longer before the US starts to eclipse the UK in volume as well as value terms.

The US clocked up A$905.4m in revenue to October 2004 compared to the UK’s A$860.3m. Unfortunately the UK showed a less impressive performance on 2003 than the US.  The US rose by some 8.5%, while the UK added just 0.1%, despite the volume growth.

However, in real terms, both saw value per litre drop for exports.  The US fell from A$5.83 to $5.27 – a drop of 10% in the average price paid per litre for export.  The UK fared marginally better but still saw the average price per litre for export drop from A$4.11 down to A$3.81 – a fall of 6.81% in real value over the course of the year.

Given that between the US and UK, they represent 69% of all Australian wine exports, that’s a pretty worrying sign that whilst market share is going up and volumes continuing to rise, the profitability and long term financial return on investments from both these markets is still uncertain for Australian wine producers.

The UK and the US were not alone, however. The third strongest market globally for exports of wine from Australia is Canada.  It saw a wildly impressive rise in volumes exported – rising from 24.5m to 33.1m litres of wine shipped.  That was a 35% rise on volumes from last year.

Yet in the value stakes Canada’s figures tell a similar story.  Value rose just 17.8% last year, less than half the rate of growth of volume for the country.  The average price paid per litre is high – it was A$7.1in 2003.

However, that’s sliding due to the difference between volume and value of shipments.  This year it has dropped from A$7.10 to A$6.19 – in other words more than a $1 has been shaved off the average price paid per litre, or 14%.

New Zealand, in fourth place, seemed to be one market that was bucking the trend.  Last year it imported some 5.8 million litres less of Australian wine, and yet managed to create a value worth A$1m dollars more.

That translates into a price per litre of A$3.62 for 2004, compared with an average of A$3.10 in 2003.  So less wine, sold for more money essentially. In fifth place came Germany, where the development of the low-end market and limited availability has become a moot point for Australian producers.

They recognise it’s a cheap market, but the potential volumes are massive.  No surprise then that you find the likes of Constellation eyeing up the German market.  And looking at the export figures confirms just that.

The country saw more than 8.2m litres added to the sales mix in 2004 – an increase in overall turnover of a whopping 38%.  And value overall rose by 32%, which meant the average price paid per litre fell by just 12 cents or 4%. But look at the actual price paid per litre.

In 2003 it was A$2.73 but by the same period the following year it had fallen to A$2.61.  The average value compared to the likes of Canada, the US and the UK, is almost frightening. And so the story continues all the way down the top ten.

Ireland dropped from A$5.43 down to A$5.09 – losing 6.2% off its real value.  The Netherlands is the same, as is Sweden and Japan, the latter of which fell from A$6.09 to A$5.85, representing a real fall in value of 3.94%.

Denmark along with New Zealand managed to reverse the trend seeing no volume growth, but value rose from A$3.34 to A$3.52.  So, out of the top ten, only two countries increased the real value of the Australian product on their shelves.

Dollar effect

Obviously the dollar and its strong position has had negative effects, especially in export terms.  "We’ve certainly had difficulties with the dollar from that perspective," explains Peter Cowan, CEO of Lion Nathan’s wine operations. "But that’s something you just have to deal with.

We are not the only export business in Australia to suffer from the situation with the dollar. Others cope and we’ll cope too."  "We’ve had it pretty good for eight or nine years or so," says McGuigan, "and I really don’t think anyone realistically thought that could last for ever."

However, with the strong currency combining with an oversupply putting downward pressure on value, there are clearly tricky times ahead on a global perspective.  Looking at the volume of exports across the top five countries the fastest growing sectors, in particular in high value countries such as the States and Canada, appears to be the under A$2.50 category.

In the UK this grew by 52% last year. In the US it grew 128% and in Canada by 138%.  The only one of the top five to see a drop in this sector was New Zealand, where imports of under A$2.50 wine fell by 61%. 

On the basis that the country reduced imports of Australian wines by over 5m litres last year, yet kept the value more or less level, it wouldn’t be outrageous to suggest that the  contribution of this sector of wines is almost non-existent. And yet, thanks to oversupply, it appears to be the fastest growing sector. 

In the UK, there was, fortunately growth in all other sectors as well.  Most impressively the level of imports of A$7.50 to A$9.99 went up by 15%, while A$5 to A$7.49 rose by 5%.  In the US imports in both those sectors fell by 17% and 24% respectively.  In Canada, the latter grew by 47% and the former fell by 4%.

The A$2.50 to $4.99 exports to the US went up by 43% over 2004.  Both this and the under A$2.50 export sectors reflect the impact of wines such as Yellow Tail on the market.  This year the brand is likely to sell in excess of 10m cases in the US, alongside brands such as Black Swan, which is selling in excess of 2m.

To some extent these sales distort the figures – but there’s no doubting that these brands are bringing Australian wine to a much wider market.  However, if the lessons of the UK are to be earnt, the Australians have to be careful they don’t neglect the higher value sectors.

Looking at the above figures, however, one could be forgiven for thinking they already have.