Australia Overview – Value Judgment

In the last year Australian wine exports reached record heights, but average dollar/litre prices have fallen. Producers are playing the regionality card in a bid to reverse the downward trend, says Penny Boothman

What did I tell you? Those of you who might still have a copy of last January’s drinks business down behind the couch somewhere could open it and see a couple of stories that are still very much in the news. The wine surplus, the shift to premium, regionality, and an attack on the Asian market are all still giving Aussie winemakers plenty to think about.

All smugness at our rather progressive content aside, this just goes to show that however fast the trade is to catch on to a new way of thinking, consumer buying habits are much slower to change. But even if Australian regionality hasn’t quite hit home yet, consumers the world over are still buying into Australian wine. Which is lucky, when you consider how much of it there is washing about at the moment.

In the 12 months to October 2005, Australian wine exports reached record heights – again – in both volume and value. Overall export volume was up 12% to 696 million litres, while value rose by a more modest 5% to A$2.81 billion. Of course, all this means that average dollar per litre prices have continued to fall by an average of 6% to A$4.04.

The UK value per litre is now a slightly embarrassing A$3.60 (down 5.3%), next to the US’s A$4.62, which has fallen 7.8%. If you discount the much smaller volume Singapore, then Canada is, as usual, top of the price per litre ($/L) tree with A$5.54, but even this has fallen by 6.9% this year. In fact, only Sweden is on the rise, and it’s an impressive one of 19.4%, but its average $/L price still lags behind at A$3.47.

Export volumes make happier reading. Britain is still the Aussies’ number one market taking 268.6m litres, a rise of 8.7%, while shipments to the US were up 11.2%
to 200.4m litres. The UK remains ahead on value as well and is, in fact, growing slightly faster than the US, with A$965.8m up 2.9%, against A$926.6m, 2.6% growth for the US. As positive as these statistics are, Australia’s position in the UK is definitely consolidating from the volume growth of 21% and 14% value growth seen a year ago.

Canadian growth
In fact the export market really making the headlines this year is on the other side of the pond: Canada. Impressive volume growth of 23.9% to 46m litres (that’s right, third on the list and 150m litres down from export market number two) has meant that the land of black bears and maple syrup has seen the biggest rise in actual export value, up A$34m (15.4%) to A$254.7m. With this in mind, and the 51% volume growth reported in Denmark and Norway, could it be that Australian producers have shifted their sights to less explored territory? In fact 47% of those Danish exports were bulk red wine, and 45% of the shipments to Norway were bag-in-box, so it may be more the case that these Scandinavian countries are doing more than their fair share of soaking up surplus wine.

When a wine producing country is in a state of surplus, a drop in average price points is not only understandable, but expected. However, a continued downward trend is actually fairly worrying: it’s a bit like dieting, only the opposite. Very easy to pile the pounds on, much more work to shake them off again. Very easy, it seems, to drop average litre prices, much trickier to raise them again.

But just how much of a problem is the wine surplus? South Australia produces 70% of the Australian crush, so this is surely a good place to start asking questions.

“We’re looking down the barrel of another large vintage,” says Doug Lehmann of Barossa Valley winery, Peter Lehmann Wines. “In my opinion Australia doesn’t have quite the glut there is in Europe, but if these high volumes continue there’s going to be blood on the streets.” Peter Lehmann Wines buys in 99% of the grapes it uses each year, putting it in a sensitive position with long-term contractors when it comes to finding a home for another large harvest. “In 2006 everyone will have to share the pain,” says Lehmann.

“Like everyone else, we started off trying to chase the volume end back in the 90s because we had lots of reasonably good wine that was reasonably cheap,” he continues. “It’s what everyone did. We set up our own company back in 1992 in England, because the UK’s quite unique. On the volume side you could see about 12 buyers and that covered them. So we set up our own company to have our own focus because I was sick and tired of going through distributors.”

Peter Lehmann Wines also has an operation in Europe, with Swiss-owned premium brands collective the Hess Collection which bought 86% of the Australian producer in 2003. Hess also looks after Lehmann’s US distribution through its winery in Napa. “It comes back to distribution,” says Lehmann. “Distribution’s always been key. It’s like cash-flow; without it you don’t get anywhere.” Wise advice from a company that exports 64% of its total volume.

Distribution gains
The Hardy Wine Company has also gained significant distribution benefits since it joined the Constellation Brands stable, also in 2003. “In the US, for example, we only had one route to market which was Pacific Wine Partners, a joint venture we had with Constellation,” explains David Woods, MD and CEO at the Hardy Wine Company. “Now we have three more distributors in the US because Constellation has four distribution companies there. It’s really multiplied our opportunities in the US quite substantially. Likewise, in the UK I guess three years ago we were not as strong in the on-premise market as we would have liked, but of course Matthew Clark has given us a very strong opportunity there, and there have been some exciting developments in that area.” Hardys quite deliberately and unashamedly in the mid 90s focused its efforts on the UK and its share of the off-trade is testament to that.

Cool-climate challenge
However, Woods recognises that there are some
tricky challenges presenting themselves to the industry, and one of them is the ever-increasing volume of cool-climate fruit on the market. With the vast majority of exports in the lower price bands, fruit from cool-climate regions – which is by definition more expensive to produce – is getting harder to find a home for. 42% of Australian production came from those regions last year. “That, individually, is the industry’s greatest challenge,” says Woods, “because that takes some sorting out, it’s not something that you can turn on and turn off over night.” It seems that quality has to be the focus for Australia for more reasons than one.

“There are still substantial markets around the world where Australia is relatively underdeveloped so there’s still plenty of opportunity, but I guess it would be fair to
say that it’s getting more challenging,” continues Woods. “We certainly wouldn’t want to be getting complacent. It sounds like a cliché, but the whole idea of continuous improvement really has to be with us. If we were in another industry would the car that we bought five years ago be acceptable today? Probably not, because it’s short of five airbags and a 7-CD changer. So in relative terms we have to be able to do the same. The wine that was great value at £5 five years ago probably wouldn’t be great value at £5 today. Competitive advantage tends not to stay with you very long, so you’re continually reinventing your offer. Sometimes businesses make the mistake of relaxing when they get to the top, the reality is that you should be doing just the opposite because everyone else has just got one target – and that’s you!”

How to keep it fresh then? What more has Australia got to offer that it hasn’t done already? Regionality, that buzzword of 12 months ago, is now the firm foundation of the new promotional strategy for trading consumer’s up the ranks. As Jamie Odell, MD at Foster’s Wine Estates, says, “We [Australia] have to sit in a portfolio with other producing countries that are producing great wines too. Foster’s Wine Estates is making a deliberate move to premium; regionality won’t see benefits for five years but it will in the long term.”

FGL Wine Estates is not the only one with a focus on trading consumers up; even popular premium brand stalwart Jacob’s Creek is introducing a super-premium tier, its Heritage Range. “It’s an image-building exercise,” explains Nick Blair, general manager international, Orlando Wyndham Group. These wines are destined for the on-trade and independent specialists at between £15 and £20. “Next year we will be upweighting our emphasis on the reserve range. There is an industry and a company desire to trade up and I think we can really compete with the best.”

Jacob’s ladder
But the off-trade is, of course, not the only target and branded wines are once again blazing the trail when it comes to widening opportunities for Australia in other sectors. “Jacob’s Creek broke brands into the on-trade,” says Blair, “and the next step is to move up the price ladder.”

Raising value, while still driving volume, is the goal, and here’s hoping next year’s story is a celebration of improved regional recognition leading to higher price points and a reduced surplus.

In the meantime, here’s one fascinating topical fact for you: in the year 1994-1995, 53% of Australian wine exports were in the A$2.50 to A$4.99 price bracket. And what percentage of exports were in this bracket in the year 2004-2005? 53%.
Plus ça change, as they say in Sydney.  db January 2006