Swimming in wine

02 May 2006 By db staff writer

“standfirst”>The US market absorbed a substantial part of Australia’s wine surplus last year but the dollar/litre price took a tumble. How can Brand Australia deal with its oversupply and restore its equity, asks Penny Boothman

Has anyone seen Macaulay Culkin recently? And what’s Daniel Radcliffe going to do when he hangs up Harry Potter’s magic wand? The transition from youth actor to adult performer is not one easily made – if anything, the more famous the child, the harder the move will be. If Australian wine were a child star, it would just be entering that slightly dodgy, gangly, spotty phase. It’s already an enormously popular household name, but it now has to persuade the world that it actually has some real substance as a serious player. And the world is just waiting for it to fall victim to hard drugs and a bad marriage.

Nevertheless, a quick glance at the stats reveals that 2005 was yet another record-breaking year for Australian wine exports, with total shipments growing a healthy 10% to 711 million litres. All well so far, but sadly, export value grew a much less impressive 1.9% to A$2.8 billion, and on closer inspection it’s easy to see why: in the year to the end of February 2006, average per-litre export prices fell another 7% to A$3.93/litre. Falling per-litre values are not news for the Australians, but the trend is deepening at a worrying rate. Export volume has almost doubled since 2002 – but the figures reveal the stark reality of how importers can afford to increase volumes so dramatically.

Gloom aside, it was all going on Stateside last year. In fact, the US was the major volume driver of the whole Australian wine-export industry  with 20m additional litres of wine flooding American shores, taking their export total to 207m litres. The average litre price, a very respectable A$4.44, is also slipping there, however, down almost 10%. But couple this with the larger volumes, and the result is that total export value remained almost static on the previous year, dropping just 0.2% to just under A$920 million.

Not to be outdone by their neighbours, Canada came in second place for volume growth, with an increment of 11m litres to their more modest total of 51m litres. However, Canada was the main driving force behind export value growth, taking in an extra A$30m worth of wine last year, bringing its value total to A$263m. Canada’s historically higher dollar per litre value of A$5.15 has always made it an attractive market for premium Australian wineries, but even this figure is a fall of 11.4% from last year.

Meanwhile, in other markets…
The UK has historically been the number-one target for Australian wine producers, but exports clawed their way up by just 2.4% in volume last year and dropped 2.6% in value due to yet another 4.8% fall in dollar per litre value to A$3.57. With every passing year, the UK market must be looking less and less attractive to Australian wineries in search of export growth, but with 263m litres imported last year, at a value of over A$938m, the UK is still at the top of everyone’s list.

Considerably further down the table in terms of total volume, China’s dollar per litre value of A$3.24 isn’t actually all that far behind the UK’s. And with growth of 145.4% in volume and 60% in value last year (admittedly from a small base), the dream of lavishing quantities of surplus wine on the Asian market is clearly beginning to come true for some exporters.

And it is, of course, this overabundance of product that is behind the falling litre prices. News of a grape and wine glut has been dogging the Australian, and indeed the global, wine industry for several years now, and even the big players are seeing the impact on their business. “Oversupply is certainly an issue at the moment. The multiples love it, of course, because it means plenty of wine at a cheap price and continued price promotion,” says James Craig-Wood, PR manager EMEA for FGL Wine Estates. “As a producer, though, it makes it difficult to maintain a respectable margin. However, these things tend to be cyclical, so if we can come out smiling after the tough times, we should be well placed to reap the benefits in the good times.”

It has to be said that in the current climate of tighter margins all round, Australian grape growers are not in the most comfortable position. I recently had an interesting conversation with one grower who also farms sheep; he was celebrating having just struck a deal to sell a paddock-full of his stock to the Middle East for A$55–$60 a head, but had yet to find buyers for all of his fruit.

Australia’s USPs
Craig-Wood’s point about the cyclical nature of supply and demand is the real heart of the matter. “To retain, and grow, its UK market share, I think Australia needs to focus on three things: regionality, diversity and quality,” he continues. Regionality is, of course, the buzz-word of Wine Australia’s latest generic campaign, but while it’s certainly a step in the right direction, simply putting an extra geographical label on a bottle of wine is unlikely to send sales into the stratosphere. “Diversity will help bring new consumers into the category, so new product development is crucial – just look at how the Californians have stolen a march on rosé. Australia’s NPD needs to be more dynamic as the real challenge is to grow the market itself rather than simply compete over existing consumers.”

The lure of the on-trade
With so much wine to sell, growth is the core issue here, but with some of the current retail opportunities reaching saturation point, many brands are reassessing their targets. “The on-trade has great potential to drive future growth for Australia,” comments Clare Griffiths, vice president brands marketing, Constellation Europe. “Customers want to see brands they recognise and trust in the on-trade, and Australia, with strong brands such as Hardys and Banrock Station, can provide this. Australia’s runaway success in the off-trade will provide an excellent platform for growth and success in the on-trade, and when combined with marketing, the success of Australian branded wine sales can be replicated in the on-trade environment.”

However, not everyone sees the on-trade as the only option for taking the Australian category forward. Sam Caporn, assistant buyer responsible for Australia at Direct Wines, has other ideas: “I am dubious about on-trade opportunities because volumes are so much smaller than off-trade. The best channels will be where large volumes of consumers can easily be reached. There are obviously the supermarkets, but mail order is also a great way of reaching the public and crucially of being able to tell the story behind the wine, as well as being competitive on price. That way, the variety and energy behind the category can be opened up and hopefully, customers’ confidence will increase and they will feel more inclined to trade up on their purchases, benefiting the whole of Brand Australia.”

“Premium wines and even the mid-market is where Australia is currently underperforming, I think,” she continues. “I am sure many consumers think of Australia when they want a cheaper bottle of wine but think of France or Europe when they want something expensive. Hopefully, this can change because Australia has many boutique producers making fantastic, iconic wines that can rival the Old World in quality and price.”

It’s true that Australia has faced tougher times than these in the UK market. It’s fought its way up from nothing to the number-one spot at record speed, so why the wobbles now? With possibilities for growth in different sectors of the UK market and new international markets opening up, the current state insecurity in Australian exports would seem to be at odds with the famous have-a-go Aussie spirit. So perhaps it is just a case of growing pains.  db  May 2006

INTERNATIONAL ANGLE

Opportunities or not, as the UK market is becoming an increasingly challenging trading arena, many producers are dipping a toe into other waters. “With the UK we’ve put a lot of work in over the last six years, and so we’re dealing smarter now. I really don’t envy people trying to do now what we’ve done. They’re looking down the barrel of a very difficult five-year climate,” says Ben Glaetzer, winemaker and director of Glaetzer and Heartland family wines. Glaetzer and Heartland exports 85%–90% of its production to a total of 32 different countries, with Malta and Slovenia the most recent pins in the winery’s map.

“Canada’s a great market. We sell a lot there, it’s just a matter of having good representation. We’ve also appointed small distributors throughout the States, targeting individual distributors within different markets. They’re not very big on generic promotion in the US – they’re very brand-led, but there’s no brand loyalty at all. I find that the mainland European markets are actually much more stable in terms of a base for brand-building.” An interesting point, when you consider the average retail price points in mainland Europe, but “building” is the operative word here.

“Russia’s a bit of a sleeper,” Glaetzer continues. “It’s also a lot like dealing with China in that there are cultural differences to overcome. These are markets where it’s really important to have a middleman with whom you can communicate easily and who understands your product, but who also understands the cultural differences of the country they’re working in. Also, China has a population of 1.3 billion people, and 80% of the population doesn’t even have a phone – I don’t really think they’re all saving up to buy a bottle of Amon-Ra. The most important thing is to research your target market as thoroughly as possible.”

Glaetzer is not the only one to underline the importance of meticulously researching potential export destinations. “Innovation based on consumer insights is a key driver of growth in emerging markets, as it is in mature ones,” says Jamie Odell, managing director, FGL Wine Estates. “For example, Wolf Blass contributed about 40% of the total Australian category volume growth in Japan in 2005, largely driven by the relaunch of Wolf Blass Eaglehawk under screwcap. The move to screwcap was based on information that only 10% of Japanese households own a corkscrew.” Odell believes that the UK, US, Canada and Ireland will continue to be the export mainstays for Australia for the foreseeable future, but reports that FGL is also seeing good growth in the Benelux countries and Scandinavia – as well as the Asian markets – with or without corkscrews.  db  May 2006