Premium Australia: Move on up

Facing a global wine surplus, Australian vineyards are being mothballed and grower contracts torn up. But if any producer country can successfully address the premium end of the market, it’s Australia

The annual Wine Export Approval Report for June 2006, produced by the Australian government and the Australian Wine & Brandy Corporation, makes interesting reading. The first line exalts that, in the financial year 2005-06, “export volumes grew 12% to a record 738 million litres”. Sounds good. The next line continues with “value grew only by 2% and to AUS$2.801 billion, marginally below the record year-end results in October 2005 (AUS$2.810)”. Not bad at all.

There are many wine-exporting nations that would happily give their overflowing tanks for figures like these, but a sobering fact follows: the average price has fallen by 9% in the year, giving an average price per exported litre of AUS$3.80, “representing the fifth consecutive financial year the average price of Australian wine exports has declined”.

The main reason for this? Probably the Australian industry’s own overflowing tanks and the dominance of bulk wine shipments in the export growth figures. Exports of bulk accounted for 87% of the growth in volume, growing by 54%, representing a quarter of the total wine exported. Forty-nine per cent of that growth came in below the AUS$2.50 mark.

And, with recent statements like that from Constellation that it is planning to invest in bottling facilities in the UK, it looks like this figure could continue to grow. So what are the prospects for the Australian premium offer against these market conditions?

In short, pretty positive. As Paul Henry, general manager, market development, Australian Wine Bureau, points out: “Australia’s predicament has to be looked at from the kind of retail environment in which we are operating. I don’t see it changing while everyone is facing surplus issues or when the market is predicated on high volume, low value; not for the next 24 months, at any rate. If you look at Australia in the £5-£9.99 price points it is currently growing at a rate of 42%.” Again an enviable position to be in.

Overzealous planting
There is no denying, however, that Australian brand owners and, more specifically, growers are having a tough time at the moment. But if any nation of wine growers and producers is capable of confronting the issue and trying to convert the negative into the positive, it’s the Australians. In fact, they are already in the process of analysing and acting upon the lessons they learned from the 2025 statement and May next year will see the publication of The Directions Industry Strategy, which will outline their failings and give guidance as to possible solutions.

One of the causes of their current dilemma is the massive amount of planting that went on in the early part of this century, exacerbated by a government tax break on vineyard planting. The result of this during the most recent harvest – and, possibly, for a few more to come, is that the growers have been forced to leave grapes on the ground and ask their bank managers for a bit more time.

Tim James, managing director at Wirra Wirra, points out that perhaps the problem lies in his countrymen’s own enthusiasm. “Australians are early adopters,” he says. “The 2025 vision was a good plan, but we all got a bit overexcited and planted all that we would need for the next 10 years in about two. We are lucky that demand kept up with supply for as long as it did. Now we are in a period of adjustment, and this makes it tough for the premium end. However, it’s at times like these when you will see the development of those people with mettle, the ones who are going to demonstrate how serious top-end Australian wines really are.”

James continues, “The excess is in bulk wine – you see very little as fruit available on the market – but I feel much more upbeat this year than I did this time last year. We have to be tough on ourselves for the next four years. Dropping our debt and stock levels will give us the best chance to forge ahead.”

Despite the positivity of some at Wine Australia in July, amid the packed aisles of sniffing and slurping consumers, the talk on the other side of the counters was of growers’ contracts being ripped up by some of the larger companies, of mothballing of vineyards and of bankruptcy.

“Big companies are playing a dangerous game in the way they are handling the growers at the moment,” says Linda Domus, winemaker and proprietor of Linda Domus Wines. “A lot of smaller and medium-sized vineyard owners are in debt because grape prices have fallen from AUS$3,000 per tonne two years ago to AUS$600 per tonne today. Fruit is so cheap, people are leaving it on the ground or mothballing the vineyards. It would be a good time to buy vineyards at the moment, but what’s the point? It’s cheaper to go to the open market.”

In this kind of environment the reality is that the banks will not remain patient for very long. As Tim Adams, winemaker and proprietor of Tim Adams Wines, says, “Some growers are not going to make it; the financials just don’t stack up. The bottom line is that they need to become efficient in what they do. If not, then there’s going to be consolidation. My feeling is that we have a minimum of three years to go through before the current situation improves, which means that things are not really going to improve for brand Australia in the short term.”

Targeted approach
There is much conjecture as to how long the current trading conditions will last. Whether it will be for 18 months or five years, no one is really prepared to commit when pressed. At the moment it is a case of weathering the storm, and those with a clear strategy in terms of their own business plan tend to be pretty pragmatic.

David Woods, managing director, BRL Hardys, is one of the pragmatists. “It’s really a question of perspective,” he says. “We are still growing in all our major export markets, but the current market conditions mean that we have to reassess and focus on the areas of opportunity. We need a more targeted approach and we need to look at the areas where we
are weak.

“What we are facing at the moment as an industry is more than just about supply and demand – there are broader issues at stake,” Woods continues. “Consider this: the warmer inland regions account for 84% of demand but only 60% of supply, whereas the cooler climate regions provide 40% of supply, but there is much less demand for these wines in the market place. They simply can’t match the lower price points required, in the context of 78% of our volume being exported at under AUS$5 per litre.”

If Woods is right, then growers like Linda Domus in the Adelaide Hills are going to face a tough time. But she is resilient. “The small producers are where the future of premium Australian wines lie,” she argues. “Real top-end wines will only come from those small-scale producers who really give a crap about the vineyards, the wines and the quality they are producing because it’s their name on the bottle, not some made-up brand.” She goes on, “You don’t get wines with character from big-company Australia, it’s as simple as that. People are bored with Australian wines because they are all very similar at the lower end and that situation is now being exacerbated by oversupply.”

She has a valid point, but oversupply for Australia and the rest of the world’s wine-producing nations has become a commercial reality. Those who can harness it while developing a valid top-end offer are the ones who will succeed. As Andrew Hardy, CEO and chief winemaker at Petaluma, says, “The question has to be: how do you leverage top-end Australia? Maybe it’s about just staying tiny and specialised. I don’t think anyone really has the answer at the moment. The commodity end is still incredibly important, however, and we need to be playing both at that end and in the more rarefied upper-price levels at the same time.”

Trading up
So for some it’s not about either/ or; it’s about positioning brands successfully in order to succeed at both ends of the market. And as Philip Shaw, proprietor of Philip Shaw wines, candidly explains: “The fact is Australia has spent much more time below £6 than above in recent years. Add to that the fact that Parker focused the mind of the consumer – and often of the trade – on a particular style of wine, and it means that those areas where it is more expensive to produce wines, due to climate or terroir conditions, have lost out.”

Globally speaking, the market that performed best for Australia in value terms last year was Sweden, growing by AUS$13m in the year to AUS$50m. The UK, US and Canada remained the largest export markets, with total value declining in line with the trend for increasing bulk shipments.

Mark Allgrove, European trading director at The Hardy Wine Company, feels that the Australians have “to take it on the chin a bit at the moment with some of the discounting policies that have been used. The next step is to start to get the retailers to recognise the inherent value of Australia at the higher price points and give them shelf space”.

Still growing
As marketing manager for Cellar Door, Fiona Boundy, points out: “There’s a lot of talk in the UK about the glow fading from the Australian category, but the figures prove that we are still outperforming the market at the higher price levels. We are consistently showing positive growth in comparison to our competitor nations. Fifteen per cent up in the £6.01-£7 bracket year on year; 3% up in the £8-plus sector (ACNielsen MAT 19.06.06). In fact, if you look at the figures, Italy is the only other country showing growth at these price levels.”

But the question remains: is the premium Australian message getting through to the buyers and, from there, to consumers? Looking along a few multiple-retailer shelves, probably not. In the UK, certainly, it seems that many buyers still have to be convinced by it, which is a shame, because at the higher price points Australia is beginning to offer real value when compared with other non-European nations at the same price levels. Much has been said about the Australian regional offer – that “regionality” holds the key to conveying the point of difference for a quality message.

“We have to play it from a pure quality perspective,” says Brett Fleming, European sales and  marketing manager, Yering Station. He continues, working with the right trading partners and pushing quality we can make premium Australian wines a tangible product that the consumers can understand. Unfortunately, the commercial message at the lower end is eroding any top-end message we have at the moment”.

Golden age
Perhaps it’s a question of perspective. The 2006 winner of The Maurice O’Shea award, Ray Beckwith, put Australia’s current issues into perspective in his acceptance speech. After 75 years in the Australian wine industry,
he commented, “My generation created the infrastructure for future generations to succeed upon.”

We tend to forget that the Australian wine industry is not just about the boom of the last 15 years and, as with all agricultural-based businesses, wine is about the long term. Vanya Cullen, managing director, Cullen Wines, has that perspective: “For our high-end wines to continue to grow in standing, Australia has to stick to the philosophy of quality, integrity and sustainability. There is a lot of wine being produced from younger vines, and it takes time to know where the best fruit is and how it performs. Add to this the amount of change going on here, and you can see that perspective is hard to achieve. By the end of this decade, through the fog of all that is happening now, we will realise that where Australia sits now is in a privileged position. The golden era for Australian wine is here.” 

Kirsten Moore, regional manager, UK & Ireland, Wine Australia
“Australia has successfully captured a very important segment of the off-trade market. So successful, in fact, that the strength of brand Australia has inadvertently convinced many consumers – and trade, to a lesser extent – that fruit-driven, high-alcohol, oaked, consistent, predictable and value-for-money wine is all that Australia has to offer. Little is known of the 60 or so distinct wine regions in Australia, some of which play host to a selection of the world’s oldest vines. Being such a relatively new player on the UK market, it is also easy to miss that some of Australia’s most established producers have been passing on their skills and vineyard knowledge from generation to generation for around 150 years.

“The challenge for us now is in creating awareness around the middle to premium end of the Australian wine offer. Regional and stylistic differences are not new to Australian producers or consumers. Premium wine has been a very important part of the Australian industry for decades. Penfolds Grange was first released in the 1950s. However, this is a whole new wine-drinking experience in the UK.

“We have worked closely over the last few years with the on-trade in showcasing the diversity of these regions and the wines that come from them. We regularly hold informal debates or forums with the on-trade to ensure we are learning from the valuable experience of those at the interface with consumers.

“Further work must also be done with the independent off-trade. Again, it is all about education. We must provide those who interact with consumers with the tools and knowledge to be able to communicate the Australian offer with confidence. Consumers buy what is familiar and comfortable and what ultimately provides a perceived benefit. At the premium end, we need to focus on creating a compelling and rewarding reason for consumers to part with their pounds and start experimenting with premium-quality Australian wines.”

© db September 2006