AUSTRALIA: On the up Down Under

It’s had a notoriously difficult couple of years, but it appears that with a renewed spirit of cooperation between its main producers, Australia’s wine industry may finally be turning a corner, writes Andrew Catchpole.

There is no doubt that Australia’s wine industry is undergoing a period of serious readjustment. Indeed, it is probably fair to say that the fall-out from the past couple of years (especially) is driving something of a transformation not witnessed anywhere else in the wine-producing world.

Underpinned by the head-on collision of a glut of wine during a global recession, its producers have been forced to take a long, hard look at their collective offer and, often very publicly, debate the way forward for achieving stability and renewed growth.

Much of this impetus must necessarily come from the bigger companies and brand owners that form the cornerstones of “Brand Australia”. And yet these are the very same companies that have been so implicated in tarnishing Australia’s image through deep discounting in its premier market, the UK, and elsewhere, undermining the hard-won quality and value-for-money perceptions that consumers once readily associated with the country.

What is more, as many now openly admit, they have achieved this unenviable position while eroding all margins, forcing a radical round of consolidation, asset fire sales and diving profits upon themselves.

And yet, this being Australia, there are increasing signs that the resilience and dynamism of its wine industry will drive a rebound rooted in greater stability, more realistic price positioning and the reemergence of a more common goal. Few, though, doubt that this will take time.

However, factors including the cooling off of the Australian Vintage-Constellation/Hardys merger talks, the retention by Foster’s of its wine division and general restructuring of the Australian divisions of Pernod Ricard, Constellation and others, plus the ending of the recession, are now allowing these companies to once again focus more on running their businesses.

“In broad terms, Australia has had a rocky couple of years, but Brand Australia is still strong in consumer minds and its brands still resonate,” says James Lousada, senior vice president sales and marketing at Constellation Wines Australia and Europe. “Structurally, though, Australia still has a long way to go, it’s still in a period of oversupply, with this vintage coming in at 1.6 million tons, which is probably 200,000 tons of oversupply.”

Long-term view

Lousada agrees that related price issues are not going to be easy to sort out in the short-term. “It will be a couple more years before we see prices moving up, but, if consumers still value the brand, I think there will be an opportunity for prices to move up and margins to become more sustainable.” He says that prices have been nudged up by around 11%, but admits this is taxation-led rather than profit generating or feeding any extra revenues back to growers in Australia.

Paul Schaafsma, general manager UK and Europe for Australian Vintage, which will crush an estimated 12% of the vintage this year, highlights these same difficulties in relation to the UK market where, it is worth noting, his company sells five times as much wine as the rest of  Europe combined.

"The reality is an exchange rate of AU$1.65 [£1] and price points haven’t moved in the UK, so essentially we are 35% worse off than last year, so what do we do? Put prices up? That would lead to reduction in sales and allow Chile and Spain to come in and take that commercial position,” says Schaafsma. His chosen route is one of making efficiency savings while continuing to run a very light company structure rather than putting up prices, which, he says, “I’d love to be able to do”.

“With the pressure of exchange rates, and 99% of wine selling between £4 and £8 in the UK, we have to look at a business model that works, given the volume of wine we produce and we have to deliver profit to our shareholders, so we can’t spend swags of money to grow the market ahead of where it’s actually at,” Schaafsma continues.

“But look at the infrastructure and resources of some of the bigger Australian companies… which have Lindemans promoted at three for £10, Hardys promoting at £3.99, Foster’s at Tesco with Wolf Blass wines at £3.79; they cannot make money on those price points with the infrastructure that they are running.”

All agree that this is unsustainable. Eyes will surely be on Jacob’s Creek, a brand that is continuing to carve out a contrasting path with increased pricing and further building of its premium tiers, including the repositioning and rebranding of its Reserve wines as Regional Reserve.

“We’ve taken some tough decisions and are looking at the long-term view, to bring long-term profitability to the business,” says Adrian Atkinson, wine development director at Pernod Ricard, owner of Jacob’s Creek. “We have taken a lead as a brand, introducing steps to reduce supply, but we are not prepared to compromise on quality so prices will increase even if this means losing some market share.”

Jacob’s Creek, like its competitors, remains committed to the UK market, but not totally at the expense of volume share over profitability. And where others are continuing to put their now limited resources behind the volume end of their portfolios, Jacob’s Creek is to focus more heavily on the up to sub-£10 price bands, aiming to supplement its profitability in the UK at price points where margins can still be returned.

This, of course, is in line with the generic position that the Australian Wine and Brandy Corporation (AWB) and Wine Australia (WA) have been working hard to align the industry behind. Namely, a greater focus on the premium quality that Australia produces, leading from the top with “Regional Heroes” and “Landmark Wines”, as part of a broader strategy that seeks to lift the equity of the volume players too, the “Brand Champions”.

Halo effect

To the dismay of many, some of the larger players have been resistant to this model, perhaps missing the point that countries as diverse as France and New Zealand have driven their industries by focusing first on their premium wines, engaging with the consumers to ensure a halo effect trickles down to the category as a whole.

Those with longer memories will recall that it was precisely this value- and quality-for-money approach, rather than volume-for-money, that led to Australia’s earlier successes as it trumped poor value wines from Bordeaux, the Rhône and elsewhere.

However, through a blend of sustained moves towards reduction in yields, economic necessity and an evolving generic message in partnership with the industry, Australia is turning the corner.

“There are exciting ideas on the table in terms of how brand positioning will be developed globally that I believe will answer and speak to some of the concerns that have been voiced in terms of the streaming between the broader industry and fine wine activity,” says Lisa McGovern, Wine Australia director, UK, Ireland and Europe.

“I think it’s very important that we have a strong church across the board and we work together, because our strength is generic, and whether a boutique Chardonnay producer in Mornington Peninsula or Pernod Ricard making large volumes of Chardonnay, there is common ground.”

Perhaps most importantly, the whole industry has begun pulling together on the vital issue of oversupply in conjunction with the AWB and the Grape Growers’ Australia association. Lousada outlines Constellations moves in relation to its brands such as Hardys.

“We have been working hard at the supply end, having a dialogue with growers about crop and yield management, and much more joint discussion with the co-ops,” he says.

On the subject of harmonising the generic messages and marketing strategy across the industry he is also upbeat that progress is being made.

“There certainly is an agenda that can be joined up,” continues Lousada. “If you take Chardonnay, even at a mainstream level with a brand like Hardys, then there has been a change in style, and the brand tiers can also sit with similar discussions about regionality so I think we have been missing a trick and have been speaking with AWB and WA as we could be better at connecting the dots.”

Liz Stich, managing director EMEA at Cumulus Wines, which presides over brands Rolling and Climbing, which have a premium positioning, believes a corner has been turned.

“The situation in Australia has certainly been unsustainable and the corporate responsibility of the wine industry has to kick in,” Stich says. “We have taken 114 hectares of our 508ha of vineyards out of production, only producing wine this year that we know we can sell as we don’t want to add to bulk market.”

“If everyone did that we’d be a lot further along the road to a sensible supply-and-demand situation and certainly other wineries, other companies, have divested themselves of vineyards, while people are now looking at what is sustainable and what is not,” Stich adds.

She also makes a very good point about the role medium-sized companies can play and how they can benefit the larger players in terms of the more premium, potentially profitable wines in their portfolios.

Role of smaller producers

“It’s easy to talk about change, but businesses geared up to generating volume by promotion don’t have the structure to go out and sell into regional wholesalers and independents and it’s difficult with the market as it is at the moment to move away from the core business,” she says. “Smaller companies can put the excitement back into the category, bringing elements of regionality and cooler climate, and this benefits the market as a whole.”

Much of the glue to bind the industry together as it moves ahead may well come from this third source, namely the mid-sized companies and long-established family estates. To this end, the Australian First Families of Wine (AFFW) initiative, a marketing alignment of 12 leading mid-sized, quality-driven, family-owned businesses was set up precisely to counter the volume-driven, discount image that has beset the volume end of the trade.

“AFFW is showing some strong leadership and collaboration among high-profile family companies, as a way of leading the rest of industry and showing we can collaborate harmoniously,” says Gail Gilbert, European sales and marketing manager at AFFW member Brown Brothers.

“By delivering high quality from a historical long base of production, and the message that Australia is not just high-volume wine, we can create greater opportunities for all to market wine at prices that are not a giveaway.”

As the global recession recedes, it looks as if Australia is gearing up to get itself firmly back on track. And, if the big  players can be fully convinced – as looks increasingly likely – to meet the rest of the industry half way, then this hugely exciting wine producing nation should soon recover its momentum.

Andrew Catchpole, May 2010