While the 90s saw Australian wine become one of the country’s biggest export success stories, it has now hit snags in the shape of frost, drought, oversupply and increasing international competition.
But Cameron Bayley finds it’s not all doom and gloom, and many wine producers are coming up with ingenious solutions.
The image of the typical Aussie with a beer in hand might be in danger. Figures from the Australian Wine and Brandy Corporation (AWBC) claim Australian beer and spirit consumption is declining, while our wine intake has risen to an average of 22 litres per person each year. And we’re doing a pretty good job of making our own, with Australia ranking as the world’s fifth-largest wine producer, behind France, Italy, Spain and the US, with enough exported product to fill about one billion bottles.
It sounds pretty good, but now it seems we have more wine than even increased consumption can handle. With 2,000 wine companies in Australia, there is currently between 500–900 million litres of oversupply, according to the AWBC. "We’re an industry that grew in the 90s because we were very quick to interpret consumer demand," says Stephen Strachan, chief executive for the Winemakers Federation of Australia (WFA). "We were putting a product into the marketplace that was different, that was very strongly demanded, and we were very good at it. We’re still good at it. But we’re being overshadowed by this quite significant oversupply."
It’s believed good grape-growing conditions produced very large harvests between 2004 and 2005, which have contributed to the oversupply. Because of the long lead times involved in producing wine, it’s a tricky industry to gauge the output. "What tends to happen is we overshoot and undershoot, no one’s perfect at picking demand trends, and neither are we," says Strachan. However, all is not as gloomy as it seems, he adds. "If you look at the 1990s when the wine industry could do no wrong and you look at the 2000s where you could be thinking we could do no right, the reality is somewhere in the middle."
With the oversupply affecting most major wine-producing countries, prices are down. So while Australian wine exports grew by 12 percent in volume between 2004-05 and 2005-06, they increased only by 2 percent in value. "One could say the growth has plateaued at this point," says Sam Tolley, chief executive for the AWBC. "Margins have been squeezed, and that’s for grape-growers as well as wine-producers. And that’s a product of the oversupply and a much more competitive international market." As well as the oversupply, the increasing number of independent retailers being bought up by large chains is also making it harder for brands to get into the retail space. It’s these factors, he explains, that have made the Australian wine business a tougher operating environment than in the past.
Niche Markets
Ian Hollick, who runs Hollick Wines in the Coonawarra region in South Australia, says toughened conditions have definitely changed the working lifestyle of the company. "We’re probably working 20 hours a week longer," he says. The business has just put on another staff member to get out in the market and fly the flag for Hollick. With plenty of competition and increased difficulty in finding niches, getting into the marketplace is now more important than ever. "So it has been just a matter of getting out there and wearing the shoe leather out more and more," Hollick adds.
With his label continuing to find new markets overseas, Hollick particularly encourages small labels and brands to find and exploit any niches they can. "And just recognise what volume and value potential those niches are."
Hollick Wines is just one of several brands focusing on new niches, and it seems to be the best solution. "The best operators, and typically those who’ve been around for a while and have seen this type of thing before, are spending a lot of time in planes," says Strachan. "Whether it’s in the Australian market or offshore markets, making sure their wines are front and centre in terms of their buyers and their consumers."
Australian wines are still selling very well into the UK and US, each market worth nearly a billion dollars to Australia. While sales to the US continue to grow by around 5 percent, growth to the UK is slowing a little, says Tolley, which is to be expected. Strachan agrees: "Markets like the UK are becoming very, very competitive so our growth in that market has slowed down quite considerably. But that’s a mature market for us, so you’d tend to anticipate that’s going to happen to us anyway."
Canada and New Zealand are also big markets. "The stand-out new market is China," says Tolley. "Which has come from nowhere to be our seventh-largest export destination by volume." The AWBC is working on developing emerging markets for Australian wine, such as Korea and Singapore, "and markets like India and Russia are on the distant horizon, but getting stronger," says Tolley.
Barokes Wines has found developing innovative packaging is another way to find a niche and combat current challenges in the wine industry. When founder, Greg Stokes, dropped a bottle of wine in a spa, he had a eureka moment and realised there must be an alternate way of storing wine. Now the company has patented their wine-in-a-can technology and created their own product category for wine consumers. "We’re creating wine as a daily food consumable," he explains proudly. "It’s not meant to compete with anything. It’s meant to add a choice to your lifestyle."
Moving Barokes wines from bottles into cans has paid off. The first cans hit the market in 2002, and the company has just posted a 487 percent increase in sales for the 2006 financial year. Stokes says a large part of this success has been the huge uptake by the Japanese, with 3,000 outlets in that market currently selling the product.
According to Stokes, when you’re competing with wine-producing big guns like France and Italy, they wield a certain amount of control purely through their history, quality and longevity. "You’ve got to look at something you can deliver that takes you beyond that. That’s why innovation is so important. And packaging is one of those ways you can bring innovation into the wine industry."
Barokes has successfully entered Asian, European, and North American markets with their point of difference creating global opportunities. In Asia, packaging is a big selling point. For a country where you can buy a cup of hot coffee in a can, having wine in one is quite acceptable. And with a tendency to consume wine in small quantities (and no one has space for cellars), the slim 250 ml cans have proven very popular. Barokes have even set up a relationship with an up-market Japanese pizza chain, creating their own customised six-pack basket that’s easily transportable for the pizza courier. In Europe, they have tackled high end deli retailers, tapping into the huge traffic of travellers around the continent looking for easily transportable product, and in North America the cans are providing a good bridge for young adults wanting to move from consuming beer to wine. The company has also started forming relationships with airlines, including Singapore’s Tiger Airways which will stock the product on all flights throughout Asia.
So, while the team at Barokes are aware that there may be a natural reservation about drinking wine out of anything that’s not glass, they have focused on finding areas where it’s not such an issue. "What we did with this was look at what the consumer wanted, no
t what the winemaker built," he explains. "We’ve been too comfortable with saying ‘We’re winemakers. We build a good product and they’ll come.’ Guess what? They don’t. That’s what’s happening on a global basis."
To help those in the industry know how to tackle the global market, the AWBC and WFA have created a strategy, Directions for the Australian Wine Sector, which is scheduled for release in April this year. "Directions aims to inform decision-making at the individual winery level," says Tolley. "It’s trying to identify global and domestic market opportunities. As well as give insights to global consumer trends."
The strategy will be very practical, he adds. Strachan agrees, confirming that the strategy is not only looking very hard at what market opportunities exist but specifically at what business cost structures will need to be in place to maximise them.
Tolley admits the Directions strategy is an update on the 2025 Strategy, released in 1996 as a blueprint for the way ahead for the Australian wine industry. While the objectives and vision of that strategy remain, "the operating environment has changed so much that we have to re-orientate our activities now and so that’s why the timing is very good".
One thing those in the industry feel could be more threatening to the wine industry than oversupply is the current drought. While the impact it is having on wine production could be seen as a solution of sorts to the oversupply, the long-term effects are far more worrying. "Some people are looking at the drought as being a silver lining, looking at the surplus," says Strachan. "[However] I don’t think it’s good at all for the industry. I think within the space of 12 months we’ll be talking about our ability to produce the wine that we need to produce for the markets we’ve got."
Although the wine industry is a relatively efficient water user, it will still be affected, particularly by water allocations coming out of the Murray Darling area, Strachan says.
"So now’s the time for some very hard decisions to be made about the future, and the future allocation of what is a very scarce product."
Hollick adds that the extreme opposite, frost, has also had a big impact on the vintage produced by the cooler climate of the Coonawarra region, with up to 60 percent of production from the area lost due to frost conditions. Again, this is good for the current oversupply but Hollick explains new longer-term plans need to be considered for cooler climate regions, where cost of production is too high to meet what the current market requires.
While Strachan admits there are challenges, the future is still solid. "We have a very strong innovative focus in the industry, and we tend to be pretty quick at reading market signals and opportunities. Those are good assets, " he says. In particular, there is a lot of unrealised potential for Australian high price wines. "The world knows about our very good quality low- to mid-priced wines. The world doesn’t yet know about our higher priced wines. There are great products out there, but we’ve got to be very adept at communicating what we’ve achieved here to the world."
There’s also the area of ‘on-premise’ sales, such as those made in hotels and restaurants. "Looking at that side of the market we can see a real opportunity, and that’s a marketplace where particularly smaller wine producers can thrive," Strachan says.
Tolley adds that focusing on the quality and the regional and stylistic diversity of Australian wines, and their distribution, are the key factors for the future of Australian wine, locally and overseas. And there’s still room for the little guys. "We’ve got middle and smaller-sized wineries who are really able to keep the category of Australian wine very interesting."
As Strachan explains, it’s not a cut and dried ‘woe is me’ situation. While it may not be the best time to enter the wine industry, for those in it there is still scope for success. "It’s somewhat of a mixed story," he says. "I think most people would say they’re finding the going tough at the moment, but many are also forging new opportunities and forging relationships with new buyers and new consumers."
Help Lines
For those in the wine industry, some helpful resources include:
*Australian Wine and Brand Corporation— http://www.awbc.com.au
The AWBC is Australia’s key export body for the wine industry, handling regulation and compliance, and offering information to exporters.
*Winemakers Federation of Australia— http://www.wfa.org.au
An independent national body representing winemakers, the WFA runs several programs for winemakers.
*Australian Wine Research Institute— http://www.awri.com.au
Part of the AWRI mission is to focus on industry support and development, and they offer a problem-solving service.
*13th Australian Wine Industry Technical Conference, July 28 to August 2, 2007— http://www.awitc.com.au
Held every three years, the conference has a technical focus, keeping winemakers abreast of advances in the industry.
*Grape and Wine Research and Development Corporation— http://www.gwrdc.com.au
Funding body for R&D in the wine industry.
*Austrade— http://www.austrade.gov.au
Check with your relevant state department for state government assistance.
Did you know?
Australia exports the equivalent of one billion bottles of wine annually.
Wine is our third largest agricultural export after meat and wheat.
We are the largest supplier of imported win to the UK, Ireland and New Zealand. And the second largest to the US and Canada.
The wine industry in Australia employs over 30,000 people.
Export of Australian wine is now worth $2.8 billion a year.
Australia’s biggest grape growing regions are the Riverland area in South Australia, Riverina in New South Wales and the Murray Darling area which covers both New South Wales and Victoria and produces 60 percent of Australia’s wine grapes.
For the year to November 2006, Australian wine exports hit a record annual volume of 749 million litres.
For this same period, wine exports to Denmark, Sweden and Ireland achieved double-digit growth, and set new records for volume and value.
The Strategy 2025 document released in 1996 set a target of $4.5 billion of export and domestic sales by 2025. This was achieved in 2005.
Latest estimates from the AWBC forecast the supply and demand for Australian wine will not reach a balance until 2008-2009 at the earliest.
For the 2005–2006 period Australians consumed approximately 430 million litres of wine, with a retail value of $2.7 billion.
Last year’s winner of the annual George Mackay Memorial Trophy for most outstanding export wine was Penfold’s 2003 RWT Shiraz.
* Source: Australian Wine and Brandy Corporation
