Agribusiness Review - Vol. 10 - 2002

Paper 6
ISSN 1442-6951

The Australian Wine Industry Perspective

Brian Croser

• Introduction
• Industry vision and challenges

Introduction

When I last spoke at your conference in June 1993, I was President of the Winemakers Federation of Australia and it was just two months before Treasurer Dawkins and his government tried to impose a 60 per cent increase in sales tax (from 20 per cent to 32 per cent) on the Australian wine industry.

It was out of this adversity that the Australian wine industry forged even stronger unity and apart from winning a much lower and incrementally introduced tax, the Inquiry into the Winegrape and Wine Industry in Australia, which followed the fight, provided the need and means of putting together an industry vision to the year 2025.

Not that the Australian wine industry had not already developed a sense of unity and the need for plans to control its future, because at the Export Success Conference in 1991, when we were exporting 70 million liters of wine worth A$200m, I announced the industry's objective to reach A$1 billion dollars of exports by the year 2000, a brave call scripted by the chief executive of the Australian Winemakers Forum, Ian Sutton.

By the time I spoke at your conference in 1993, exports had progressed to 100 million liters worth A$300m, but the skeptics were emerging in the criticism of the A$1 billion target. Today we are exporting 125 million liters of wine, worth A$584 million, and increasing at 25 per cent per annum by volume and 32 per cent per annum by value, and even the Australian Bureau of Agriculture and Resource Economics projects A$1.25 billion of exports at the end of the year 2000.

Australian premium bottled wine exports have increased by 30 per cent for each year of the past eleven years and the growth shows no sign of abating. There are now 11 bottles of premium bottled Australian wine consumed overseas to every 9 consumed domestically and despite a healthy 11 per cent growth rate domestically, the 25 per cent export growth ensures that before long, that ratio will be 2 export to 1 domestic.

If anything, there has been a gear change upward in growth as the impetus for premium wine consumption provided by the world wide advent of the café society has been supercharged by the good news story of wine's beneficial effects on health. Since 1993, medical studies around the world have continuously poured forth good news for moderate consumers of wine, and especially red wine. Wine is now attributed with the power of cleaning arteries, of reducing the potential for blood clotting and hence of stroke and heart disease, of reducing the risk of cancer, and most recently of preventing Alzheimer's disease.

As an example of this health wrought gear change, the growth rates for premium table wine in the Australian market, jumped from their 35-year average of 3.5 per cent per annum to 11 per cent per annum currently, and the same pattern is emerging worldwide. These growth rates have caught the 'new world' wine producers, who have been the main drivers and beneficiaries of emerging world wide demand for well made table wine, but who are short of premium grape supply. This has been exacerbated by the demise of large areas of premium vineyards in California due to a new virulent strain of Phylloxera.

For Australian premium table wine, worldwide demand exceeds supply and is likely to do so until the Tsunami of supply coming on stream from Chile, California, South Africa and elsewhere begins to emerge towards 2000. Even then the fundamentals which drive premium wine consumption worldwide should ensure that oversupply, should it emerge, will be temporary. Besides this unsatisfied world demand, the Australian wine industry has some other relative advantages.

Despite the thousand winemakers and four thousand independent growers, the Australian wine industry is an increasingly concentrated industry. Four companies control 65 per cent of turnover and ten control 84 per cent and this structure is likely to continue to implode as takeovers and mergers occur. Most of the large companies are accountable to public shareholders and therefore there is a focus in the industry on margin and profitability, not just market share. The industry deals in a high value per unit volume and weight, non perishable product for which it has established a high degree of vertical integration from vineyard to manufacturing at the winery to marketing of strong brands, and finally to distribution in the international marketplace.

In my lifetime in the industry I have watched Australian wine companies progress from being agriculturally driven, to becoming sophisticated manufacturers, to becoming innovative brand developers and marketers, and finally in the most recent step, becoming owners of distribution systems, both here and in Australia and overseas.

The industry is fortunate to deal with a fixed repertoire of varieties , which the power of human selection and the force of history and tradition reinforce.

New grape varieties do not succeed in the world wide premium wine industry. It is an industry based on Cabernet Sauvignon and Chardonnay with support roles played by Shiraz, Merlot, Pinot Noir, Riesling, Semillon and Sauvignon Blanc. Innovation is confined to clonal subtleties and to vineyard and winery technology, which enhances consumer appeal of the product. In technology the Australian wine industry is recognized as the world leader. Australia also enjoys international demand in the quality of its exports and its experts.

The Australian wine industry is a very small part of the world wine industry with less than 2 per cent of total production, 3 per cent of world exports by volume, and 4.5 per cent by value. The industry shares with the horticultural industry the natural advantages of this wonderful continent which is perhaps more suited in large tracts to the production of wine grapes than any other crop because of its relatively low fertility, well structured and drained soils, and its clean dry air.

We do have some disadvantages. Being small in world terms may provide an advantage in the flexibility to occupy a profitable niche, but dealing with the merged strength, for example, of brand Met/IDV and Guinness, who have just put together a $33 billion merger, is difficult for even the largest of our wineries.

We are now totally export driven and at the whim of the international marketplace.

The Australian wine industry has traditionally been a victim of over and undersupply of its raw materials, in similar manner to the hog cycle. We are currently in the grips of a premium grape shortage, which is escalating grape prices and driving planting response to unprecedented levels.

The industry is enormously capital intensive with long lead times to returns. In the completely vertically integrated chain, a vineyard planting may yield its first revenue as wine, six years after the initial expenditure.

Of all of the disadvantages of the Australian wine industry relative to its competitors overseas, the government's influence has been identified as the strongest disadvantage.

What is the current state of the Australian wine industry? It is bigger, more optimistic and commercially aggressive than it has ever been at any other point of its history. The Achilles heel of the industry has always been the inability to balance the supply of raw material with demand. In my lifetime in the industry I have seen massive oversupply of premium red grapes in the early seventies and an equivalent undersupply of premium white grapes developing into an oversupply by 1985, which was the year of the infamous Vine Pull Scheme. Changes of ownership, of management, and the imperative of solving the oversupply situation gave rise to the export phenomenon which began in 1986.

The unplanned for and unprecendented growth of exports plunged grapes into serious shortage in 1988 and 1989, driving up grape prices which in turn encouraged large grape plantings, resulting in oversupply again by 1991-92. We are again out of balance in the supply of premium grapes with grape prices at record highs equivalent to those of 1988-89 and massive plantings coming on stream. Fortunately we are ahead of the international pack. Starting with 30 000 hectares of premium varieties in 1994 we have planted an additional 16 000 hectares, through 1994, 1995 and 1996, and will plant a further 17 000 hectares through 1997, 1998 and 1999 to achieve 63 000 of premium grape vines by 1999.

Six years for a 110 per cent increase in the area of premium grape varieties, and an estimated investment of $1.2 billion.

More than one third of these vines are currently owned by the wineries and that ratio will remain throughout this vigorous expansion. At least another third of grape production is on long term contract, and this significantly reduces the effect of the spot grape market on wine costs and the role of small independent grapegrowers.

The very encouraging features of the new plantings are the percentage of premium grapes coming from the traditional quality wine areas as opposed to the Riverland and the Murrumbidgee Irrigation Area (MIA). Regardless of the importance of the Riverland and the MIA to our premium grape supply, the core of quality still lies with regions such as Coonawarra, Barossa Valley, Hunter Valley, Margaret River, McLaren Vale, Clare, Yarra Valley and other premium regions. The supply of premium grapes will grow from the expected 570 000 tonnes of this immediate past 1997 vintage to 800 000 in the year 2000.

The premium grape supply position of the Australian wine industry has never been healthier or more appropriately positioned to take advantage of emerging unsatisfied worldwide demand.

The institutions of the industry have been forged through the opportunities and challenges of the past ten years and we are well positioned.

The industry is in control of its own regulations of its own regulations through the Australian Wine and Brandy Corporation, its own export promotion through the Australian Wine Export Council, its political agenda through the Winemakers Federation of Australia, its research and development through the Australian Grape and Wine Research and Development Corporation and of course, its own research institute, the Australian Wine Research Institute. Two excellent universities, Charles Sturt at Wagga Wagga and the University of Adelaide at the Waite Campus are providing intelligent motivated and highly educated winemakers and viticulturists, and the supporting training system through TAFE for our own vineyard and winery workers is used as a national model.

Industry vision and challenges

The crucible of the tax fight and the Government Inquiry that followed, crystallized our strategy 2025 and the five-year plan to 2001.

The vision of strategy 2025 is that by the year 2025 the Australian wine industry will achieve A$4.5 billion in annual sales by being the world's most influential and profitable supplier of branded wines. We currently sell A$1.7 billion of wine. Our share of world wine trade by value will rise from 2.5 per cent to 6.5 per cent by the year 2025.

The vision recognizes that Australia will never be the lowest cost producer of wine and that it must therefore exploit and expand the premium niche through the power of technical and marketing innovation. The objective is that Australia will drive the global wine industry as Japan has lead the global car industry. To achieve the vision, the industry has to put in place A$5 billion of funding to give it an additional 40 000 hectares of premium grapes, and by achieving A$2.5 billion of exports in the year 2025, 17 per cent of the value of world wine export will be Australian. The end position may seem ambitious, but the growth rates required are modest.

What are the challenges? We have to increase the profitability of the industry and find a way of moving the capital locked up in vineyards through to the funding of winery capacity, inventory increases and marketing investment. Innovative capital structures to move vineyards off balance sheets are being introduced from the financial sector.

The industry has to survive the short term wave of supply which will emerge through the year 2000 and it can only do that through the strength of its brands to command a premium and the power of its control over distribution to reach the consumer.

The industry must maintain unity of purpose and ensure that regulation is effective but minimal, with regulation to satisfy government, and give confidence to the consumer – but not in the form of the European appellation model which impedes commercial flexibility and innovation and creates economic rents for the incumbents.

We have to convince government that we are a small industry and that we need maximum management of our own affairs whether it be in regulation, research and development, or access to resources. The requirement of government imposing its influence through independent representation on statutory bodies has to change. Government should accept that the wine industry can manage the conflicts of interest inherent in making decisions about itself as opposed to eliminating potential conflict through the imposition of less relevant independent influence in industry structures.

In this time of maximum change and opportunity, all industry institutions need to be market focused and relevant.

We need to simplify our industry structures, with one statutory body to serve from vineyard to market, responsible for regulation, export promotion, and the research and development, which will create the innovation and market advantage.

We have to somehow unite the small grapegrowers, and small winemakers, so strategically used by government behind the existing forces of the industry. They, like my company, Petaluma, are on water skies behind the Queen Mary. We will all succeed in crossing the turbulent pond, or founder on the rocks, depending on the decisions of the big companies of this industry. That is a commercial reality and I know those companies are aware of their responsibilities, primarily to their shareholders, but also to the industry.

Australian wine is one of the world's most sought after luxury products and the Australian wine industry must represent an attractive target for the major distributors of alcoholic beverages around the world into whose markets we are nibbling. I really hope that the Australian wine industry can maintain a core of independent Australian ownership as distinct from our food manufacturing industry. I do not advocate that this should happen by legislation as happens with the media industry or through the undue protection of the Foreign Investment Review Board. It should happen because Australian wine companies retain the edge of innovation and profitability to ensure shareholder loyalty in the face of foreign takeover.

Finally, if there is any single ingredient which has contributed most to the corporate will and success of the Australian wine industry, it has been the ability of its executives and leaders to bury self interest in flavor of the corporate good. This has served the industry well in the construction of its institutions in times of adversity such as the tax fight and in the crystallization of opportunity. Under the current market circumstances, Australian winemakers are beginning to believe they can walk on water, and there is a tendency to lose sight of the factors, which have created the environment in which they have been successful. It is important to recognize that our biggest challenges are yet to come and I know that industry unity will be the strongest factor in allowing us to face those challenges successfully.