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News Analysis |
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| June 12th 2007 |
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| Wishful Thinking in Australia? |
by James Halliday
“Our message has been all about value and I think we've now squarely got to say that
there's a premium to be paid for Australia“, said Paul Henry of the Australian Wine and
Brandy Corporation as he unveiled Directions to 2025. James Halliday takes a closer look.
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 On 2 May, a remarkable document was released. It took 18 months of work by a task force of 22 people, representing every strand of the Australian wine industry, who all had different perspectives and interests and yet shared a common goal. The task force was not beating its chest with selfcongratulations when it wrote, “That we have been able to develop Directions to 2025 – and Strategy 2025 ten years before it – is a tribute to the unity of the Australian wine sector. It simply would have not happened in most other wineproducing countries.”
The document provides a series of Directions that have a seemingly impossible target, but does so without ignoring the difficulties that the industry presently faces. It lists the following difficulties:
• A structural imbalance between the cost of production and the price opportunity
• Grape and wine supply as well as demand fluctuations within Australia
• Retail consolidation driving downward pressure on pricing and margin
• Slow domestic growth and a tougher market for exports
• A resurgent Old World and better resourced New World competitors
• Greater environmental and sustainability challenges and responsibilities, particularly exacerbated by climate change
• Changing social concerns
• Changing demographics and consumer expectations
• The fact that wine has become recognised as a fast moving consumer good
Before proceeding to outline its ambitions, Directions looks back to Strategy 2025, an audacious 30-year plan released in 1996, which proposed that by 2025 the industry could achieve sales of A$4.5 billion, with A$2.5 billion of export and A$2 billion of domestic sales.
The 2025 targets were achieved – indeed substantially exceeded – 20 years earlier than expected. I was a member of the original task force, responsible for a detailed inter-country competitive analysis, and well remember the cynicism and criticism it met with from the few financial journalists with any interest in the wine industry. There will doubtless be scepticism about Directions 2025, particularly given its release against a climate change debate reaching hysteria; a massive swing in public opinion about environmental issues; a genuine fear about long-term water shortages; an announcement by the Prime Minister that unless there are substantially above-average rainfalls in the next six months, there may be no water allocations for irrigated farming next summer; and the official, albeit preliminary release of figures for the 2007 harvest.
The harvest of 1.34 million tonnes was 29% lower than last year’s 1.9 million tonnes, the smallest since 2000, and the lowest yield since 1976. The severe and prolonged drought, courtesy of a deep and long El Nino period, now finally breaking up, meant bone-dry soils and cloudless night skies resulting in |
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News Analysis |
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Page 2 of 3 |
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widespread and repeated frosts in many regions where frost is normally rare; fires, raging in northern Victoria for weeks, that destroyed more than a million hectares of bush and led to widespread smoke contamination of grapes; and marauding rabbits, hares, wallabies, kangaroos, feral deer and feral boars eating anything green (or purple).
What is more, the outlook for next year is little better; viable bud numbers in frosted and drought-stricken vines are very low, and the recovery process will be slow. The wine surplus that caused so much consternation six months ago will soon be a wine shortage.
It may just be that this will fit in perfectly with some of the major aspects of Directions 2025. Its thrust is that by adopting the detailed business and marketing strategies it lays out in detail, an extra A$4 billion of wine can be sold between now and 2011, resulting in cumulative sales of A$30 billion, rather than the A$26 billion expected based on current production levels and consumer trends.
Directions 2025 goes to some lengths to explain that it will succeed because it is based upon a realistic assessment of existing market conditions in Australia and around the world. It is no accident that senior representatives of the biggest companies were on the strike force; what is not explicitly stated is that they agreed to share business information on every aspect of production, marketing, sales and sales forecasts, which hitherto would have remained closely held secrets. Directions 2025 would be less likely to succeed in an environment in which wine producers harbour unrealistic expectations of current trading conditions. It examines the 11 markets that account for 90% of Australia’s current sales volumes: Australia itself, Great Britain, the United States, Canada, Germany, the Netherlands, Denmark, Japan, New Zealand, Ireland and Singapore. In these markets, 29% of sales are basic wine, the lowest category. As one moves up the price scale, aggregate values progressively decline to 11% at the super-premium and specialty top-end. By contrast, Australia’s sales are highly concentrated, just over 50%, in the mid-range popular premium segment.
Here Australia out- performs market potential and its competitors, including France, Italy, Spain, Chile and California. However, Australia underperforms in the higher and in the lower price points. Before climate change and water shortages, Australia decided not to contest the lower end, a decision that in retrospect was a very wise one. Chile and Argentina, with - so far - unlimited water and increasing mechanisation, will have a stranglehold on the lower end of the market with their cheapest wines. This leaves the super premium and specialty markets for Australia to challenge. Its key opportunities are to increase its sales by growing alongside price points that are themselves growing in the market, and also to foster the market’s expansion of higher price points.
Directions 2025 is not about seeking higher |
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News Analysis |
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Page 3 of 3 |
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prices for the same or similar wines presently selling for less, nor spending massive promotional sums to support sales of what are genuinely better wines, only to end up with lower or negative net price returns. With over 60 geographical regions covering every combination of terroir, including climate, Australia has as wide a range of regionally, varietally and stylistically diverse super-premium quality wines as any country in the world.
The fundamental difference between Strategy and Directions is that the former built volume dramatically, but the train was travelling too fast to stop when it should have. Directions aims to present Australia’s regionally based superpremium wines to the world, not diffidently, as in the past, but with self-confidence.
These will be represented by Brand Champions (accessible wines with a message about product and country); Generation Next (innovation of marketing product and package); Regional Heroes (with a strong sense of place); and Landmark Australia (built on inherent quality and world-class reputation).
It must be said that a fair bit of this is a mix of marketing spin and jargon. But the fact is that Australia – with bigger companies being the chief offenders – has not presented more than a handful of its many great wines to the world’s markets. This, in turn, has restricted local prices because so much of this topend wine fights for market share in the face of supermarket dominance and, hence, give little motive for either ever higher quality or greater volume.
If Directions 2025 is to succeed, the larger companies will have to radically change their previous mindset, and put their money where their mouth is, and the smaller producers will have to enthusiastically and persistently follow the lead of their larger brothers.
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