 |
Regional Analysis |
|
|
Page 1 of 7 |
|
|
| December 12th 2006 |
|
| Brand Australia - past, present & future |
by James Halliday
Australia is currently the victim of its own success. While clinging to its status as the dominant supplier to the United Kingdom and perhaps soon to the United States, the average export value per litre has steadily fallen over the past two years, exacerbated by bulk sales.
|
|
|
It is a little known fact that between 1924 and 1940 Australia exported more wine to the United Kingdom than did France. It was fortified wine, which arrived in barrels, and due to bacterial spoilage, was nothing to be proud of. When trade resumed after the Second World War, Australia was nowhere to be seen, and its efforts between 1945 and 1980 are best forgotten. Likewise, its exports to other parts of the world were insignificant, barely changing over the 35 year period, hovering under 2%. In 1985 Australia imported 13 million litres, and exported 8.7 million litres.
Today, Australia exports 738 million litres each year, earning $A2.8 billion (1.67b), and imports 22.1 million litres at a cost of $A188.2 million (€112.3m). Appropriately enough, it all started in the United Kingdom, spreading in due course to the United States. The drivers of change were many and various: the 1984 trip to Australia by the Institute of Masters of Wine; the ground breaking efforts of Bob Oatley and Chris Hancock of Rosemount; the willingness of Australian winemakers, rather than marketers, to follow their product to market; and, arguably the most important, the role played by Hazel Murphy in ’putting the glass in the hand of consumers’ as a low budget marketing campaign by the Australian Wine Bureau in London.
The initial reaction to the highly flavoured, luscious wines, especially chardonnay, was one of shock and awe, but High Street merchants and supermarkets soon found that, regardless of the critics, consumers returned en masse to buy ever more wine. Brand Australia, built on sunshine-in-a-bottle, was born, and rapidly built upon its own image. It was the era of the varietal wine, and the chardonnay-shiraz-cabernet sauvignon trio reigned supreme. What mattered was that they were from Australia, not from which region. It would be ultimate folly for all too clever marketers to walk away from Brand Australia – and the recent decision by Lindemans to make wine in other countries is deeply worrying. It was fine when French coops in the Midi employed Australian Flying Winemakers and sold their wine in the UK with ’made in the Australian fashion’ emblazoned on their labels, but that was moving the people, not the place.
The Lindeman move devalues the sense of place, the uniqueness of that place, at the very time the urgent challenge –and opportunity – for Australia is to focus attention on the 62 regions officially demarcated as Geographic Indications. These offer an equivalent number of combinations of soil and climate, terroir, if you will, ranging from very cool (as cool as Champagne or the Mosel Valley) to very warm (as warm as Montpellier, Jerez or Lodi).
There are the clearest possible links between terroir and variety: Hunter Valley Semillon; Clare and Eden Valley Riesling; Margaret River and Yarra Valley Chardonnay; Adelaide Hills Sauvignon Blanc; Coonawarra Cabernet Sauvignon; McLaren Vale Grenache; Tasmania, Yarra Valley and |
|
|
|
|
|
|
|
|
Regional Analysis |
|
|
Page 2 of 7 |
|
|
Mornington Peninsula Pinot Noir; Margaret River Cabernet Merlot; Tasmania Sparkling wine; Rutherglen Muscat and Tokay, fortified wines with generic name changes under way. Shiraz, and Chardonnay, are the odd men out, particularly the former, which thrives in almost every region, albeit with different expressions. Australia must unlock elusive marketing money and time to take the best of these wines at $10 or more ex cellars to its customers around the world. If I were a wine dictator, I would repeatedly stage blind tastings against the other varietal leaders, the other world styles, and let the results speak for themselves. Getting there to do it is the problem.
A brief history
The Australian wine industry has been through three phases in the past 50 years: stable total production between 1956 and 1966, with the red to white wine split being more or less equal. Next, doubling of production by 1976, all on the back of the first red wine boom; then another plateau to 1986, but with the red wine share commencing a decline, hitting in percentage terms its all time low back to the 19th century in 1996; then soaring production from 1986 to 2005, with red wine once again on the ascendant. These figures show a highly dynamic industry, responding rapidly to market forces with minimal government interference other than the imposition of punitive taxes on domestic sales, which are effectively over 40%.
The structure of the industry
Whether the largest producers are rated by wine grape intake, by vineyard holdings, by sales of branded wines or by size of processing facilities, the outcome is much the same: the top 20 producers account for over 90% of the country’s production, the more than 2100 other wineries sharing the remainder. The Australian Wine Industry Directory (Winetitles, Adelaide, 2006) uses information provided by wine companies – and estimates of its own for Hardy Wine Company, part of Constellation, which does not provide data – to provide the branded wine table. It should be noted Southcorp and Beringer Blass are now part of Fosters, a parent company contemplating yet another name change as at October 2006.
The small wineries
The 1900 or so small wineries are sharing the pain of an oversupplied market, but in varying degrees. If the base of the pyramid slips downwards, the point at the top must follow. The discount phenomenon, and the concentration of power in the supermarket chains, is the bedrock of retailing in both Australian and the United Kingdom. The routes to market for the small producer are becoming ever more congested; in the domestic market the independent retailers, restaurants, the internet and – most importantly – cellar door trade are increasingly vital. For the smaller wineries, a 26% wine equalisation tax refund from the Federal government on the first $1 million of sales has been of great assistance. Exports have been a boon for some, a fool’s paradise for |
|
|
|
|
|
|
|
|
Regional Analysis |
|
|
Page 3 of 7 |
|
|
others.
Playing the rationalisation game
The acquisition of the Hardy Wine Company by Constellation, and the more recent takeover of Southcorp by Beringer Blass, has continued a pattern of rationalisation which has had several phases of peak activity since the late 1960s. The pot of gold stemming from production, distribution and marketing efficiencies has been elusive to say the least. Stripping off balance sheet items such as wineries and vineyards, but retaining the brand and using creative accounting to revalue wine stocks downward, has been a repetitive strategy. The longer term outcome has been the steady erosion of market share held by once proud brands.
Throughout this 35 year period one item of common wisdom has been held dear: that the medium-sized, family owned and run companies will be squeezed out of existence by the pressure from the big companies above them, and the rapidly increasing number of small, quality oriented wineries underneath them. The three companies at the epicentre of this assumed, though probably real enough pressure were Yalumba, Brown Brothers and Tyrrell’s. Rather than succumbing, they have prospered, and have been joined by Angove’s, Kingston Estate, Grant Burge and Taylors and others, all of which remain family owned. Standing conspicuously to one side is Casella, a fairy tale story touched on earlier, and which in 2006 expected to crush 150,000 tonnes (compared to its 2005 crush of 126,000 tonnes). So far as outsiders can see, it is turning the oversupply and tough times to its advantage, but its growth cannot go on forever.
Grape and wine production 2005
South Australia remains the clear leader, followed by New South Wales and Victoria, the other states varying distances back. The only comments of significance are firstly that in 1960 around 90% of Australian’s wine production was fortified compared to today’s 1.4%; secondly, that rosé, while rapidly increasing, still represents too small a percentage to be separately recorded; next, that the Queensland figures are anomalous, but with no official explanation; and lastly that ABARE forecasts show Tasmania, albeit from its small base, and the Limestone Coast Zone of South Australia as likely to show the strongest growth through to 2008.
Rapid varietal change
The dynamism is even more clearly shown by the recent changes in unsubsidised varietal plantings including projections through to 2008 by ABARE The two key drivers are shiraz and chardonnay, the latter expected to rise by 19% between 2006 and 2008, compared to 9% for shiraz.
Planting
The seven-year decline in the share of white wine production, from 61.85% in 1998 to 41.48% in 2004, has been halted, with a rise to 44.46% in 2005. The unlikely hero, in some people’s eyes, is chardonnay, which continues its long march, up from 311,000 tonnes in 2004 to 378,000 tonnes in 2005. If you look back to |
|
|
|
|
|
|
|
|
Regional Analysis |
|
|
Page 4 of 7 |
|
|
1998, the chardonnay crush was only 148 000 tonnes. Whatever café talk may be, the ABC of chardonnay is „always bring cash“, not „anything but chardonnay“.
On the other side of the ledger, the decline in cabernet sauvignon from 320,000 to 284,000 tonnes comes as no surprise. With both chardonnay and cabernet sauvignon, the change in tonnage is also reflected in the hectares planted. Shiraz is the unexpected odd man out, its tonnage fell, a surprise in itself, from 437,000 to 415,000 tonnes, while plantings continued their steady increase since 2000. Prior to that time the increase was tumultuous.
So did any major red variety hold the line? Yes, merlot did so; although new plantings have come to a halt, yield from plantings made between 2001 and 2004 lifted total tonnage from 124,000 to 133,000 tonnes. Although it is very useful as a blend component with cabernet sauvignon, merlot has fallen from favour as a varietal wine with wine judges and some winemakers. It is also true to say it has been planted in areas where the climate is too warm, and there is an element of shooting the messenger when it comes to regions to which it is in fact suited.
The question is whether ABM will mean „anything but merlot“, or „always buy merlot“. The pundits have been wrong about chardonnay, and it is possible the same will apply here. Nonetheless, I think we will see merlot drift downwards in the years ahead. On the other hand, petit verdot, the only statistically important variety captured in the ’other red’ category will likely see its 2005 crush of 25 000 tonnes increase.
Exports: A background snapshot
The figures for the top five export markets for Australian wine show continuous growth in volume for the past five years. However, with the exception of Canada, and to a lesser extent Germany, value growth began to falter in 2004. For all that, the overall average price per litre (all markets) is still second only to New Zealand. Moreover, if the surge in bulk exports diminishes, the value will rise again. The key bulk market may well remain China, where much of the Australian wine will disappear into an opaque oriental labyrinth.
Export markets
United Kingdom: After the dramatic rise in exports between 1985 and 1995, many observers declared the growth rates could not be sustained, and that Australia’s market share would not continue to increase. In fact, the growth continued unabated until 2004. What was overlooked was the increase in per capita consumption: the market was growing year-on-year, in stark contrast to continental Europe, and Australia’s share was also rising. It may be a temporary pause, but by 2006 growth in consumption had stagnated, the 20 year honeymoon with wine apparently over. Moreover, while Australia is clearly number one, France still dominates on-premise – and particularly white tablecloth restaurants. It is |
|
|
|
|
|
|
|
|
Regional Analysis |
|
|
Page 5 of 7 |
|
|
an area in which Australia has an opportunity to gain share, and at higher prices and margins. Little more need be said about this ultra-competitive, discount and supermarket dominated market.
United States of America: Partly due to the high prices of Californian wines, led by the Napa Valley, partly to the three-tier distribution system, and transiently to the weakness of the Australian dollar, the United States has been a more profitable market than the UK if the average price per litre is taken at face value. However, the three-tier system is under sustained legal attack, which will reduce the interstate marketing costs but increase the supermarket (Costco, Wal-Mart, etc) power, and with it, discounting. Moreover, the average price has been sustained by the high-priced, flamboyant red wines which are losing their novelty attraction. Finally, low-priced, ’little critter’ wines have taken prime position, all factors contributing to a continuing fall in the per litre value. Canada: Has surpassed the US in value per litre, and has continued to grow in size, but, here too, prices are falling. It nonetheless remains the third most important market, with a genuine interest in and appetite for Australian wine across all price points, with almost 50% above $A5 per litre, compared to 16% for the UK and 22.6% for the US.
Germany: This has remained an elusive market for Australia, particularly given that it is the largest importing country in the world, with a particular focus on red wine. The reasons are the fragmented regional markets, the opposite of the UK with London to all intents and purposes the ’single desk’, and the low prices the market is prepared to pay. Its $1.99 is third only to France ($1.75) and China ($1.56). Germany’s purchase of $5 and above is a derisory 7%.
New Zealand: The plusses are its geographic closeness to Australia, a free trade agreement, and – like Germany – a need for red wine. Unlike Germany, it all works to overcome the tiny population: on a per capita basis it consumes more Australian wine than any other export country. The above $5 take is 21%.
Cloud or silver lining?
The most important driver of growth in the Australian industry for the past 20 years has been exports, which now put it in fourth place in value terms after France, Italy and Spain. However, since a high point in value per litre in 2001 of $4.76, the highest of all exporters other than New Zealand, there has been an accelerating decline on a year-by-year basis.
ABARE forecasts that volume growth will continue at a lower annual rate of 14% to reach just below one billion litres by 2008, with a continued decrease in average value of around 7% to $3.66 per litre. As Table 2 shows the impact that exchange rate fluctuations have played (and will continue to play) on FOB earnings. This apart, the major reason for the decrease in the value per litre is the large |
|
|
|
|
|
|
|
|
Regional Analysis |
|
|
Page 6 of 7 |
|
|
increase in the volume of bulk wines.
Australia had largely vacated the bulk market in the end of the 1980s after Sweden, in particular, recovered from the Chernobyl scare, and turned back more to its traditional markets. It has been forced to return to bulk exports for two reasons: first, to sell unbranded surplus wine at low prices to third party purchasers; and second, to reduce shipping costs and time cost of packaging expenses of branded wines.
Thus, growth in bottled table wine sales has almost ground to a halt; all of the growth has been in bulk or, in the case of red wine, soft packs. Bulk wine accounted for 87% of the overall growth in volume in the 12 months to June 2006.
The cloud is, of course, the decline in value per litre and the near-stagnation of bottled wine sales increases. The silver lining for those who wish to see it is the re-entry of Australia into the bottom tier of the UK market, in particular, capturing new wine entrants at the lowest price point. The same can be said of the nascent Chinese market. The alternative view sees the lack of product control and the loss of aspirational positioning as great dangers.
The [yellow tail] phenomenon
In a press release of March 2006 Casella Wines announced, amongst other things, that it had recently exported its 25th millionth case of [yellow tail], from a standing start three years earlier. Indeed, while hard figures are difficult to come by, it would seem that [yellow tail] was the sole factor preventing a significant decline in bottled wine exports.
On the other side of the coin, it has reinforced the cheap-and-cheerful, sunshine-in-a-bottle image of Australian wine, selling for around $US6.99, £5.49 in the UK, and well under $A10 in the domestic market. While grape prices continue in real terms at all time lows Casella will continue to expand off the back of real profits, and presumably has plans in place to deal with the recovery of balance between grape supply and demand, whether that be in one, two or three years time.
Grape supply and prices
The Australian wine industry formulated a ground breaking 30 year plan in 1995, and published its assumptions and objectives for all to see. It assumed a steady increase in grape plantings over the 25 years to 2020; in fact those plantings took place less than 10 years, driven by a mix of optimism, modest taxation breaks in the ability to offset establishment losses against other income, and soaring exports. By the end of the 1990s, the return per hectare for vineyards in the irrigated Riverland and Murray River regions exceeded all other broad acre agricultural or pastoral activities.
Grape growing is no different to those other activities when it comes to cycles of prosperity and of severe economic hardship. Once might argue the only thing surprising about the surplus was that it took as long as it did to materialise. In the 2005 vintage, ABARE calculated 60,000 tonnes of grapes were |
|
|
|
|
|
|
|
|
Regional Analysis |
|
|
Page 7 of 7 |
|
|
left unharvested; there are, as yet, no official estimates for 2006, but there may have been up to 100,000 tonnes unsold, or just over 5% of a potential harvest of 1.96 million tonnes.
A significant further decline followed in 2006 taking the two-year reduction to between 26% and 57%, depending on the variety, in the Murray Valley. Lower grape prices mean lower wine costs, and should underwrite a modest recovery in Australia’s competitiveness in international markets.
Australian grape growers are a pragmatic lot; rather than blow up wine tankers, they are variously looking at vine removal or low-cost care and maintenance regimes effectively mothballing vineyards until prices recover. While spot market prices of $A200 a tonne, less than the cost of production, were paid in 2006, fewer such instances will occur in the future. Moreover frost damage may radically change the balance of supply and demand.
Those who are suffering
In one way or another, and to one degree or another, the endless blue skies between 1993 and 2003 are now obscured by clouds, and in some quarters, thunderheads. McGuigan Simeon and Evans & Tate are substantial public listed companies which have had no option but to disclose their economic woes, and to savagely write down the value of stock on hand. It would be surprising if Evans & Tate were not to slip down, perhaps even out of the top 20 in the 2006 rankings. Smaller listed companies such as Cheviot Bridge, which acquired the Long Flat brand from Tyrrell’s for a cool $A10 million figure, Simon Gilbert Wines, with some former Southcorp key executives in control, Palandri, which is listed in both Australia and London, but with trading in its shares halted on September 20 while a complex restructuring process was engineered, and Dromana Estate have all had poor results for the 2006 financial year, with only Cheviot Bridge clinging on to a small profit. The sharks are circling.
Frost, fire and pestilence
Some months ago, Brian Croser raised the possibility that extensive frosts might severely reduce the 2007 crop, particularly in the engine room of the industry along the Murray, Murrumbidgee and Goulburn Rivers. At that stage the El Nino event, which brings lower than average rainfall, was not certain, but a severe two-year drought was already in place. Clear skies and dry soil are frost incubators, and the frost season from mid October to mid November was then some time away. El Nino is now official, and in the last few days of September a severe frost killed all the Goulburn Valley stone fruits, also causing significant vineyard damage. A few days later Coonawarra in South Australia and the Grampians in Victoria were also hit by frost. The earliest bushfire season has ironically been declared, again due to the drought, dry soil and parched vegetation. It will be a miracle if further significant frost damage is avoided. The cure may be more painful than the illness, but if it eventuates grape prices are more likely to rise than to fall.
The China Conundrum
In the decades ahead, the Asian market from India to Taiwan and South Korea, will become of prime importance to Australia, at some point challenging the United Kingdom and United States. China will be the centrepiece, but no one should build a short term business model on that proposition. Exports to China in September 2006 have soared on a moving annual total basis up 519% by volume and 133% in value. But while its $26 million value places it in seventh place among Australia’s overseas markets, 80% of the wine was bulk at an average price of 61 cents a litre, and its average for all wine, including bottled products, was only $1.61, the lowest of all export markets. Profitless prosperity indeed!
|
|
|
|
|
|
|
|
|
