Things are looking up again for the Australian Wine Industry in its international markets – or are they?

China is a lucrative market for Australian premium wines.

Australia is not only the second largest bottled wine exporter to China with a 15% market share in value and 13% in volume but exports “are expected to rise by 50% over the next three years” (The Drinks Business, Oct 2013). This projection would make it surpass the current biggest export market, the US. Annual Chinese consumption growth (+59%) is way ahead of its production (+24%) and China is expected to become the sixth largest consumer of wine in the world by 2014. With a growing middle class interest in premium wines in particular and decreasing demand for EU imports, Dean Person the National Australian Bank’s head of industry analysis is predicting a huge potential for Australian winemakers.  Australia’s First Families of Wine visited China this year in a bid to highlight the quality and diversity of Australian wine and Mitchell Taylor, AFFW chairman proudly announced “Our Chinese launch was an overwhelming success”.

Opening high-end tasting rooms and cellars in China has proven to be a successful way to engage and penetrate this new market for wineries like Yabby Lake. This Mornington Peninsula winery has a presence in eight provinces with five cellar doors offering wine education experiences. Having a cellar door in the current market saturated with cheap and often counterfeit wines, offers confidence to the consumers. “There is a lot of scepticism about wine in China… that cellar door base gives the wine some credibility” says Duane Roy, winemaker of Glandore Estate.

Despite the love-hate relationship with the UK, Australia knows it can sell volume here.

The UK with its discount culture and consumption driven by brands is an opportunity and challenge for Australian big brand owners, if they are willing to listen and invest. Paul Schaafsma, UK and European head of Accolade Wine with its number one UK brand Hardys, believes that producers need to “closely engage with retailers and understand what their consumers want to drink” (Harpers, Oct 2013) to succeed. Accolade Wines has just signed a three-year deal with the UK’s largest retailer, Tesco. This may well bode well for Accolade, but it raises questions for that company’s Australian competitors that have yet to sign that kind of agreement.

Australians know how to throw a party.

Savour was one of the biggest marketing initiatives undertaken by the Australian Government and Tourism Australia. The event attracted 750 of the world’s leading wine trade professionals offering a potential economic benefit to Australia of AU$2.8 million according to The Advertiser. It demonstrated two key things. Firstly that Australian producers are aware of the current unprofitable situation. Exports have dropped visibly from AU$3 billion in 2007 to AU$1.8 billion in 2012 according to the Winemaker’s Federation of Australia. Secondly they are committed to innovation and willing to listen to the world. Paul Schaafsma praised the event’s “appropriate focus on Australia’s regional and premium wine offer” and highlighted its necessary balance. One of the positive outcomes was a three-year joint food and wine campaign between Tourism Australia and Wine Australia. The fact that both small and big producers got together to promote their wines shows an important commitment to the Australian future as a whole.

The weakening Australian Dollar is helping to stimulate sales again in the US.

The fact that “the single most important economic factor in the last 20 years affecting Australian wine has been the exchange rate” as suggested by wine economist Mike Veseth, shows how fragile both margins and retail prices can be. Prayers for exporters were answered early in 2013 when the Australian dollar started to depreciate. No one was more pleased than Casella Wines, whose brand Yellow Tail has 75% of its sales in the US.  They experienced their first ever-financial loss (AU$30 million) last year due to the exchange rate after 20 years of trading. According to The Drinks Business, Yellow Tail is now looking to regain its lost profit. Yalumba from the Barossa (Australia’s oldest family-run winery) has already achieved 300% sales growth in the US after the favorable exchange rate enabled the retail price of its Y Series to be lowered by $2 to $10.

However Australia is finding it tough to make a come back in the US.

Despite the promises of growth and restored quality reputation, there remain some doubts. Will Australia be able to grow its market share in the US? Will it be able to reclaim its profitability yet again? According to The Drinks Business, Treasury Wine Estate anticipates shipments to the US will fall by up to 2 million cases in its 2014 financial year. Further more, Paul Rayner, the chairman, suggested “the company may look to offload its US business after chief executive David Dearie was shown the door over a AU$160 million loss” (The Australian, Sep 2013). The business also revealed a 53% drop in profit, down to AU$42 million in 2013, causing the shares plunge from AU$6.50 to $4.45. Larry Gandler, a Credit Suisse analyst, echoed this saying that “The underlying problem in the US is the health of the brand because of underinvestment in marketing” (The Australian, Sep 2013). Mike Veseth also pointed out during his Savour speech that “US market is so fragmented with at least 52 wine markets and the consumers are so diverse with more than 40% of adult Americans not drinking any alcohol at all, it is a maze to find your consumers and the right distribution.”

The real test is whether Australia can learn from its mistakes.

Overproduction and overreliance to selling the volume through the UK and the US are still haunting the Australian Wine Industry.  Treasury Wines Estates was forced to pour AU$35 million worth of excess wine down the drain in the US (the equivalent of 500,000 cases) in July 2013. According to Bloomberg, a bumper grape crop this year is threatening to encourage further price cutting that could damage Australia’s quality image abroad (The Drink Business, Aug 2013). This calls for a review of Australian strategy.

Despite the fact that the industry has observed that the commercial grape oversupply causes distortion of the price and potentially the image, no effective solution has been find to tackle this issue. Muray Valley Winegrower chief executive Mark McKenzie lashed out after the outcomes of the Expert Review of the Wine Industry and said “It is ironic that the wineries blame fruit oversupply from independent growers for much of their woes, but they have not advocated any direct action to reduce excess production either through cool climate commercial wine grape production, or through the removal of excess wine production capacity” (Sunraysia Daily, Oct 2013). Whereas Mike Veseth spins more positive view and suggest that “Australia has come a long way toward alighting supply and demand in the markets and removing its excess capacity which various by regions yet there is still work to be done.”

Combination of all these thoughts justify the conclusion that yes things are, for many producers, looking up. Growing markets such as China are opening doors to Australian premium wine producers. UK thirst for promoted big brands will guarantee sales, even if margins will remain poor, for big brand owners. Savour has demonstrated that Australia has a good story to tell and is engaging with its customers. Yes exchange rates cannot be controlled, are hard to predict and have crucial impact on the margins but the current weakening of Australian dollar is stimulating sales. However, changes and strategy reviews are also due in order to tackle the wine surplus and falling prices. With the global consumption of wine exceeding global production of wine for the last 6 years, the new world is full of rising opportunities.