AUSTRALIA makes a lot of wine.
A lot of it’s cheap. A bit of it probably might be called nasty by fancy expert tasters, but overall Australia has established an international reputation as a reliable producer of reasonably good quality, great-value drinking.
In the past couple of decades we poured it down not only our own throats but into major overseas markets like the UK and Europe, the US, and increasingly Asia via brands like the kangaroo-adorned Casella label and other so-called “critter” wines, as well as a range of big corporate products.
We’ve ridden on the back of a global thirst for cheap plonk.
But something has happened to that thirst in the past five years and it’s changed the way one of our most glamorous industries operates.
The world isn’t drinking so much of our low-priced wine any more. They can get that cheaper from places like Chile and Argentina where production and transport to market costs are significantly lower.
This is hurting our export figures big time, according to peak industry body Wine Australia.
Its latest Wine Export Approvals Report reported the volume of wine exported fell 2.1 per cent to 698 million litres valued at $1.82 billion.
A major factor in the decline was a drop in cheap muck, bottled and bulk, sold overseas from $2.50 and below.
But, and it’s a big but according to Wine Australia, the world has developed a taste for more expensive Australian wine.
The volumes might be down across the board but we sold 14 million more litres in the $7.50 to $9.99 segment and 16 million more litres in the over $10 department.
The figures are encouraging, says Wine Australia’s chief executive Andrew Cheesman.
“The growth across higher price segments suggests Australia’s continued strategy to build a stronger perception of the quality of Australian wine is achieving cut-through,” Mr Cheesman said.
While the over-$7.50 segment actually accounts only for 4 per cent of our total volume of exports, it makes up 23 per cent of the dollars our wine producers earn from overseas sales.
“This segment is important to the sustainability of the sector and is a major focus for Australian wine exporters,” Mr Cheesman said.
“But there’s still a lot of work to be done,” he said.
Clearly, if figures revealed yesterday at the Australian Wine Industry Technical Conference in Sydney by Paul Evans, chief executive of the Winemakers’ Federation of Australia, are anything to go by.
In 2007, US consumers purchased around 77 million litres of Australian wine at US$3.75 and above but in 2012 only purchased 16 million litres at the same price.
At the top end, US wine connoisseurs purchased 1.5 million litres of wine priced at US$15 and above in 2007, but only half a million litres in 2012.
Profit margins around the world also have declined rapidly Mr Evans announced, and this was directly attributed to our exchange rate in the past financial year.
“While a rise in the Australian dollar might have been a trigger for the decline in Australia’s export performance (in most export markets), recovering lost share at profitable price points is not going to be a given, even with a structural adjustment in the value of the Australian dollar,” Mr Evans said yesterday.
“Our challenge in our traditional markets is more than just price.
“It is also about the health of the Australian brand,” Mr Evans said.
We’ve already had high-profile victims in the currency fallout plus the changing tastes for low-priced Australian wines.
Mega brand Yellowtail owner Casella Wines posted its first loss last financial year, turning from a $45 million profit in 2010-2011 to a $30 million loss.
It cited the high value Australian dollar as the reason its profit margins had collapsed, despite its eight million case turnover in the US being the main driver of the Casella success story up until then.
The company hopes to trade back into the black with the introduction of premium Barossa Valley wines into its portfolio as well as a new beer brand.
Now, Australia’s largest wine company Treasury Wine Estates also is taking drastic measures to shed its exposure to the commercial wine sector in the US, announcing it will destroy $35 million worth of wine and offering $40 million in discounts to move even more, aiming to establish its reputation with more quality product.
The company’s management obviously has been reading the same figures as revealed by Wine Australia yesterday.
In the US’s middle to aspiring $7.50-and-above segment we are showing rare positive signs, growing 15 per cent to 4 million litres in the past year alone.
Making inroads at this premium end of the market is a key focus for the Australian wine sector, Wine Australia commented in its report. We’re under-represented in this segment and need to get on board.
Treasury’s chief executive David Dearie agrees.
“The USA is the world’s largest consumer of wine and it’s growing, he said yesterday.
“It’s growing at the more luxury price points. That’s what the consumer is moving to.
“It’s a fantastic growth opportunity at the right price points,” he said.
But there will be impacts in other parts of the wine industry if Treasury writes down “some onerous grape contracts” as it seeks to reduce its stock loads in the US, Wine Grape Growers Australia chief executive Lawrie Stanford says.
“We will have to wait to see how it flows through the system,” Mr Stanford said yesterday.
“If they are talking about writing down contracts then it will clearly affect some growers, many of whom continue to face price pressures while having to reduce their costs.
“Most growers say they have been doing this for some time and there are very few avenues left for them to do more,” Mr Stanford said.
Growers have been in a miserable spot for quite a few years, Mr Stanford said, and while wine producers have been passing the market created grief onto growers, they are now starting to feel the same impact as some growers have been.
“Clearly there’s a need to sort it out,” Mr Stanford said.
“The industry is coming to the point where it has to make some very hard decisions.”