I travelled to New Zealand and Australia in March 2010. While in Australia I toured several cool-climate zones in the state of Victoria, visiting a number of small producers.
The highlight of the week in Victoria was a morning visit to Coldstream Hills where I interviewed James Halliday. James is a prolific writer and he has authored many books which are the benchmarks for their coverage of this country’s wines.
Halliday has enjoyed a varied, robust and accomplished career over the past 40-some years: as managing partner in a Sydney law firm ; as a merchant banker; as a winemaker, first at Brokenwood, then at Coldstream Hills, then as group winemaker for Southbrook and, as a wine writer and wine judge. He travels widely and spends one month of each year in Burgundy. He is not only an expert on Australian wine; he is an expert on the wines of the world as well as on winemaking and the business of wine. He is truly a 21st century wine Renaissance man.
My interest in meeting with Halliday was to hear directly his thoughts on the future of the Australian wine industry.
I have written earlier on the struggles that brand Australia is facing and I am saddened to report the negative news continues:
- Constellation Wines announced in early April an A$100 million write-down on its Australian wine business, a business that includes such well-known brands as Hardys, Leasingham, Banrock Station and Chateau Reynella. In the meantime, Constellation has sold a majority interest in its Australia and European wine businesses…
- Rumours are circulating that Foster’s, the huge Australian drinks conglomerate (Wolf Blass, Lindemans, Penfolds, Rosemount, etc.), is preparing to put its wine business unit on the market, possibly at a deeply discounted asking price, simply to stem future losses and write-downs.
- The sales value of Australian wine in LCBO Vintages was down 2% in the year ended March 31, 2010, the first decline in recent history, as buyers moved down market and as buying patterns shifted to other New World countries (Vintages sales of Argentinean wines increased 25% in value in the same period).
These factors – along with continued press coverage on over-planting, over-production, bad economics and the decade-long drought – provided the backdrop for my discussion with Halliday.
Halliday spent almost two hours painting a picture of Australia: where it has come from, where it is today and where it has to go.
The good news headline is similar to my earlier comment on what South Africa needs: the story of the variety and quality of Australia needs to be better told, in the face of growing competition from other New World regions.
It is noteworthy that Australia has grown faster and further than was contemplated when James and some of his colleagues developed the Vision 2025 outlook in 1996. At that time it was expected – ironically, against some serious skepticism – that Australia would mature to become a $4.5 billion wine producer by 2025. That goal was reached after 6 years in 2002 when $2.5 billion in export trade and $2.0 billion in domestic wine sales was reported.
The Aussie wine juggernaut was thus launched and huge, high-quality harvests in 2004, 2005 and 2006 created further momentum that has been hard to slow despite changes in economic conditions, global competition and poor quality harvests in 2007 and 2008. It is now – in 2010 -that the industry has recognized the current state is not sustainable and action is required.
James highlighted the structure of the Australian wine industry as composed of two distinct sectors. The largest is dominated by the commodity wine making conglomerates, the firms who focus on merchandising and price to command domestic (and international) market share. He calls this sector the bottom of the pyramid and the wines in this sector represent 90% of the domestic Australian wine market. The second sector is made up of an enormous number of mid-sized and small producers, many of whom make wines in such small quantities they never reach a retail store in Australia, let alone travel to a foreign market.
Halliday describes a bleak outlook for the commodity segment:
- Nielsen research has found that domestic brand loyalty at the low end is low/non-existent among consumers, who look for the lowest price when they shop for wine.
- The supermarkets in Australia command 60% of the overall wine market and accordingly have enormous buying power, comparable to that of Tesco, Sainsburys et al in the UK. A new development is introduction of “own-brand” wines by the supermarkets and this phenomenon has taken off such that unbranded wines now occupy third position in Australian wine market share.
- Tax reform is underway in Australia and one sector to be affected will be wine where the current ad valorem tax is expected to be replaced by a flat tax which will make low-priced wines significantly more expensive than currently and also result in high-priced wines experiencing some price drops. Currently wines are marked up by a 46% sin tax before hitting the retail shelf in Australia – sounds like Ontario n’est-ca pa?
- A third factor affecting the wine low end is water. Long term forecasts call for higher than normal rain in the Northern Territory and continued lower than normal rain in the south. Depending on where the big producers are located and which river system they rely on will affect irrigation capabilities and production. Producers who rely on the Riverina irrigation area represent some 40% of the commodity wine sector and they should have sustainable water supplies for the long term. This leaves over half the commodity wine production at future water supply risk.
- There is another water-related challenge. As reservoirs levels have plummeted over the past 10 years, saline levels have skyrocketed and there is a risk that sulphates could eventually poison the water.
- Cost of water is an additional factor. Because water availability is uneven, water rights are bought and sold, often at very expensive prices. The effect is to raise grape growing costs to levels higher than the prices the grapes fetch in the market affecting the ability of growers to continue to produce fruit that they sell to the commodity wineries.
In the meantime Australia has demonstrated strong regional links with specific varietals. For instance, Hunter Valley has become known for benchmark Semillon. Stunning Pinot Noir wines now are made in Tasmania, Mornington Peninsula and the Yarra Valley. Classic Rieslings are made in Clare Valley and Eden Valley. Chardonnays of extraordinary length come from the Yarra while Chardonnays of depth and texture come from Margaret River.
While wine has been made in Australia for over 200 years many of these wine regions are relatively youthful: for instance, there were only a handful of wineries in Mornington, Yarra and Margaret River in 1980. More effort must continue to develop regional-hero planting strategies and communicate the story of Australia to the export world. As James describes it, there are climate zones in Australia that range from Dijon in France to the south of Spain in character – and the variety of Australian wine styles reflects this climatic diversity.
The challenge for Wine Australia is to find the right marketing tools and the funds to deliver the message. This is a special challenge given the marketing success and rich funding of Chile, California, Argentina and even France. There is a great deal of competitive traffic in the wine world and targeted messaging will be required if Aus is to re-brand itself to the global consumer.
James described the Aussie approach to surmounting the challenge and it looks like it might be a winner. Activities started in 2009 with the first of what is now an annual, intensive one-week boot camp called the Landmark Australia program aimed at high-end wine writers. The Regional heroes program is now underway in several countries, including Canada as well as a series of local master classes aimed at local writers and sommeliers. The goal of these activities is to engage with the gatekeepers who influence buying practices.
The reality is the best Australian wines can compete with the best wines of anywhere in the New – or Old World and represent much better value according to Halliday. This is the core of the Australia-0f-the-future story and is the success that the small, craft producers have been able to achieve over the past 30 years. I am inclined to agree with James, based on a one-week tour though Victoria and am pleased to report you don’t have to pay Penfold’s Grange prices to find the noble wines James is describing.
Separate from the marketing messaging to its markets what does the future hold for Australian wine? James identifies three things that will (likely) happen…
- China will become the biggest wine market in the world and will single-handedly reverse the current gradual decline in world wine consumption. Australia is well-poised to exploit that development. China is already an important trading partner with China where coal, iron and even water are Australian exports. Today Australian wine accounts for 21% of Chinese wine imports (France – 45%; California – 8%).
- Widespread de-planting will occur. James estimates some 30 – 40 thousand hectares will have to be uprooted. These vines represent vines that should have never been planted in the first place or the wrong varietals that were planted in the right place. Better understanding of clonal selection, market fads, Phylloxera, fires, economics – all will lead to some combination of de-planting and/or replanting over the next several years.
- Australian wine styles will evolve. Harvest will be done earlier as the Aussies have figured that, for example, 13° Baume yields wines with more than 13% alcohol – as the Aussies work to reduce alcohol levels in their wines. There will be less intervention in winemaking, less use of American oak in favour of French oak for maturation and use of larger format barrels to reduce oak effect and slow down the pace of maturation. Sounds Old World doesn’t it? These are procedures already in use in many small wineries in Australia – I saw it for myself.
The visit with James Halliday was a highlight of my trip to Australia. James is one of the most gracious, witty people I have met in my life and he was generous beyond any reasonable expectation I might have had. I came away with a much better understanding of the dynamics of the wine industry in this amazing country as well as a more bullish outlook for Australian wines than I ever expected.
James publishes an entertaining and insider-view blog: http://australianwinecompanion.blogspot.com/. Check it out.