The situation in the Australian wine sector – plummeting exports and chronic over-production – is a curious one. With the feature on Aus this past release I decided to dig into the Australian challenge to better understand what has happened and what might be the solutions to resolve the imbalances.
I have written previously on some aspects of wine Australia: the rapid growth of the sector; the problems of multi-year drought conditions in some regions; the decision to undertake major de-planting of low-quality, unprofitable vines; the recognition that brand Australia needs to move up-market with greater emphasis on wines that reflect the place of their origin. These are all actions that need to be taken and I suspect they will eventually address many aspects of the problems faced by growers and distributors.
Australia has come from nowhere over the past 25 years to become the seventh largest producer of wine by volume. For example between 1995 and 2004 wine production grew 2.5 times, recording a whopping 10% average annual increase. Australian acreage under vine totaled 400,000 acres by 2009, ranking 12th worldwide and representing 2.2 of total global acreage. During this period only China among major wine producing countries has exceeded Australia’s growth in wine production.
Note, by the way the dissonant ranking: 7th in production, 12th in acreage. There must be some high yields along the way… see below for more.
Along with many countries in the New World Australia has experienced dramatic changes in domestic consumption of wine. Alcohol consumption in Australia has declined 1% per annum over the past 35 years with per capita consumption declining from 13.1 litres per person in 1974/75 to 10.4 litres per person in 2009/10. This decrease has been largely at the expense of beer consumption with beer share of market dropping from 70% to 44% since the mid-1970’s. During this period wine consumption grew so that wine share of market increased from 17% to 37% in the same period.
Despite the increased consumption of wine, local consumption did not keep pace with the growth in Australian wine production. Fortunately exports grew during this period and they grew rapidly. The global appetite for oaked Chardonnays, ripe and jammy Shirazes and early-drinking Cabernets was enormous and Aussie exports took off. Over the past decade exports grew at an annual rate of 11% such that today Australian exports consume roughly two-thirds of total wine production.
There is another element to Australian exports that should be noted: bulk wine. Today some 46% of wine exported from Australia is shipped in bulk. This is low-quality, high-yield wine used for bottling or blending in the importing country and this wine is one of the factors contributing to the global glut of wine that exists today.
Another factor in this complex equation is imports of wine into Australia. Imports have grown along with every other variable: from 3% of total local consumption in 2000/01, imports have grown to represent 12% of all wine consumed in 2090/10. The bulk of this imported wine comes from New Zealand and is largely wine made from the Sauvignon Blanc grape, a grape not widely grown in Australia.
The heart of the Australian challenges now lies in how to deal with growing inventories of wine. Because of growing volumes of wine made, combined with recent declines in exports, the oversupply of wine in Australia is another growing phenomenon. It is presently estimated that Australia makes 20% more wine than it sells. This means there is somewhere between 20 and 40 million cases of wine made annually that is surplus to demand. Unchecked, the growing imbalance between production and sales will see this number grow to levels which could destabilize markets if this wine were to be dumped.
Reduced demand/oversupply in the vineyard is the source of the final factor: domestic grape prices are in decline. Grapes are a commodity and when quality is low or when demand is low or when supply exceeds demand, prices will fall. Producers are under financial pressure and this will have its corrective effect. Vines will be pulled for other crops.
During this period of phenomenal growth for Australia there have been dramatic changes in global consumption patterns. Global wine consumption actually declined between 1980 and 2000 by an average of 1.4% annually. Since 2000 consumption has been steady, in line with population growth, although it declined by 2.0% between 2008 and 2009.
In the Old World there has been a steady decline in per capita consumption of wine. For instance the rate of decline has been almost 1.5% per annum in France from 63 litres per person per year in 1995 to 54 litres per person per year in 2006. Italy has shown similar decreases in per capita consumption of wine.
On the other hand consumption of wine has increased in the new World: by 1.9% per annum in the USA, 4.4% in the United Kingdom and an astounding 6.5% in China.
Similarly production in place like New Zealand, Chile, Argentina and South Africa has grown. All these elements have created a highly competitive export market place: more wine coming into a global marketplace where growth in wine consumption is stagnant or in decline
Add to the mix, the fact that wine consumers are faddish. Yesterday’s Chardonnay became today’s Sauvignon Blanc and tomorrow’s Sauvignon Blanc will be Torrontes or Riesling. Consumer tastes are evolving to appreciate lighter wines – body and alcohol, both – with more elegance, higher acid and more food-friendly character being sought by palates that are maturing. If you are offside on changing tastes you can be left behind. Australian acreage is dominated by Shiraz (30% of all vines), Chardonnay (18%) and Cabernet Sauvignon (17%). Uprooting vines will involve major shifts in plantings and decreases in production while the new vines reach maturity…
Price is another factor. The Australian dollar trades today at almost par with the US dollar (compared with approximately A$.70 per USD at the turn of the century), making Australian wines more expensive to export markets. This is a major deterrent in the low end of the market and in the bulk wine sector where buyers are much more sensitive to changes in price than changes in quality.
The point of this somewhat turgid exposition is to say there are some serious issues faced by Australia that other growing producers need to heed.
First, growth is good but it needs to be managed: vine planting, types of grapes, yields, etc. all need to be carefully managed Wine Australia had an ambitious goal, stated in the Vision 2025 strategy developed in 1996, to become a $4.5 billion industry by 2025. That goal was achieved in 2002. Clearly something was out of control during this period of phenomenal expansion.
Secondly, diversification of markets and products is essential. Australia ships 63% of its exports to the UK and the USA. If currencies work against you and you are selling wines that can be easily substituted (i.e. cheap bottles or bulk wine) your markets can abandon you overnight.
Thirdly, a regulatory process with teeth is required in an expansionary environment. Such regulatory regime must be granted the power to address and correct under-performers – be such underperformance be in terms of quality and/or economics. Once a steady state is achieved this form of regulation is to be avoided. But in the meantime it is required to avoid distortions in supply and quality. Some of this regulation can be provided by lenders and I expect the ag-lending community in Australia is actively calling loans as I write this piece.
All this said, we will see case studies on Australia hitting the classrooms at UC Davis and the University of Adelaide over the next few years. This is a case that is still being written as this great country pulls itself together. The Australian people are resilient and resourceful so rest assured they will find a successful resolution to their challenges.
In the meantime, buy Australian wine.
Copyright© W. John Switzer 2003 – 2012.