The writing on the wall

The global financial crisis has magnified the growing oversupply of Australian wine. To go forward, the industry might have to take a step backward, writes Charles Gent

06 January 2010

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Photo: Alan Hoare

VISITING an ageing Hunter Valley winery in the late 1950s, wine aficionado Max Lake was struck by a faded notice on the door, apparently dating from the Great Depression. Beneath the forbidding heading “Warning to Growers,” it read: “Owing to the dangerous position arising from Overproduction, Growers are warned against any further planting of Wine Grapes.” Beneath the text was the name of Herbert Kay, chairman of the Australian Wine Board.

Two months ago, the Wine Board’s modern equivalents slapped a similar notice on Australia’s wine producers. Issued jointly by the Winemakers’ Federation of Australia, Wine Grape Growers’ Australia, the Australian Wine and Brandy Corporation and the Grape and Wine Research and Development Corporation, the statement is more wordy than the 1930s edict, but equally blunt in its message. It states that Australia is producing twenty to forty million more cases of wine than it can sell each year, and that the current surplus stockpile, calculated at more than 100 million cases, will double in two years if current levels of production and demand persist.

The statistics lead to the bleak but unavoidable conclusion that oversupply has become a chronic, structural problem: “Comprehensive analysis and consultation suggests at least 20 per cent of bearing vines in Australia are surplus to requirements, with few long-term prospects.”

Many wine and grape producers did not need to be told; they have been living on an economic knife-edge for years. But if the existence of a massive oversupply and a mounting surplus is no secret, the bald acknowledgement by the industry’s peak bodies that a fifth of the wine grapevines in Australia are redundant still carried an element of shock.

While the joint statement talks of the consequences in terms of devaluing the Australian brand, entrenching discounting, undermining profitability and hampering long-term strategies, some very direct effects of oversupply are already discernible, with major wine companies selling off premium vineyards (and simply abandoning them if buyers can’t be found) and divesting themselves of wineries, some more than a century old. Another visible sign of glut can be found at wine shops and cellar doors, where discounting is the order of the day and piles of cleanskins or bottles bearing export labels betray cancelled overseas orders and an accumulation of unsold stock.

So, how did it come to this? Perversely, it seems to be a legacy of success. In the last two decades of the twentieth century, Australian wine was the beneficiary of an unparalleled boom in exports, spearheaded by an English infatuation with wooded chardonnay. The trajectory of sales was dizzying: in 1984–85, the volume of wine exported to Britain was less than 600,000 litres; by 2001, the figure was 183 million litres. Most notably, the comparatively cheap and cheerful (albeit well-made) Jacob’s Creek range in Britain and Yellow Tail brand in the United States enjoyed an extraordinary run of sales.

It appears that many people inside and outside the industry took on a bullish confidence, imagining that the annual increments in export orders would continue indefinitely. In reaction to the export bonanza, the planting of new vineyards took off almost vertically: between 1996 and 2000 the area under vines in Australia very nearly doubled, reaching 115,000 hectares. This veritable frenzy of planting was sustained by a vision of unlimited export earnings and underwritten by a welter of investors keen to exploit tax breaks.

Many industry figures considered the massive plantings a desirable and necessary corollary of the soaring offshore demand, and traditional grape-growers who expressed misgivings about the rate of expansion got short shrift. As president of the Winemakers’ Federation in 1999, Brian Croser described their concerns as a “Luddite viewpoint” and called the tax scheme plantings “a great resource.”

Much of this resource has since become an albatross around the industry’s neck. A multiplicity of factors – including the high Australian dollar, the global financial crisis and a trend towards lighter wine styles – has combined to set the great export surge back on its heels. The apparently inexhaustible demand is now far outstripped by supply.

While the GFC is undoubtedly a factor in falling exports, few hold the recession to blame for the sector’s fundamental crisis. Winemakers’ Federation CEO Stephen Strachan sees global economic problems as an aggravator of other more endemic problems. “The broader issues that are driving the industry are somewhat unrelated to the GFC, and they are having a bigger impact on us,” he told me.

Nonetheless, the GFC is a major factor in the decrease in Australian wine export volumes, which have fallen by 10 per cent in each of the past two years. Demand in Britain in particular has dropped off significantly, and Strachan says drinkers are also “trading down” – moving to cheaper brands. While they are spending less, they have plenty to choose from. “There is a price war in the UK, led by the major retailers and driven by the fact that there’s an international surplus, so that they can pick and choose in terms of what they put on the shelves,” Strachan says.

The most active area of sales is in wines that sell for between £3 and £9 ($5 to $16 Australian), Strachan says. “Australia is caught up right in the middle of that because we’re in surplus. What we’re finding is that wineries have a pretty stark choice; that is, to sell at a very low margin or a loss, or not sell.”

The virtual duopoly of wine retailing in Australia has parallels in Britain, and some of the larger wine companies have found themselves locked into deals with Britain’s major supermarket chains that tend to operate to the retailers’ advantage. And Australian winemakers are not the only sufferers in the protracted price fights; a major owner of British wine retail chains, First Quench, went into receivership in October, closing hundreds of shops and losing thousands of jobs in the process.

It’s one thing to discount your own product discreetly, but quite another when foreigners start to do it with a fanfare of publicity. In July, the bargain-basement sales of bulk Australian chardonnay into an already depressed American market by the US-based Bronco Wine Company sparked considerable agitation in Australia.

Bronco’s, whose mainstay is cheapie Californian brand Charles Shaw – also known as “Two-Buck Chuck” – bought a large consignment of Australian chardonnay, labelled it as Down Under Chardonnay and sold it for US$3 per bottle. The company’s CEO, Fred Franzia, who is fond of a headline, asserted that Australian wines in the United States were overpriced: “We’re going to pound them for a while,” he said. Response in the local press was predictable; Australian winemakers said selling identifiably Australian wine at bottom-rung prices was cringe-inducing, while the Australian Wine and Brandy Corporation’s marketing strategist Paul Henry denounced Franzia’s opportunism and was even quoted as saying he would have preferred the wine to be destroyed rather than dumped on the US market.

Stephen Strachan takes a phlegmatic stance on Franzia, and again points the finger at oversupply as the real culprit. “It’s a purely rational response in a market that is oversupplied,” he says. “I would argue that it’s not sustainable, and at some point growers – or anyone in the value chain that’s supplying the product – would have to make decisions about whether they continue to invest in that sort of activity.”

The plentiful availability of retail and mail-order cleanskins – unlabelled bottled wine – is one indicator that many wineries are doing their best to shed surpluses at home as well. And while Strachan does see local flow-on effects from the GFC, he says there is more evidence of resilience here. “In the Australian market, the $30-plus price point has gone backwards, which is what you might expect; at the bottom end there’s a lot of shift away from branded wine towards cleanskins. There’s a lot affecting the wine business, but if you look at what consumers are consuming, it’s about static, and we’re seeing actual growth in the $10 to $20 price point.”

There is another vinegar-fly in the vat, though, and that stems from the share of spending in the $10 to $20 band currently devoted to New Zealand sauvignon blanc: imports of the Kiwi white reached an extraordinary twenty-seven million litres in 2008, leading one South Australian politician to suggest it was our patriotic duty to drink local versions in preference. “From an industry point of view,” says Strachan, “it’s up to us to knock off the New Zealanders with Australian wine, but the reassuring point is that consumers are continuing down that march towards premium products.”

UNITED STATES–based Constellation Wines, one of the world’s largest wine companies and owner of the Hardy’s, Banrock Station and Stonehaven labels, is one major company that has begun its “readjustment” with a vengeance. It has closed down the historic Stanley Leasingham winery and vineyards in Clare and is shutting down a substantial part of its Padthaway vineyards.

Explaining his company’s drastic actions, a Constellation spokesman made reference to “unprecedented negative conditions” in the market. He was clearly no student of history: far from being without precedent, the cycle of boom and bust in the Australian industry is a very familiar phenomenon, at least to wine historians and economists. Looking at what came before the export-driven boom of the 1980s, wine economist Kym Anderson identified no fewer than four booms: in the 1850s, the 1880s, the 1920s and the 1940s. Each of them, he said presciently, was followed “by a long plateau and a large decline in grape prices.”

Ironically, Thomas Hardy, the aptly named migrant from Devon, was one of the few successful survivors of Australian wine’s first big crash. Initially fuelled by the thirsts of the goldrush and an expectation that Britain would provide a ready market for colonial wine, the boom’s momentum was dragged down by transport costs and high British tariffs. And thanks to a rash of copycat wine growers who produced large quantities of indifferent and often bad wine, colonial wine rapidly acquired a dodgy reputation. Australia’s major horticultural periodical, The Garden and Field, summed up: unskilled producers had generated “an almost general dislike of colonial wine, and even that which was really good became neglected.” Those words carry more than a little resonance today.

Reputation remains a crucial aspect of the fortunes of Australian wine abroad. The wine press in both Britain and America gave Australia a very smooth ride throughout the boom of the 1980s and 90s, but their enthusiasm appears to have soured.

Since the late 1980s, the pivotal concept in the international promotion of Australian wine has been Brand Australia, a marketing strategy that (very successfully) touted the generic character of Australian wine as flavoursome, fruit-driven, clean, reliable and good value for money – or, more glibly, “sunshine in a bottle.”

But for several years there have been dark murmurings in the British press about our wine quality, featuring such unflattering adjectives as “bland,” “simple” and, perhaps most tellingly, “industrial” or “corporate.” The Observer’s Tim Atkin wrote in 2001 that he had begun to approach tastings of Australian wine with “a mixture of boredom and distaste.” Leading English wine scribe Jancis Robinson, writing in the Financial Times in April 2009, claimed that our exports have moved from being revered to reviled, and that interest in Australian wine in both Britain and the United States “seems to have evaporated as rapidly as a puddle in Alice Springs.” Australia, she wrote, is becoming “increasingly synonymous with cheap wine.”

Temporary expatriate English wine writer Andrew Jefford, sojourning in Adelaide, concurs. In a recent speech to the Wine 2030 Research Network conference he argued that Brand Australia has become “faceless and formless” and is “morphing from an asset to a liability.” As an acolyte of terroir and “wines of place,” Jefford is a fan of Paul Henry’s Regional Heroes program, but dryly observed that the international wine press will applaud regional characteristics only if they can find them.

One very positive step is being taken to re-engage the affections of British wine journalists. Hazel Murphy, the enterprising Austrade official who invented the concept of Wine Flights seventeen years ago to show off Australian wine to the British trade, is back in harness. She has organised forty journalists, importers, retail buyers and sommeliers to tour this year.

YOU HAVE to feel a little sorry for Paul Henry, who as manager of market development for the Australian Wine and Brandy Corporation is architect of the new strategy for promoting Australian wine overseas, Directions to 2025. It’s hard to talk up the image of Australian wine and promote a higher value product when all the pressures are forcing prices downward.

In the past two years, Henry has committed the corporation’s promotional budget to elevating the perceptions of Australian wine, moving it up, he says, from being thought of as a great everyday drink to being regarded as a great drink. One of his tactics is to focus on our wine’s regional characteristics. Regional Heroes is playing to the notions of terroir and typicité so beloved of the Europeans, with the idea of getting the overseas market to buy wine in higher price brackets.

The idea of inducing overseas buyers to “trade up” is hardly new. In an Age column in the 1960s, Melbourne wine merchant Dan Murphy urged winemakers to “forget about exporting cheap, fruity Burgundy to the boarding houses of England. Our future export trade is to ship choice vintages to the best homes in the world.”

But it has proved difficult to implement, especially as for most of the past decade or so, Australia’s major export markets for wine, Britain and the United States, were more than happy to purchase multi-regional blends made in industrial quantities. The big companies, too, have been mostly content to service their cash cows, the so-called branded commodity wines. But it seems that Paul Henry’s efforts to shift our emphasis are warranted. Our once unique trick of mass producing tasty, reliable wines has been adopted by several other wine-making nations, some of which, especially in South America and eastern Europe, enjoy much lower labour and production costs.

Stephen Strachan agrees that competing on virtues such as regional character and even our environmental credentials is vital to persuading overseas wine drinkers to “trade up.” He is also hopeful that new markets, China in particular, will help to pick up the slack left by faltering British and American demand. But before any of it can be achieved, he says, the problem of oversupply needs to be resolved.

Remedies for huge structural oversupply, however, are not easy to engineer: the wine industry remains in many ways unregulated, and the federal government has little interest in interfering. When it last attempted to address oversupply in 1985 by means of a compensated vine-pull, the results were controversial and often counterproductive. Attrition hasn’t worked so far either: Strachan says the hope that reduced water allocations along the Murray would persuade sizeable numbers of growers to leave the industry has not been realised. He says many growers still remain hopeful of an increase in grape prices and have failed to come to grips with the magnitude of the oversupply.

Many of the large wine companies, however, have read the writing on the wall; they are taking in less fruit, and have made it clear that their intake will come down by 20 per cent over the next three years. “As they do that,” says Strachan, “there will be more and more growers with no outlet for their grapes, and there has to come a point where they cannot survive in that environment.”

In what amounts to a form of assisted euthanasia, the industry bodies are offering Australia’s 8000 grape growers accounting tools to make realistic assessments of their own viability. Yet even as the rationalisation of assets, operations and vineyards by the bigger companies proceeds – and there is certainly more to come, from Foster’s and others – Strachan suspects that relatively few of Australia’s 2600-odd wineries will disappear, as most proprietors have already shown a dogged preparedness to survive on slim margins and low profits.

To go forward, it seems the industry first has to take a step backward. In other words, says Strachan, “We have to get rid of the oversupply as quickly as possible to start bringing some margin back into the business, and to start getting a connection with the consumer that is not defined by price.” •

Charles Gent is a journalist at Flinders University and the author of Mixed Dozen: The Story of Australian Winemaking Since 1788.

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  1. mike seabrook added this comment on 12 January 2010 | Permalink

    The problem (one of the problems) of oversupply (cruelling the traditional wine grape growing families’ future) is that the Riverland growers through their co-op financed the International Wine Investment Fund which in turn financed one of the largest management investment scheme grape growers in australia.

    The MIS tax punters are largely going to be the last to get out of production as they have 15 or so year contracts with the MIS promotors and their associated parties who want to continue receiving their contracted est 10% of sale proceeds plus charges their associated entities are making for services to the managed investment scheme vineyards, no matter what losses the MIS vineyards are making, with the MIS punters being called on to make up the losses.

    The MIS punters would have been no worse off by paying the taxes and punting the balance on lotto tickets or the pokies.

  2. Martin added this comment on 14 January 2010 | Permalink

    As a consumer I love an over supply – great bargains! Nothing wrong with cheap wine, just like there’s nothing wrong with cheap computers … I don’t hear anybody complaining about them. Let the market sort it out otherwise we’ll end up another government cash fuelled scheme that distorts the market like the tax breaks that helped create the problem in the first place.

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