Cheap wine, but not enough growth

The history of the Australian wine industry is a terrific blend of improving production quality, technology innovation, marketing flair and risk taking. However, the industry is now facing unprecedented challenges at home and abroad.

An oversupply of wine (or undersupply of consumption if you wish), increasing competition from other beverages, the higher Australian dollar, higher input costs and lower production volumes means new challenges for winemakers.

What is the future for Australia’s 7000 wine grape growers?

According to Mike Stone, chief executive of Murray Valley Winegrowers, the local wine industry is about to change dramatically. Talking to Asa Wahlquist in The Australian, Stone says he believes the gulf between the fine-wine sector and the commercial sector will grow, with the commercial sector dominated by some big outfits.

“At the moment there are a lot of small to mid-sized players in that commercial sector, but the pressure they have been under the last few years is going to see them leave.”

A recent ABARE study of 60 wine grape growers in the Riverland area of South Australia provides a useful illustration of the financial challenges facing these producers.

Since this study was completed, the situation has further deteriorated with higher input costs, lower production and lower prices for wine grapes.

Some in the industry suggest that it takes 150 hectares to make a sustainable wine grape growing business. While there is some contention around the optimum size, there is little disagreement that operations will need to get much, much bigger.

Which might explain why Orlando Wines is doing so well. In tough conditions, its flagship wine, the Barossa Valley-produced Jacob’s Creek label, is “nudging” annual sales of eight million cases, reports The Australian Financial Review – helping the Pernod Ricard Pacific business produce a 31% rise in EBIT for the 2006-07 financial year.

But even in the exports business – bread and butter for big companies like Orlando – the landscape is changing. “Australia can no longer compete on price or volume alone,” says Paul Henry, general manager of market development with the Australian Wine and Brandy Corporation, quoted in The Australian.

According to Henry, it’s time to concentrate on the strengths of the Australian brand: innovation and quality: “We now need to compete in quality terms and price terms in a way that we haven’t in our recent history. To an extent we have been giving it away. That doesn’t build a credible premium for your brand franchise in the medium to long term.”

Like many other parts of Australian agriculture, the future of the wine grape producer is buy, sell, merge or perish.

This story first appeared on BusinessSpectator.com.au