Australia sets long term strategy on using premium wine to push up commercial wine prices
By Richard Siddle
Scotland’s legendary figure, Robert the Bruce, does not appear to have anything obviously connected to the fortunes of the Australian wine industry. But spend some time with Wine Australia’s chairman Brian Walsh and you start to hear his famous poem going over and over in your head: “If at first you don’t succeed, try, try and try again.”
That famous line could quite easily be the generic body’s motto, or determination, to change the way it is currently perceived in mature markets around the world.
Yes, on the one hand it is mighty proud that the efforts of its producers and winemakers over the last 30 to 40 years has seen it become one of the top five wine producing countries in the world. In some markets like the UK it has been the stand out number one selling wine country for up to the last 10 years.
In fact, on the face of it there does not appear too much wrong with how Australian wines are selling around the world. But look a little closer and things are not as healthy as they appear.
Take the UK. It might have 24% volume and 23% market share of the main grocery market, but almost all its wines - an incredible 96% - are being sold below £7. Nearly a third (30%) are being sold below £5, representing 24% of all the value it creates in this vital market (Source: IRI 52 weeks to August 31, 2017).
Which when you factor £2.60 of every sub-£5 bottle of wine goes to the Treasury in duty there is hardly any money being made for producers at the other end of the supply chain.
Walsh, himself, admits its market share in the UK is “scaringly high”.
It is why he told an industry debate, held in London recently by Negociants UK, that Wine Australia had set out a very clear two-pronged strategy for all its mature markets around the world, and particularly in the UK.
Namely it would concentrate on two areas of the market: fine wine; and the branded, commercial, commodity end of the industry. Which for the UK meant wines between £5 and £8. What’s more any real investment would only go towards helping promote, build and generate a market for its premium and fine wines so that it could look to use that part of the industry to then help lift and make the case for raising entry level pricing above £5, £6 and £7.
He admitted, however, that was no quick fix. Quite the contrary. In fact it might even end up being a “multi-generational” ambition. But the country as a whole has to have a long term ambition to “to raise awareness of Australia’s winemaking capability”.
Walsh even conceded a point made by Simon Thorpe MW, managing director of Negociants UK, that it would make economic sense to see its market share in the UK come down to nearer 15% rather than lift it towards 25%.
Walsh said that would ultimately be “a decision for the major brand owners” but it would be a step in the right direction. “If we had 15% market share in six major markets around the world, then we would be a very strong position, rather than have 24% in the UK and only 7% and 6% in other countries.
Thorpe added: “It might be more attractive to have 15% here if each of those percentage points could deliver more profit for Australia.”
Price points
Wine Australia’s ambition, he stressed, was to “be at or our near the highest bottle price point of our major competitors in key markets”. “In many markets we are very close, and that is a great position to be in. We are the fifth largest wine exporter in the world and if we can be one or two in most of our markets then we would be over the moon.”
He added: “We think we can do nicely in the £10 to £15 price spot in the UK because we don’t have a lot of problem selling those kind of wines.
But we know it’s a very small base.”
Market dynamics
Walsh also pointed out market dynamics were beginning to turn in Australia’s favour and that it was in a far better position in terms of supply and demand to take a firmer control of its own future. The fact the country had been in over production for the last 10 days has meant there has always been grapes “accessible to buyers at below cost of production”.
“But that dynamic is changing quite dramatically,” he said. “We’ve had price increases, even in the warmer regions, in the last two years of some significance and we’ve had some of the bigger players saying we can’t pay any more for grapes and achieve those price points any more.”
The big difference now is that global demand for its wines, particularly for China, means that “slack is being taken up”. “Sales to China have taken pressure off inventories,” he added.
The big test will come when it does not have the bumper harvests it has enjoyed over the last three years, but he is hopeful “natural forces” will also play their part in seeing the base level for Australian wines move up.
If that was the case then it was quite possible for those Australian regions currently growing grapes just to hit price points, could be adapted to make higher quality wines.
Fine wine issues
The question over its fine wine credentials was also a major part of the debate. Dan Jago, chief executive at Berry Bros & Rudd, argued Australia still had some way to go to convince both trade buyers and serious wine collectors that it had a genuine fine wine market to get excited about.
But Wine Australia’s definition of fine wine is a little more flexible than only concentrating on the super premium, aged wine market. It could, argued Walsh, be any wine priced between £10 to £100 or more, providing the consumer buying it is able to understand this part of Australia’s premium offer and what it can do more of.
“We are putting all our effort in to that (fine wine) area. We are not sure yet if that then creates a trickle down effect, but if we can grow from that small base in the higher price points then the whole average price point for Australia comes up and we can move away from the research that shows that we are as regarded as making very good value wine, but not special occasion wine,” he explained.
He added: “If we can replace the volume with value and just slowly change that dynamic where everyone is making money rather than maybe treading water with profits and prosperity, we would be in a much stronger position.”
Huge changes had already taken place in Australia, he stressed, with massive research in to analysing its plots of land so that it can understand its soils and terroir better. There was also “probably only around five to 10” of its 3,000 producers that are involved in that “drive for volume ambition.” The rest are actually “aspiring” to drive higher priced, site specific wines, said Walsh.
But as Robert the Bruce said - all of this is going to be a long drawn out process. “We wont’ see significant change in our working lives,” he claimed. “But we are hoping Wine Australia can build the foundations that future generations will embrace.”