Q&A with David Watkins of Australia’s Fleurieu Vintners and Boar's Rock
By Richard Siddle
In the latest in our series of articles profiling key VINEX members in the global bulk wine industry we turn the spotlight on the premium end of the market. David Watkins, who helps produce premium grade bulk wine from the cool climate areas of McLaren Vale, Langhorne Creek, Currency Creek and Adelaide Hills with Fleurieu Vintners and Boar’s Rock wineries, sees a very healthy future for developing existing and emerging markets for quality Australian bulk wine, particularly in to China and the United States.
How do you see the current market for bulk wine in Australia?
I think first you have to put it in to the context of what has been a very tough decade for Australian wine. But it has definitely picked up significantly in the last 18 months.
How do you look back on the big step changes in Australian and bulk wine?
Australia is still very much in its infancy in its history of wine. We started our life like the Romans and went and tried to plant every variety everywhere. This approach is now being refined. We first started to see real market growth for Australian wines in the UK which brought a lot of demand. That demand then came from the United States. We had a terrific run for a while. Then the next big change came in 2002/2003 when production over-supply became a reality primarily due to tax breaks given to planting vineyards. The Government left those breaks open for too long and we ended up with a situation where there was too many vines planted and where there was a lot of capital being mobilised in to wine for the wrong reasons. In the nineties and early 2000’s, the bulk side of the business really started to grow until we were hit with the global financial crisis which, along with the over-supply, resulted in the price differential between the high and low quality ends of the bulk wine market narrowing. As a result a significant number of growers and wine producers fell by the wayside.
How do you see the market going forward?
Thankfully, over the last couple of years, we have seen growth for premium quality wine coming back in to the market. We are seeing demand from some customers for the first time in five years who are now interested again in what we have. Our federal government has worked hard to build up Free Trade Agreements with China, Japan and South Korea and this is making a big difference. For example, previously, there was a minimum duty of 14% to 22% applied to importing our wine in to China, and this has now been progressively removed down to 0% from January 2019. The overall world supply of wine is also down, with the OIV saying it is going to be the smallest production since 1961 whereas last year Australia had a total crop of 1.9m tonnes, which was 100,000 tonnes up. So all these things are working in our favour and pricing is going up which is positive news for growers. It's too early to say how things are going to be in vintage 2018, but we have seen frost in some areas which is unusual and in keeping with the climatic changes taking place elsewhere in the world.
How do you see the market for Australian wine in China developing?
The FTA provides us with a new stimulus to work in China. It also means we are now in a much better position to be able to compete with other producers such as Chile that also has a FTA with China. There is such a growing middle class there who have good family wealth and they don’t have many siblings to dilute it. They are well travelled and influenced by the West. There is a desire to learn and they can do their research about wine online. They also now have great access to wine thanks to the enormous power of the big online retailers which is going to be a very important route to market.
Which type of customers are coming back to you after five years?
Mainly from China. Before they were only ever interested in talking to us about price. But their customers are changing, becoming more developed as wine drinkers and asking for different things. Particularly in China where they are developing their palates very quickly. Before Cabernet was Cabernet with little recognition of quality differentiation. Now buyers are recognising that consumers are looking for different styles.
Where do you see the future trends for Australia and bulk wine?
A lot will increasingly depend on getting access to the right parts of the market. Australia’s geography means we are still quite an isolated community. Buyers can’t just easily jump on a plane and come and see us and the big wide world out there is a long way from us. The Australian wine industry is still controlled by a small group of very large gatekeepers. They determine the prices they will pay growers for certain grapes, what styles of wine they want to make and what grapes they want to buy. Still a very large percentage of our Australian production is created by a very small number of players. Only 53 out of 2,600 wine growers crushed more than 3,000 tonnes last year, which is not a very large number. So if you want to buy say, 1m litres of Australian Shiraz, you don't have a lot of choice who to go to. But, if the buyer wants a smaller quantity, there are many producers who could supply if there was a method of making contact between the two.
What changes would you like to see?
We have to find a way for smaller producers to make a connection with smaller buyers so that they don’t have to rely on the big gatekeepers as much. I want to be able to get more access to more buyers. I would like to be able to supply a customer who might be running 10 bottle shops or pubs. I can supply them with a split container of bottled product or a full container of bulk wine for them to bottle in their location. But it is very hard to find those kind of customers due to the geography of Australia. They can’t just easily fly here and it is difficult to find them when we go to their locations. The main market for bulk wine sales platforms is currently being fulfilled by product that is interchangeable around the world. The next phase of development is for more specialized products to be transacted in this way.
Tell us about your own winemaking capabilities?
We own 450 hectares of grape vines and have two wineries in the Adelaide region with a combined capacity of 15,000 tonnes. It means we are in control of our own vines and our own production. We are involved in making cool climate, premium grade bulk wine and this makes up 95% of what we do. But the cost of our viticulture is higher and our yields are smaller. We are doing smaller ferments, to maintain the quality grades in different parcels of wine rather than blending them together. We’re not operating in the same way as the large inland irrigated wineries are, whose grape growing and winemaking costs are much lower than ours. Hence, we are not able to provide wine at lower prices and we operate at the higher end between A$2.50 to A$12 to A$15 per Litre. A lot of other Australian wineries buy our wine to extend the blends for their branded wines.
What do you think of the VINEX model?
I think it is a very powerful and useful tool. It takes away a lot of the risk of working in bulk wine on which so many current relationships are based because it provides a framework for the transaction which helps create trust. It allows buyers to find alternative sources and vice-versa and wineries can opt in or opt out with individual parcels of stock. There is also so much published information there to go and understand the market and the product better. It potentially offers opportunities and new routes to market for smaller producers, agents, retailers and wholesalers.
It seems overall you are sleeping better than you might have been five or 10 years ago?
Absolutely. Up to 18 months ago it was very tough and we had to be all over our costs. We have had to have nerves of steel to continue to invest in our vines and vineyards at a time when we were working in a spot market. We have been reliant on opportunistic buyers when we can’t behave like opportunistic producers due to the lead times and capital involved because we still have to invest in our staff and our wineries.
*David Watkins was formerly a venture capital manager and has recently become a company director of VINEX.