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Australian Wine industry: can it maintain momentum?

Introduction
1. Wine drinking is an ancient activity, with clear evidence of it in the third dynasty in
Egypt around 2700BC (1). This wine was imported since Egypt’s climate was not
conducive to wine-making. The Greeks are believed to have started consuming wine
around 5000 years ago, and ancient Greeks worshipped Dionysus as the god of wine
2
. Some two thousand years later a Greek historian ‘describes shipping wine down
the Euphrates or Tigris from Armenia…: round skin boats were loaded with date-
palm casks of wine and delivered to Babylon.’ (1) The Romans of course were both
great producers and drinkers of wine.
2. The purpose of this case study is to trace the development of Australia’s
comparatively extremely young wine industry and wine-consuming market. It starts
with a brief history of the Australian wine industry then proceeds to a discussion of
events of the 1990s and the early years of the twenty first century. Next is a detailed
discussion of the Australian wine industry’s value system, starting with Australian
grape producers and wine producing regions and ending with an overview of the key
features and recent trends in Australian retail wine market. The final section distils
some of the key strategic issues and challenges facing the industry in late 2004/ early
2005.
Brief history of the Australian wine industry : 1788- 1978
3.The Australian wine industry began in 1788 when the first vines brought by
Governor Phillip from Rio de Janeiro and the Cape of Good Hope were planted at
Farm Cove (3).

4.Between 1788 and about 1820, the local wine pioneers struggled to make any real
progress. The first successful viticulturist was Gregory Blaxland, who was the first to
both export Australian grown wine in 1822 and to win an international wine award (3).

5. The 1830s saw wine growing emerge in the other new Australian colonies of
Western Australia, South Australia and Victoria. Several now legendary names
entered the wine industry between the mid 1830s and late 1850s. Perhaps the two
most important were Doctor Christopher Rawson Penfold and Thomas Hardy. The
de Castella family also established vineyards in the 1850s (3).

6.The wine industry’s growth faltered in the second half of the nineteenth century.
Several factors were at the core of this decline. One was Australia’s small population
base. Another was that Australians, on average, were not large consumers of wine;
those who were wine drinkers preferred the imported product (3). The industry was also
hampered by the outbreak of vine disease in 1887. Perhaps the most important
problem was the time lag of several years between vine planting and the possibility of
wine production (3). This problem ‘had naturally led to over planting in some areas’ (3).
In turn this created a surplus of grapes and eventually the uprooting of ‘some
unprofitable vineyards’ in the first decade of the twentieth century.
This case was written by John Odgers, School of Management, RMIT University as a basis for class
discussion and analysis rather than to illustrate either effective or ineffective strategic management
practice

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7. The real spearhead of Australia's wine revolution was undoubtedly the successful
production and marketing of pearl (perle) wines. In November 1956 Gramps
introduced 'Barossa Pearl', a naturally sweet sparkling wine (reminiscent of
champagne) which appealed particularly to women and had a vast impact on the
Australian market. (3) By the early 1970s wine consumption per litre per head in
Australia had reached nine litres. In 1976-1977 this figure had grown to 13.7 litres (3).
Perhaps the other major innovation that had an equally large impact on demand for
Australian wine was the introduction of the wine cask. This ‘bag in the box’ was
developed in the late 1950s. By the early 1980s cask wine had cemented its place in
the Australian wine marketplace.

8. Unfortunately, the industry’s growth was again strongly threatened. In 1979 the
Australian wine industry faced the grim prospects of ‘increased supply costs, demand
fluctuations, surplus production, and price discounting’ along with unfavorable
changes to Australia’s taxation structure (3). Some thirty years later, as we shall
discover these characteristics are again coalescing.

9. Between 1980 and 1989, the Australian wine industry’s manufacturing revenue,
after allowing for inflation, increased by 1.5% per year. (4) Over the same time frame,
the wine manufacturing industry’s value added — calculated by deducting non-labour
production costs from revenue and adjusting for changes in the value of stocks (4) —
increased by 2.6% per year, ‘due to increased efficiency associated with industry
rationalisation and the introduction of improved technology’ according to an annual
industry review (4) .

10. The 1980s saw a rush of large corporations enter the Australian wine industry
looking to add a growing revenue and profit stream to their business portfolios (5). By
a decade later however most had ‘lost interest as they were unable to obtain
reasonable rates of return, due to the unique requirements of the industry (5). Others
were the victims of the financial pressures of the late 1980s when access to ‘easy
money’ dried up and interest rates rocketed. (5) One such corporation was Adsteam
that was forced to sell its wine interests, mainly the prestigious Penfolds and
Lindemanns labels to South Australian Brewing (SAB) that already owned the
Seppelts label (5). Later, SAB sold its beer brewing component to New Zealand’s Lion
Nathan, with the remainder of SAB’s assets being renamed Southcorp Holdings
Limited. More will be noted about Southcorp in a later section.

1990s: Strong growth period and industry strategic cooperation


11. 1992 saw the creation of BRL Hardy through the merging of the growers’
cooperative, Berri Renmano, with Thomas Hardy and Sons, one of the founders of
Australia’s wine industry (4). BRL Hardy was floated on the Australian Stock
Exchange in August 1992, and subsequently has become one of Australia’s major
wine companies.
12. In 1995, Foster’s Brewing Group (FBG) successfully acquired Mildara Blass,
itself the result of a merger of Mildara Wines Limited and Wolf Blass Wines
International that created the third largest wine maker in Australia with an estimated
15% of wine industry sales. (4). FBG’s acquisition of Mildara Blass was highly
consistent with the Group’s decision to shed non-core activities and to become a
specialist brewing business. It was also reasonable given the continuing decline in per
capita consumption of beer in Australia (40) and other parts of the world. The

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acquisition was probably also a response to the just noted acquisition by the highly
ambitious New Zealand conglomerate, Lion Nathan, of SAB’s brewing assets and
operations. Clearly the Australian brewing industry’s level of competitive intensity
was not going to reduce and thus the brewing industry’s profitability was also going
to remain tight.
13. The mid 1990s was a unique turning point in the Australian wine industry with the
coming together of stakeholders from each aspect of the industry to frame a long-
term path for its holistic growth and development. In June 1996, the Winemakers
Federation of Australia released Strategy 2025, a statement of the objectives and
goals for the Australian wine industry over the next 30 years (7).
14. The Australian wine industry’s vision by the year 2025 is ‘to achieve $4.5 billion
in annual sales by being the world’s most influential and profitable supplier of
branded wines, pioneering wine as a universal first choice lifestyle beverage (7). The
industry will ‘achieve its vision by adopting the mission statement: Total commitment
to innovation and style from vine to palate. The main objectives set in Strategy 2025
are detailed in Exhibit 1 (7)
Exhibit 1: Australian wine industry’s main objectives – 1996- 2025
 Increase in per capita wine consumption in Australia from 18.1 litres to 22
litres by 2025
 Enhance the image and reputation of Australian wine
 Entrench innovation as the driver of industry competitive advantage
 Enhance wine style in quality, purity, uniqueness and diversity
 Establish global leadership in specific branded market segments
 Target of 6.5% world wine production by 2005
 Capitalise on market growth opportunities by expanding industry capacity
 Extend the scope of industry participation in complementary business
sectors
 Improve profitability.

The Strategy 2025 initiative identified and quantified the resources needed to achieve
the industry’s strategic aspirations.
40,000 hectares of new vineyards; 570 million litres of extra processing capacity;
1,100 million litres of new storage; 10,500 new workers and $5 billion in corporate,
grower and equity funding. 9

15. The first element of Strategy 2025 was a five-year industry plan (7).
The thrust of the five years 1997 to 2001 will be to:
 accelerate penetration of international markets
 initiate domestic market development
 increase Australia's competitiveness through an upgrade of grape supply security
and quality, further reduction in costs, a shift in investment priority, and an
improvement in Government policy support and facilitation.
The plan was warmly embraced.
Strategy 2025 became the roadmap for dozens of wine company business plans and
industry organisation action agendas and it inspired a period of frenzied development –
especially in viticulture.9

16. The industry further noted it ‘must optimise its operating environment by
ensuring: its internal structure is appropriate and dynamic; its relationship with

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governments and regulators is constructive and pro-active; and its communications
with media, government, investors and the community are forthright and reliable (7).
17. The wine industry has a $3 per tonne levy, which is matched by government (4).
The funds are primarily used for research and development. As noted, the 2025 Wine
Strategy identified innovation as the driver of the industry's competitive advantage.
As such, the strategy emphasises the need for increased research and development,
accelerating the development of environmentally sustainable production,
benchmarking management practices and production and developing a culture of
learning (4).
18. The wine industry’s growth in gross sales turnover between 1996-7 and 2001-02
exceeded that of the other main sectors in the Australian food industry, averaging
11.9% per year compared with 6.1% per year for the total Australian food industry (8).

Early twenty first century


19. In November 2000 the Australian wine industry developed a 10-year marketing
strategy – The Marketing Decade; Setting the Australian Wine Marketing Agenda
2000-2010’.

The prevailing view expressed in this document is that there exists a market
development potential, which can enlarge the sales and brand opportunity for all
producers. Collaborative marketing activity to establish the Australian category in
new markets has been identified as the most effective means for achieving this
outcome.
This voluntary industry cooperation is not at the expense of competition between
individual brands — such rivalry drives success in the marketplace (9).

20. This industry-wide marketing strategy ‘articulated a vision for Australia to grow
the consumer franchise for Australian wine to achieve by 2010 annual sales of
A$5billion, at a higher average margin and with enhanced brand values’ (9). In respect
of target marketing strategy, it felt that a heavy focus of marketing investment and
activities on ‘encouraging more frequent consumption from the occasional segment
of the market’ would underpin ‘the greatest potential (market) growth. (9)’

21. In August 2002, Sustaining Success (10) the Australian wine industry's environment
strategy, was released and a research and development strategy for the industry was
currently being developed. The environment strategy ‘provides a long-term strategic
plan for the wine industry setting the environmental agenda for the next 25 years.’ It
was developed to complement Strategy 2025 ‘as the wine industry's framework for
recognising acceptable environmental practices and driving sustainable management
techniques from an industry perspective.’ (10) The environment strategy, a most
valuable initiative, addresses issues such as water conservation, waste management,
biodiversity / land management and greenhouse management. (10)

Wine industry value system

22. Perhaps the best way to gain a deeper understanding of the economics and
competitive dynamics of the Australian wine industry is to explore the components of
its industry value system. Exhibit 2 summarises some of the key organizations and
characteristics of the Australian wine industry value system. The following pages
will discuss each of the five main levels of the industry’s value system, namely:

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1. wine grape producers
2. wine manufacturers
3. wine wholesalers
4. wine retailers, and
5. wine buyers/ end-users (or the wine market)

Exhibit 2: Australian wine industry value system schematic


Constellation
Wines (USA)
The Australian Wine Value System
2004 merger
With BRL Hardy Grape producers
Supplier Southcorp
value chains (Premium)
Packaging
Primary Samuel Smith
suppliers
factors McGuigan Hardy Wine & Sons P/L
of Simeon
production
Manufacturer Wine manufacturers
value chain BRL Hardy
Wine
Cellar Bulk Southcorp
Door sales Wine Berringer
( 5%) producers Blass Orlando
(FBG) Wyndham

Channel
Value Wine wholesalers
chains Specialist
$$$ Retailers
(e.g
Wine retailers
Cellarmasters Woolworths Hotels, clubs
Coles
Myer restaurants
Buyer, end- Off
user value premises On-premises
chain

23.Exhibit 3 summarizes some key data for the first two levels of the Australian wine
industry’s value system over the years 1997-1998 to 2002-2003 (4), (50).
Exhibit 3: Some key data on Australian wine value system 1997-98 to 2002-03
Unit of 1997-1998 1998- 1999- 2000- 2001- 2002-2003 Average
(1)
measure 1999(1) 2000(1) 2001(1) 2002 (1) (1)
Annual
% growth
1997-
2003
Total wine grape production (3) 000 tonnes 951 1101 1129 1422 1606 1411 8.2
Total wine industry production Megalitres
(1)
680 793 806 1053 1195.2 1314.7 14.1
Plus: Total wine industry imports Megalitres 25.6 24.3 19.6 12.8 14.5 17.1
(3)

Plus: Total wine industry opening Megalitres 1,570.1


inventory (3)
Equals: Total wine available for Megalitres 705.6 817.3 825.6 1065.8 1209.7 1331.8 14.1
sale

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Total wine sales volume: domestic Megalitres 338.8 348.4 369.3 384.1 385.3 410.2 3.9
(1)

Total wine sales volume: export (1) Megalitres 193.6 216.2 287.6 339 417.3 511.1 21.4
Total wine industry sales Megalitres 532.4 564.6 656.9 723.1 802.6 921.3 11.6
volume (1)
Total available for sale less total Megalitres 173.2 252.7 168.7 342.7 407.1 410.5 2.5
industry sales
Notes:
(1) All figures taken from IBIS WORLD (2004): C2183 - Wine Manufacturing in Australia, Published Date: 27 July 2004
(2) All figures taken from Gordon, W. (2005): Australian Wine Grape Production: projections to 2006-07, ABARE e-report 05.02 prepared for the
Grape and Wine Research and Development Corporation, Canberra, ACT, January
(3) Inventory levels extracted from ABS (2005) Publication 1329.0 Australian Wine and Grape Industry
24. Exhibit 4 details the cost and retailer’s margins for three typical Australian wines,
one with a retail price of $10 per bottle, one with a retail price of $15 and the third
with a retail price of $25 per bottle (20) . A cursory analysis of Exhibit 4 indicates both
the relative differences in the component costs of these three wines and at the same
time the close similarity of the margins they provide to the four value system
members involved; namely, the grape grower, the wine producer, the wine distributor
and the wine retailer.

Exhibit 4: Indicative costs components of Australian bottled wine


Retail price Retail price Retail price
$10 bottle $15 bottle $25 bottle
Goods & Services Tax $ 0.91 1.36 2.27

Retail margin $ 2.36 3.47 5.86


Wine Equalization Tax (WET) $ 1.51 2.29 3.79
Distribution margin $ 1.5 1.95 3.19
EX WINERY PRICE 3.72 5.93 9.89
Bottling/ packaging cost 0.85 1.35 2.10
Sales/ marketing 0.55 0.80 1.45
General administrative costs 0.38 0.65 1.10
other costs/ margin 0.84 1.33 2.49
Grapes 1.1 1.8 2.75

Total taxation cost 2.42 3.65 6.06


% taxation cost to retail price 24.2 24.3 24.2
Source: ACIL Consultants (2002): Pathways to profitability for Small and Medium Wineries,
Report prepared for the Department of Agriculture Fisheries and Forestry Australia page
http://www.daff.gov.au/corporate_docs/publications/pdf/industry_dev/wine_Report_v2.pdf
accessed on July 15 2005

Grape producers
25.Exhibit 5 shows the wine industry geographic regions across Australia (22). To give
some perspective on distances involved, the flight time from region 15 of Exhibit 7 to
region 2 is approximately 3 and a half hours: the same time to takes to fly from
Singapore to Hong Kong. As Exhibit 7 shows the Australian wine industry comprises
many different geographic and topographic regions. In terms of geographic
concentration, grape production is the greatest in South Australia (46% of the

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2001/02 total winegrape production, but down from 58% in 1991/92) (22). New South
Wales comes in second, with 27% and Victoria third with 22% of total Australian
winegrape production on 2001/02(22). In total, there were 1541 wineries operating in
Australia in 2002, up from 607 in 1991. (22)

26. The production of wine grapes is a challenging activity. The following quotes
offer a number of insights into the necessary but not sufficient conditions for
producing high quality wine grapes (51). They clearly show how important it is to
employ an experienced and practical viticulturist.

Exhibit 5 Australian wine producing regions

Source: Department of Agriculture., Fisheries and Forestry (2002): Out of the cellar: A Social Atlas of
Australia's Wine Growing Areas, Canberra, ACT. '© Commonwealth of Australia reproduced by
permission'.

26.1 The parcel of land is not the complete answer, and in order to appreciate the
holistic nature of vineyard one must understand the totality of the elements involved
and their interaction with one another. This understanding is the concept of terroir -
Terroir is a French term that studies the interaction of soil, slope, orientation, rainfall
distribution, climate, drainage and their impact upon the quality of the grapes
produced ….
26.2 The vineyard and management systems have to be designed to ensure that the full
potential of the site can be realised. The main design issues are vine density, row
orientation, method of pruning, ground floor management, cropping levels, canopy
management, soil moisture, pest and disease control. …
26.3 Some vines produce, better flavour development from their own roots whilst the
converse is true for some grafted vines. Local knowledge and experience are vital in
these decisions and can not be made from text books.
26.4… The viticulturist has to ensure that he (sic) has selected the best piece of sub
terroir for each variety and clone. The further we go along the quality path, the more

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the realisation of the fact, that in order to achieve greatness, meticulous care must be
taken all the way
26.5 Many top wine makers also use the taste test to determine the flavour development
in the grapes. Only experience can be your guide in this situation as a ripe grape
chewed by a wine maker tastes nothing like a glass of wine. Yet a decision must be
made as to the likely flavour profile, and its readiness for harvest. Starting to sound
complex - well it certainly is!

27.Variability in weather and longer-term climatic conditions, the semi-desert nature


of most of Australia’s landmass, are two of the major sources of risk faced by wine
grape producers. The other dominant characteristic of grape production is the long
lead-time between planting the vines and the achievement of the first usable vine
crop. It takes on average around four years before the planted vines bear fruit. (5) The
Winemakers Federation of Australia vice-president, who owns a winery near Geelong
in Victoria, speaks from personal experience about this very long revenue-generating
vacuum: ‘It’s about working seven days a week and doing that for five years without
a break before you even get started.’ (6). This long value-generation lead time also
means that grape producers need to improve both their cost management skills and to
enhance their ability to forecast market demand several years into the future. (14).
Inability or plain bad luck on either count can and does result in very negative
outcomes. For instance grape growers from the Barossa Valley region say that the
oversupply of wine grapes and massive stockpiles of wine are signals of a crisis,
which has left tonnes of grapes to wither on the vine. In some cases, companies paid
suppliers not to pick their grapes for the 2005 vintage (53)

28. An economic analysis of wine producers in the Mudgee and Riverland regions of
New South Wales (23) throws some interesting light on the cost structure and economic
returns of vine production in Australia. Exhibit 6 summarises the comparative
financial outcomes of an average farm in the Mudgee and Riverland regions for the
year ending 30 June 2002.

Exhibit 6: Summary of financial returns for average grape producing farms : 2001-
2002
Item Mudgee region Mudgee Riverland region Riverland
average region average region average
average
Average $ all wine grape % of total Average $ all % total of cash
farms cash receipts wine grape farms receipts

Cash receipts
Wine grapes 243575 87.9 190553 71.5
Livestock sales 21005 7.6 201 0.1
Total cash receipts 277081 100.0 266392 100.0
Cash costs
Hired labour 59103 21.3 28011 10.5
Cropping contracts 26095 9.4 10327 3.9
Chemicals 20906 7.5 8441 3.2
Repairs & maintenance 16031 5.8 11029 4.1
Interest payments 11528 4.2 22457 8.4
Lease payments 8072 2.9 8562 3.2
Off farm packing 0 0.0 17156 6.4
Total cash costs 191882 69.3 162145 60.9
Farm cash income 85199 30.7 104246 39.1

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Less: non cash costs
Depreciation 17778 6.4 11222 4.2
Operator and family labour 22257 8.0 25122 9.4
Changes in value of stock 0 0.0 -227
Equals: Farm business profit 45164 16.3 68128 25.6
Source: Table derived from Table 4, page 8 and table 11, page 16 of Spencer, D. and Ashton, A.
(2003): Wine grapes: a survey of producers in the Mudgee and Riverland regions 2001-02 Report
prepared for the Grape and Wine Research and Development Corporation, October.

29. The Mudgee region is considered to be cool climate wine region, whereas the
Riverland region is deemed to be a warm climate grape growing region (23) . The
Riverland region is the largest grape producing region in Australia, accounting for 28
per cent of national grape production in 2001-02 (23) The Mudgee region is a relatively
new grape growing area, and is much smaller in terms of its total grape output,
accounting for only around 1% of Australian grape production in 2001-2002. (23) It
produces higher quality wine grapes suitable for super premium and ultra premium
bottled wines. (23) Another striking difference between the two regions is the
characteristics of a representative grape producer. In the Mudgee region over half of
the farm operators ‘were university or tertiary educated’ with an average age of 52
years. On the hand, less than 25% of the Riverland producers have university or
tertiary qualifications and the average age is 48 years. (23)

30.Finally, only 63 per cent of the producers in the Mudgee region were contracted to
supply their harvested grapes to a winery in 2001-02 as compared to virtually all of
the grape producers in the Riverland region. (23)

31. Some of the key differences that heavily influence the magnitude and inter-
relationships of the data presented in Exhibit 6 are as follows.
 Wine grape growers in the Mudgee region recorded an average rate of return on
capital and management of 3.1 per cent in 2001-02, significantly lower than the
average rate of return of 8.5 per cent recorded for growers in the Riverland. (23)
 Overall… the key factor contributing to differences in financial performance
among wine grape producers in both the Riverland and Mudgee region in 2001-02
appears to have been the scale of farm operation. For example, the top 25 per cent
of farms in the Riverland in 2001-02 (ranked by rate of return) were generally
much larger in terms of their planted area than the bottom 25 per cent. (23)
 Hired labor, chemicals, contract cropping and interest payments were where the
major differences in costs appear. Although the labor cost per hectare for the top
producers in both regions were fairly similar the average labor cost per hectare in
Mudgee was nearly double that of the Riverland. This probably reflects the earlier
stage of development of vineyards in the Mudgee region together with the focus on
production of high quality grapes. (23)

32. A US Study of grape growing (24) makes several very telling points
 Variety selection is a critical management decision when establishing a new
wine-grape vineyard. Once selected and establishment costs have been
incurred, the manager then will almost be forced to continue to produce the
chosen variety as long as the vineyard is to be productive. This will usually
span 26 seasons or Years 5 to 30 of vineyard life. (24)
 Selling prices that growers receive for wine type grapes will depend on the
demand and supply of the final product. Also, wineries adjust their raw
product purchase price in accordance with changes that occur in supply and
demand in their distribution channels. (24)

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 Independent growers who are considering establishing new wine grape
vineyards may want to consider negotiating long term marketing contracts
with local wineries. If a contract agreement can be made to establish a range
in prices and quantities of acceptable qualities, some degree of insurance can
be provided the grower for recovering vineyard investments and making a
profitable return. Contracting may be one way of minimizing the mutual
dependency risks of (1) the grower looking for a profitable market and (2) the
winery processor looking for a stable supply of quality wine grapes. (24)

33. The balance off bargaining power in the Australian wine industry’s value system is
certainly skewed against wine grape producers, and especially the small independent
ones (52). In fact, a parliamentary committee ‘has recommended strengthening the
Trade Practices Act to give wine grape growers more bargaining power ‘in an
industry reeling form a huge oversupply of grapes and racked by disputes between
(grape) growers and winemakers (52). Such over supply conditions have caused grape
prices to be ‘crunched …and the trends is expected to continue’ (52) In a grape variety
specific sense, ‘white wine grape prices are expected to continue to fall until 2009-10
and red grape prices until 2006-07. (52) The committee recommends 'amending the Trade
Practices Act to strengthen contractual arrangements' since it noted that 'clauses in
contracts that allowed one party to vary the contract unilaterally could be exploited

34. Exhibit7 presents a projection of wine grape production over the years 2004-05 to
20-06-07 Perhaps the most telling statistic detailed in Exhibit 10 is the average
(50).

annual percentage growth of only 0.7% per year. One can quickly see the projected
dramatic reduction in wine grape growth by comparing this data with the 8.2%
growth per year achieved by wine grape growers in the period 1997- 2003 as noted in
Exhibit 6.

Exhibit 7: Projections of wine grape production 2005-05 to 2006-07


Unit of 2003-2004 (2) 2004-2005 (2)
2005-2006 (2)
2006-2007 (2)
% Average
measure Projection Projection Projection annual
growth
2203-04 to
2006/-07
Value system data
Average yields / hectare: grape tonnes 13 12 11.8 11.8
production] per
hectare
Total wine grape production (3) 000 1895 1834 1879 1933 0.7
tonnes

Notes:
(1) All figures taken from IBIS WORLD (2004): C2183 - Wine Manufacturing in Australia, Published Date: 27 July
2004
(2) Gordon, W. (2005): Australian wine grape production, projections to 2006-07,abare eReport 05.2
Prepared for the Grape and Wine Research and Development Corporation, January
(3) Gordon (2005, p. 20) prepared 3 yield scenarios (low, projected and high ) based on historical variation
to project wine grape production
.

35. The three largest grape growers in Australia in 2004 were (4):
 McGuigan Simeon Wines Limited
 Hardy Wine Company Limited

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 Samuel Smith & Son Pty Limited

Of these three, as noted in Exhibit 2, the first two are also substantial wine makers
with a host of different wine labels and individual wine styles in their product range.

Wine manufacturers

36. The activities of Australian wine manufacturing industry have been specified as
follows (4):
The Australian wine manufacturing industry purchases grapes and other key
ingredients which are processed into wine, port and wine-based alcoholic beverages.
These products are packaged in glass bottles or casks then sold to wine merchants as
well as retail outlets such as specialist liquor stores, restaurants and hotels. Some
wineries also sell their product direct to the public via cellar door sales. This class
consists of units mainly engaged in manufacturing or blending of wine, fermented
cider or wine vinegar, or alcoholic beverages N.E.

37.The processes involved in wine making are to the uniniated very simple, involving
the crushing of grapes and fermentation. They have not altered in centuries.
However, wine making is, like wine grape production, a complex and challenging
process. Again, the following insights from an industry practitioner about the
winemaking process (51) are illuminating.
37.1 Firstly, a decision as to what % of the whole bunch (as opposed to crushed
berries) will go into the fermenting vats (is needed).
37.2 How are the grapes to be de-stemmed and are they to be crushed heavy handed or
lightly?
Is the must to be allowed a maceration period prior to ferment commencing, and if so
how much sulfur is to be used and when? The fermentation process is always a critical
factor.
What kind and size of fermenter is to be used?
What sort of yeast is to be used? what proportion of wild yeast strain as compared
with cultured yeast is to be incorporated?
How long and at what temperature is fermentation going to take place?.
How much of the (wine) is going to be barrel fermented to give the wine added
complexity? What kind of oak is to be used, from which producer/s is the oak from and
what level of toasting is required?

37.3 Some wine makers prefer to use the system of pigeage (old fashioned bare foot
trampling) compared with hand plunging. The concept of pigeage also brings in a new
number of potentially bizarre variables. How many people and of what weight, are to
be allowed to plunge in the vat?

37.4 The further that we go down the decision path from site selection through to
wine making, it becomes even more apparent that there are an enormous number of
variables that come into play. The great wine makers endeavor to establish as much
control over the entire process and try to restrict the biggest variable of all - the
weather, as their only wild card in the production of great wine. (emphasis added).

38. To help improve both the quality of the wine produced and the cost of its
production, both the grape production level and the wine manufacturing level of the
value system have improved their technical sophistication through the use of such
methods as flying winemakers, a new-age usage of oak, computer modelling for the

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prediction and amelioration of crop disease and micro-oxidation (Wine Industry
Trends 2004). New technology has also enabled a significant reduction in maturation
time for most wines. This is reflected in a significant decline in the stocks to sales
ratio (4). A final example of technology’s burgeoning influence on wine production and
distribution processes is the cooperation between CSIRO and the Orlando Wyndham
Group to ‘scope, develop and deploy innovative decision support technologies in its
supply network.’ (27)
39. Exhibit 8 graphically displays the very quick growth of Australia’s wine industry
over the thirteen years ending June 2004

Exhibit 8: Key statistics – Australian wine industry 1989-90 to 2003-04

Source: Australian Bureau of Statistics (2005): Sales of Australian Wine and Brandy by Winemakers
(Cat. no. 8504.0);

40. In 2002, Australia was ranked fifth on the United Nations Food and Agriculture
Organisation's list of world wine producers, producing 1220 million litres (11). In 2001-
02, for the first time in its history, the volume of wine exported from Australia
exceeded the volume sold domestically (11). This is truly outstanding given that in
1980, Australia exported 2 per cent of its wine and was barely known in the United
States and Europe (12). By 2003, the US was Australia’s most important wine export
market, and between 1990 and 2003, Australian wine exports to the United States had
achieved a 29-fold increase (12).
Judging from various export award winners there are five drivers of export success.
They include:
 A commitment to research and development.
 A willingness to use the latest technology in production and marketing (especially
the internet).
 The ability to forge strong business relationships based on an intimate knowledge
of customers' needs and preferences.
 Excellent round-the-clock after sales service.
 Valuing the entire workforce and supporting employee career development. (62)
41. The fiscal year 2002-03 was a difficult one, with the profitability of all wineries
trending down. (13) Additionally ‘a significant number of wineries in all categories

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have recorded a loss for the 2003 financial year. In fact, more than half of the
responding wineries with less than $5 million of revenue generated a loss before tax
for the 2003 year.’ (13) Analysts identified ‘intensified competition, oversupply of red
varietal wine and retailer consolidation …as the key factors contributing to the 2003
result.’ (13) The over supply of bulk red wine was attributed to 3 main factors: (i) a high
rate of plantings in the late 1990s; (ii) a large 2002 wine vintage; and (iii) a ‘slow
down in the growth of export sales’. (13)
42.Australia harvested a record vintage in fiscal year 2004, with the total wine crush
being 40% more than the 2003 vintage and 23% more than the previous record
vintage of 1.606 million tonnes in 2002 (14) As a result of such wide swings, ‘research
has been commissioned to investigate the causes of yield variation between seasons
and how they should be managed’ (14). The flow on effects of a wine harvest ‘generally
take 9 to 12 months to affect the Australian wine market’ (15). In other words, the
impacts of the record 2004 vintage will really start to show in 2005. Industry
projections in fact postulate an oversupply of wine, ‘as far as 2008 and possibly
beyond.’ (16) Despite this record vintage, the Australian wine manufacturing industry
achieved mixed outcomes 2003-04 (in constant 2002-03 prices); as indicated in
Exhibit 9 (4).
Exhibit 9: Australian wine industry’s overall performance 2003-04 (4).
 Revenue totalling $5.05 billion, up by about 2% from the previous year. This
accounts for 43.4% of Australia's beverage and malt industry revenue.
 Value added totalling $1.76 billion, down 10% from the previous year.
 Domestic demand totalling $2.53 billion, down 5.2% from the previous year.
 Employment totalling 12,088 workers, down 1% from the previous year.
Source: IBIS WORLD (2004a): C2183 - Wine Manufacturing in Australia : 27 July 2004.p. 5

44. The industry’s export success however continued to gather steam in 2003-04.
Over the five years ending 30 June 2004, the value of Australian wine exports ‘grew
at an estimated average annual rate of 18.6% to $AU2.69 billion (in constant 2003-03
prices.’ (4).
In constant 2002-03 prices, Australian wine exports were valued at an estimated $2.69
billion during 2003-04. This was equal to an estimated 53.3% of industry revenue and
about 84% of Australia's beverage exports for the year. Their share of industry
revenue has increased from 35.3% since 1997-98. Since that time, exports to the UK
and US have proliferated and their joint share of Australian wine exports increased
from 68.7% of total exports to around 70.3%. Canada, Germany and Holland also
increased their share of Australian wines over the five year period while New Zealand,
although increasing its total intake, fell as a percentage of Australia's total export
destinations (4).

Exhibit 10 shows the level of exports of wine into Australia over the period 1991-92
to 2003-04

45. Other data however sound a cautionary note. The average value of Australian wine
exported during 2003-2004 was $4.27 per litre, down from ‘from the $4.67 recorded
in 2002/03.’ (17) This drop in average prices was partly the result of heightened
competitive pressures in both of Australia’s largest overseas wine markets. The US
wine industry had recently suffered considerably from a weakening US economy, the
California wine glut, falling grape prices and consumers switching to low price wines
(18)
Consequently the profits of ‘Australian wine powerhouses such as Southcorp and

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Foster’s Group’ had also been ‘ravaged’. (18) At the same time Californian wine
producers had started to ‘work smarter, to increase their focus on quality outcomes,
and deliver what the winery customer wants at a commensurate price’ (18) Problems
had also beset the British wine market, that while in volume and value terms had
doubled since 1995, had seen the average price of a bottle of wine ‘growing at only 2
per cent a year in supermarkets and bottle shops.’ (19) Analysts claimed that this trend
was likely to continue, given the growing power of supermarkets, and a global net
increase in quality-wine supply, ‘keeping prices low in real terms’. (19) Another
growing threat to Australia's wine export success emanates from mainland China
where 'Australian (wine making) experts are being drafted to help the Chinese
develop a massive wine industry that observers believe will eventually compete for
export markets, challenging local vineyards on quality and price …China now has
'more areas under vines than Australia, and the potential to produce large quantities of
cheap wine using low-cost labour.' (49)

Exhibit 10: Wine Exports

Exports of Australian produced wine, Annual totals: Original

Source: Australian Bureau of Statistics (2005): 8504.0 - Sales of Australian Wine and
Brandy by Winemakers, Feb 2005, accessed on July 11 2006
http://www.abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyReleaseDate/C4C161E1DE2D1DA
DCA256FF80078A29C?OpenDocument

46.The securing of a lucrative distribution deal for 'the world's biggest retailer, Wal-
Mart’ by Orlando Wyndham, the producer and owner of the very well known
Australian wine brand, Jacob's Creek is a notable exception to this trend. Given the
actual tapering off of demand for Australian wines in the US market, 'the deal could
be even more important to the brand's position in the US (56).' Another considerable
advantage of this deal its that it 'gives Orlando Wyndham an edge over its
competitors' since in the US distribution system 'a patchwork of distribution channels
exist and national retailers are not as prevalent as they are in markets such as Britain,
Europe and Australia.' (56) Wal-Mart's rationale for signing his deal is that it is 'part of
an agenda to ensure it becomes the low-price destination for just about all goods or
services, and (to) give itself a more extensive grocery range (56).'

47. Exhibit 11 presents an overview of the key characteristics of this industry from
1997-98 to 2002-2003. Two of the most interesting metrics in Exhibit 8 are the ratios
4 and 5, both of which quantify the industry’s production volumes in comparison with
sales volumes. The two ratios clearly indicate that the Australian wine manufacturing

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industry has been producing at a much faster rate than it has been selling wine in the
years 1997-98 to 2003-03. The industry itself is closely monitoring these
relationships. One industry spokesperson offered the following observations about the
ratio of stock holdings to annual wine sales. (27)
Much of the analysis of the health of the Australian wine industry has centred around
stock levels in relation to sales… it has been agreed that the ideal range for the stocks-
to-sales ratio was 1.50-1.75 (i.e. years of stock measured at 30 June). Outside this
range the industry becomes unstable — if the ratio is low there are grape shortages
and higher prices — if the ratio is higher, grape supply exceeds sales and prices will
tend to fall. (28)

The impact of the shifts in the market mix has been towards sectors with longer stock-
holding periods, increasing the industry’s holding of stocks for any given level of sales.
This translates into a gradual increase in the stocks to sales ratio over the past few
years. (28)
The Conference outputs are based on an expectation that winemakers will aim to
maintain red wine stocks at no more than 2.5 years of sales measured at June 30, and
that white wine stocks will be maintained at around 1.5 years of stock. (27)
48.The Australian Bureau of Statistics (55) offers another perspective on the Australian
wine production industry’s inventory challenge.
Following a modest rise of 0.8% in 2002-03, which followed growth in inventories
ranging between 9.4% and 21.0% in the previous four years, there was a rise of 17.2%
in inventories in 2003-04. This rise was indicative of wine producers rebuilding
reserves of wine held following the good harvest of 2003-04, and it largely redresses
the impact of a lower production year in 2002-03.

Exhibit 11: Key characteristics Australian wine manufacturing industry


Unit of 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 Average
measure Annual %
growth
Industry Turnover: current prices $m 2383.8 3024.9 3309.9 4040.8 4590.9 4953.0 15.7

Industry Turnover: constant prices $m 2685.7 3396.8 3649.1 4249.7 4717.2 4953.0 13.0

Domestic Demand: current prices $m 1639.0 2108.0 2093.4 2429.0 2655.7 2672.1 10.3

Domestic Demand: constant prices $m 1846.6 2367.2 2307.9 2554.6 2728.7 2672.1 7.7

Exports: current prices $m 842.3 1022.8 1319.9 1699.5 2077.6 2446.8 23.8
Exports: constant prices $m 949.0 1148.6 1455.1 1787.3 2134.7 2446.8 20.9
Imports: current prices $m 97.5 106.0 103.3 87.7 142.3 165.9 11.2
Imports: constant prices $m 109.9 119.0 113.9 92.2 146.2 165.9 8.6
Number of Establishments Units 1104 1115 1197 1318 1465 1486 6.1
Number of Enterprises Units 811 825 898 988 1084 1114 6.6
Employment Units 7788 8726 9173 10876 11855 12210 9.4
Total Wages: current price $m 210.7 244.3 253.9 292.5 329.3 355.3 11.0
Total Wages: constant prices $m 237.4 274.3 279.9 307.6 338.4 355.3 8.4

Selected ratios 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 % change


1. Imports as share of domestic % 5.3 4.5 4.5 3.4 5.2 6.2 3.3
demand
2. Exports as share of turnover: % 35.3 33.8 39.9 42.1 45.3 49.4 6.9
constant prices
3. Wages as share of constant prices % 8.8 8.1 7.7 7.2 7.2 7.2 -4.1
turnover
4. Total production less sales Megalitres 147.6 228.4 149.1 329.9 392.6 393.4 21.7
(increment to inventory)
5. Increment to inventory as % total % 27.7 40.5 22.7 45.6 48.9 42.7 9.0
sales

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6. Net profit returns % 24.6 22.3
Source: All figures taken from IBIS WORLD (2004): C2183 - Wine Manufacturing in Australia, Published Date: 27 July 2004

Exhibit 12: Inventories of Australian ‘beverage wines

49.Perhaps the other most salient data presented in Exhibit 11 are those that relate to
growth in demand at constant prices. Clearly these data show that the average annual
growth in export turnover in constant dollars over the period surveyed (i.e.20.9% per
year) is nearly triple the average annual growth rate if domestic demand of 7.7%.

50.Exhibit 13 is an average cost structure break-down for an Australian wine


manufacturer.

Exhibit 13: Average costs and returns Australian wine manufacture in 2004
Item % of total
ex factory revenue
Depreciation 4.0*
Other 4.0*
Purchases 65.1*
- Containers and other packaging materials 25%-30%
Wine for blending, fortification or distillation 20%-25%
Grape Juice & grape spirit 5%
Sugar and others 5%- 15%
Rent 0.4*
Utilities 1.5
Wages 7.0*

Returns to manufacturer 18.0*


Source: IBIS WORLD (2004): C2183 - Wine Manufacturing in Australia, Published Date: 27 July 2004

51. The data in Exhibit 13 however need to viewed as averages only, since the
specific cost elements can vary markedly form producer to producer, as noted by an
experienced industry analyst (4)

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Costs will vary according to the extent to which wine manufacturers produce their own
grapes and wine. Some wine manufacturers concentrate on selling lower-margin bulk
wine to other firms who bottle and brand the product themselves. Wine manufacturers
who sell their own branded wine to wholesalers, retailers and through their own cellar
door or through other direct sales (e.g. direct mail) will tend to produce higher profit
margins relative to those that do not (direct sales produce higher margins than sales
through wholesalers and retailers).

Wine companies who sell branded products tend to spend between 5-10% of annual
revenue on marketing, but for the industry as a whole is around 3.5-4% of revenue.
However, this is likely to have increased in 2002-03 and 2003-04 since promotional
spending of Australian wineries increased (especially in Britain and the United States)
as competition for sales continued to intensify.

52. Another notable pressure on mine producer’s margins is the strong competition for
retail sales that is forcing Australian wine makers to reduce prices, which is adding to
earnings uncertainty. (4)
53. Exhibit 14 presents the top 22 wine producers in 2001 and 2002 by company
identity. Their combined Total represents 20% of total national winegrape hectereage.
It shows a highly concentrated industry, with the top five companies collectively
holding just under 65% of the total vineyard hectereage of the top 22 wine producers
Based on major players’ financial results for 2003-04, IBISWorld estimates that the
four largest Australian wine producers collectively accounted for approximately
72.1% of the industry's total revenue in that year. (4)
This is down from 84.4% since 2001-02 due largely to poor performance on behalf of
Southcorp while Foster's is also estimated to have lost significant market share. In the
meantime, Hardy Wine Company and other smaller wineries have continued to grow their
market share in the past two years. (4)

Exhibit 14: Australia's top wine producers by vineyard hectereage, 20021


Rank
2002 2001 Wine Company Hectares
1 1 Southcorp Wines 8,102
2 nr McGuigan Simeon Wines 4,600
3 2 Beringer Blass 3,500
4 3 BRL Hardy 2,400
5 5 Orlando Wyndham Group 2,200
6 15 FABAL Wines 1,073
7 7 Riverina Estate 1,060
8 9 Reynolds Wines 1,025
9 8 McWilliam's Wines 950
10 10 Wingara Wine Group 720
11 11 The Yalumba Wine Company 715
12 nr De Bortoli 620
13 nr Lion Nathan Wine Group 592
14 13 Nugan Estate 581
15 nr Brown Brothers 552
16 14 Taylors Wines 550
17 nr Gooree Park 547
18 18 Jindalee Estate 514
19 17 Angove's 500

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19 nr Thomson Vintners 500
21 nr Zilzie Wines 440
22 16 Cranswick Premium Wines 438
Source: Compiled by Winetitles based on information provided by wine companies
54. Exhibit 15 presents data on the top four Australian wine producers during the
fiscal years 2001-02 and 2002-03.

55.Results for the fiscal year ending June 30 2004 were varied for the top wine
producers. Southcorp rebounded from the 2003-03 financial disaster.
Southcorp has undergone major restructuring over the past year to restore
performance and improve business after it booked a net loss of $922.9 million in
2002/03, which followed massive write-downs of goodwill and the value of some of its
brand names.

But the company returned to profit in 2003/04, with a bottom line result of $46.24
million. (34)
56. Fosters however struggled in 2003-04.(36)
Most of the damage was done by the group's Beringer Blass Wine Estates (BBWE)
business which cost Foster's $1.5 billion four years ago when it was acquired as the
growth engine for what was once a pure brewing company.
BBWE's earnings before interest tax and amortisation and significant items (EBITAS)
crashed 32 per cent, falling from $428.8 million in 2003 to $291.7 million.
Like its competitors, BBWE has been forced to sacrifice some of its profit margins in
the face of the California grape and wine glut, price wars and US consumers quaffing
cheaper wines

Exhibit 15
Financial performance of Major Australian wine producers 2001/02- 2002-03
Unit of Southcorp Beringer Hardy Wine Orlando
measure Limited Blass Wine Company Wyndham Group
Estates Limited Pty Ltd (2)
(Foster's
Group
Limited)
Estimated market share 2004 % 21.1 20.8 17 13.2
Sales 2001-02 $ million 1472 2080.4 757.6 558.6
Sales 2002-03 1180 2038.1 854.1 614.6
Sales 2003-04
Earnings before interest & tax 2001-02 $ million 287.1 444.3 101.9 98.6
Earnings before interest & tax 2002-03 $ million 132.1 371.1 119.3 91.3
EBIT: Sales Revenue 2001-02 % 19.5 21.4 13.5 17.6
EBIT: Sales Revenue 2002-03 11.2 18.2 14.0 14.8
Total assets 2001-02 $ million 5150.8 1420.7 807.5
Total assets 2002-03 4851.3 1614.5 865.1
NOTES
1. All figures are extracted from IBISWorld (2004): Wine manufacturing in Australia C2183 pp. 29-48
2. Orlando's financial year ends 31 December. Figures are averages for years ending 2001, 2002, 2003

Two of the much smaller, specialist wine manufacturers — Casella Wines and
57.
McGuigan Simeon — however had outstanding results in fiscal year 2004. (37)
Casella Wines is expected to earn a net profit of around $55 million in 2004 from sales
of $295 million. The business is funded internally with ease, and the family has no
interest in an initial public offering. …

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Southcorp must rue the day ex-chief executive Keith Lambert decided to rationalise the
company's distribution arrangements in the US after the $1.5 billion Rosemount
merger in 2001.
The subsequent disruption freed up the US distributor, WJ Deutsch, to partner with
Casella Wines, and from a standing start in the same year Yellow Tail now accounts
for one-third of the US market for Australian wine.
Discounting and an oversupply of premium grapes continue to plague the US
operations of both Southcorp and Foster's.

McGuigan Simeon, meanwhile, continues to carve out a highly profitable niche as a
low-cost producer of bulk wine, and increasingly branded lines as well. Net profit rose
25 per cent to $40.2 million. The results show there is still money to be made with
careful strategic planning and sound execution.
But companies like Foster's and Southcorp, which paid boom-time prices in
transformational deals, have a lot of work ahead of them.
58.However, the situation for McGuigan Simeon has started to become negative in
2005. (54)
The Australian Wine and Brandy Corporation predicted Australia's oversupply of
some grape varieties would continue for another two years, but that wine stocks would
be short of demand from 2007. Now the glut of red wine grapes has forced McGuigan
Simeon to reduce profit forecasts. The company said that if trading conditions do not
improve significantly in the next 24 months, there was a strong chance growers would
pull out vines, something not experienced for 20 years.

59. The ownership structure of the Australian wine manufacturing industry is


constantly changing with a growing level of ownership of small domestic operations
by foreign wine companies. (4) Doubtless, one of the most significant corporate moves
in the early twenty first century is the merger in 2004 between BRL Hardy limited
and a major beverage alcohol company, Constellation Brands, Inc of the USA., itself
one of the ‘world’s leading producers and marketers of alcoholic beverages, with a
broad portfolio of wines, spirits and imported beers. These two dominant players
already have a successful 50/50 US joint venture, Pacific Wine Partners, which has
achieved outstanding results in only its first year of operation. (29) The combined wine
company will become the world’s largest wine business by sales. (30) The former and
founding Managing Director of BRL Hardy, itself the result of a merger between two
traditional rivals, was selected as the CEO of Constellation Wines, with responsibility
‘for formulating and implementing a world-wide wine strategy that supports the
individual sales, marketing and production activities of the companies' existing wine
businesses, and maximises the benefits of Constellation's newly created wine
portfolio, expanded routes to market and greater operating resources . (30)

60. The level of concentration in the Australian wine producing industry is predicted
to increase. ‘again in the next few years as many of the smaller firms are in the
process of merging or exploring merger options’ (4) Indeed, two of the three shown in
Exhibit 13 —Southcorp and Foster’s, represented by Beringer Blass — actually
‘merged’ their wine operations in early 2005. A senior media business (41) regards this
‘merger’ as one of a series of ‘imminent structural changes that may distort the
underlying cyclicality of the industry’. Foster's-Southcorp merger if managed well
could allow Foster's to ‘dominate the industry by enabling it to invest the potential
sizable savings from synergies into supporting its key brands and building closer
relationships with its retail customers.’ (41) A key plank of FBG’s post-merger strategy

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is the major overhaul of its marketing strategy in its Australian operations, where
‘Foster's expects that appropriate segmentation, combined with services specifically
tailored to the needs of its customers in each group, will increase sales and prevent
brand culling’. (64) Two other key aspects of FBG’s post-merger strategy are the
rationalisation of both its brand portfolio and its production facilities portfolio. An
example of the second type of rationalization was recently reported (63).
International brewer Foster's Group Ltd is planning to sell its Geyserville winery in
California to The Coppola Companies for an undisclosed sum.
"The facility is to be sold as a going concern, with The Coppola Companies acquiring
a staffed production and bottling facility restaurant, and tasting room/gift shop,"
Foster's said in a statement.
The sale of Geyserville followed a strategic review of Foster's global wine business,
which recommended the disposal of certain non-strategic assets in California and
Australia.
Foster's will retain ownership of the Chateau Souverain brand, including the
Alexander Valley and Sonoma County wines.
The brand will be moved from Geyserville to the company's Asti Winery near
Cloverdale, which is currently being redesigned and updated.

61.The impact of the Fosters-Southcorp merger ‘alone will maintain the pressure on
the mid-sized producers and help to continue the process of winnowing out the
middle of the industry' (41). Not all industry analysts however were satisfied with the
logic or probable outcomes of the Foster’s Group-Southcorp ‘merger’. One such
dissenting voice is that of a Merrill Lynch analyst who observed that ‘the company's
assertions that it would more than double the profitability of Southcorp were
"overwhelmingly optimistic".He also questioned claims by the group's management
that creating the world's largest premium wine company was a plus when the industry
was fragmented, retailers were consolidating and grapes were in oversupply. (48)

Added 30/08/06
Gettler, L. (2006): “Foster's share price hits near-record’ The Age, Business Section,
p.1August 30, 2006
Source: http://www.theage.com.au/articles/2006/08/29/1156816899057.html accessed
30/08/06
TAKEOVER speculation and a better than expected second half have propelled
Foster's shares up more than 9 per cent to a near-record $5.95 closing price.
….
Investors also welcomed Foster's announcement of a $200 million share buyback and
plans to divest its underperforming Wine Clubs and Services business. Analysts expect
this could fetch $300 million to $400 million.
Still, with Australian wine producers struggling to make money because of an
oversupply of wine, a succession of bumper harvests, cut-throat competition and
pressure from retail giants, Foster's wine business — which boasts brands such as
Penfolds and Wolf Blass — showed little top-line growth.
While wine trade earnings jumped 31 per cent on a pro-forma basis to $430.7 million,
net sales revenue was up only 1.1 per cent.
But to rejuvenate its wine sales and earnings, the group unveiled its blueprint for
reviving the once-mighty Rosemount brand, which has been in serious decline over the
past few years.
Foster's will also rebadge Lindemans, turning it into a brand that would capitalise on
the booming "new world" wine trade coming out of Chile and South Africa.

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ABN Amro analyst David Cooke said: "This year was a year of getting its back office
right and cost-cutting, but 2007 will be a year concentrating on revenue growth."
Foster's yesterday posted a $332 million second-half net profit, taking full-year net
profit, pre-significant items, to $623.1 million, up 15.4 per cent on the previous year.
The result was driven by strong earnings from the beer business — Carlton
United Beverages earnings increased 17 per cent to $670 million — and better
than expected savings from the $3.2 billion Southcorp acquisition.
But the share surge was pushed largely by news reports that the world's largest
brewers, InBev and SABMiller, were rumoured to be eyeing Foster's for a takeover,
which may be worth more than $12 billion at yesterday's prices.
Analysts said yesterday that a takeover would be problematic because the beer giants
would have to team with another party, like Diageo, so they could dispose of the wine
business.
But some fund managers said Foster's would still make an attractive proposition for a
cashed-up predator.
Michael Birch, from Wallace Funds Management, said: "There is definitely a school of
thought that Foster's is worth more as three or four segmented businesses than as one
amalgam and it's not a prohibitively large company that a single player couldn't come
in and break it up. It makes sense from our point of view that someone would want to
buy it."
But Foster's chief executive Trevor O'Hoy said: "We could not be better placed as a
company goes, so that does not surprise me, that sort of interest, but we have not heard
any specifics."
Foster's strong result was boosted by realising $1 billion from the sale of assets in
Europe and India and divestment of its Asian brewing businesses.
The group also revealed that cost savings from the Southcorp merger were ahead of
schedule, with synergies for 2006 coming in at $61 million. Foster's will pay a final
dividend of 11.75¢ a share, fully franked — up 9.3 per cent on the 2005 final dividend
— and payable on October 2.

62. Ironically, perhaps, on the same day that the Fosters Brewing Group (FBG)
announced that it had secured 37.2% of its arch rival, Southcorp, 'Australia's biggest
wine company, US-based Constellation Brands ... said it had formed a consortium
with private equity groups...and the US drinks group Brown-Forman Corporation, the
company behind Jack Daniel's and Southern Comfort.' (57) In turn, this new consortium
had started a preliminary approach to Allied Domecq, the maker of famous brands
such as Ballantine's whisky and Beefeater gin. Another of the world's largest
beverages companies, Pernod Ricard, was also vying for control of Allied Domecq (57)
63. A great majority of Australia’s wine producers earn part of their revenue through
the sale of wine and related merchandise, including food, at the ‘cellar door’. Such
on-premises ‘cellars’ or ‘tasting rooms’ serve several functions. They act as a retail
establishment on the winery grounds and such rooms eliminate some additional
shipping and distribution channel maintenance costs (31).
… a recent Tourism New South Wales study found that 73 percent of wineries considered
cellar door sales ‘extremely important’ to their business with a further 18 percent viewing
cellar door sales as ‘very important’. This finding is backed up by VWTC research that
found 68 percent of Victoria’s wineries are dependent on cellar door sales for their
survival. (20)

Ali-Knight and Charters (2001) observe that wineries need to attend to several critical
success factors before enjoying the potential revenue streams offered by cellar door
sales activities.

Australian wine industry 2005 09/03/2019 20


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'However, access to these income streams requires


 a commitment to the overall customer experience, as opposed to a solitary
concentration on the sale of wine, and suggests
 the need for value-added features like regular master-class tastings,
 a system of consistent communication with a regular customer database and
 the maintenance of a consistently pleasant and welcoming atmosphere at the
winery
(Ali-Knight and Charters, 2001 as cited in Simpson and Bretherton, 2004: 2)
64. Some of the largest wine producers were keen to control a larger share of the total
value generated in the Australian wine value system. For example, Mildara Blass,
itself owned by Fosters bought Cellarmasters in the late 1990s (5).

65. Regardless of the distribution method(s) employed by the wine producers,


branding is vital: all major players ‘had well known brands pitched at particular price
points or value segments.’ (32)

66. Another key trend in the Australian wine market is the growth in wine tourism that
‘has become a major industry, roughly $US750million a year in the nation's three
major grape-growing states: South Australia, Victoria and NSW’. (12) Wine tourism 'is
considered to offer a long-term source of high profit wine sales, an excellent
opportunity for greater consumer feedback on product and service quality, an
augmented reputation for the host region and its individual winemakers, and a
valuable addition to the existing range of visitor attractions. (59) Several state
governments have been and continue to stay active partners in this initiative. The
Tasmanian wine industry’s strategic plan for 2002-2007 for instance stresses the link
between the wine and tourism industries. (33)
67. An industry report published in 2002 (20) is very clear on the direct link between the
Australian wine industry and Australia’s tourism industry and the key challenges that
need to be resolved. The report’s findings are worth quoting in some detail.
67.1 To date, communication and coordination between the wine and tourism sectors
have been limited, although many initiatives are in train to improve the position. One risk
is that too many organisations are being formed, with too much talking, rather than
action.
Not all wine regions are equally placed to attract domestic or international visitors.
Apart from intrinsic factors such as location relative to major population centres, regions
with a broad mix of attractions and good services such as accommodation, restaurants
and shopping have the best chances of success. Regions need to provide tourists with a
compelling reason to visit or stay longer by aggregating all their tourism strengths. It is
important that wine is highlighted as only one of the reasons to travel.
67.2 (…) The skills of a successful cellar door are essentially those of the tourism
industry, not the wine industry. Merchandise and services other than wine can add to the
attraction of a cellar door..
67.3 The performance of cellar doors, while excellent in places, is not uniformly
consistent. Design, staff training and continuity, relations with tour groups and overseas
visitors, and relativity of cellar door prices to retail bottle shop prices are among the
areas where improvements are possible. Cooperative local wine route marketing groups
can help promote a bigger trade than individual wineries competing between themselves.
67.4 To date, communication and coordination between the wine and tourism sectors has
been limited. This has been improved with the establishment of Australian Wine Tourism
Alliance (AWTA) and the National Tourism and Wine Export Forum (NTWEF):

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• AWTA was established by ARWF to improve the communication links between the
wine and tourism industries; it is a partnership approach between state and national
wine and tourism organisations with the main objective being to grow the ‘Australian
wine tourism pie’ rather than restrict healthy competition between regions and states;
areas of cooperation are likely to include research, training and information
dissemination;
• NTWEF was recently established by the Tourism Task Force (TTF), involving the
nation’s largest wine exporters; its objective is to develop new incentives to benefit
both the wine export and tourism export industries, such as leveraging the strength of
‘brand Australia’ and individual wine brands for the mutual benefit of both industries.

67.5 Other major tourism industry organisations with some degree of linkage to the
wine industry include TTF itself, the Australian Tourism Export Council, the
Australian Regional Wine and Food Network, Restaurant and Catering Australia, and
the Australian Hotels Association.
68.Among the most strategically important of such characteristics are detailed in
Exhibit 16 (4).

Exhibit 16: Selected characteristics of the Australian wine making industry

 The level of entry barriers is high and the trend of barrier is increasing
 The level of capital intensity is high.
 Capital intensity is affected by the level of vertical integration, particularly
backward integration. Ownership of vineyards tends to increase capital intensity
as does ownership of wine making facilities (wine makers have varying reliance
on the use of bulk wine). Bulk wine manufacturers tend to have a higher level of
capital intensity, due to investment in wine making machinery, lower staff
requirements in packing and selling and lower selling prices
 Machinery and technology investment is substantial for large scale production and
distribution management .
 Scale and distribution capabilities are becoming more important
 Most of the value added by this industry involves ageing the product and brand
marketing, which does not require a heavy investment in labour resources

Wine distributors

69. The output of wine manufacturers reaches the end consumer in one of several
ways:
 Direct sales at the producers’ cellar door’
 Distribution through liquor wholesalers and retailers
 Sales to consumers through dedicated wine clubs.

Exhibit 17 is an estimate of the cost structure in 2002 of average liquor wholesaler. (34)
Exhibit 17: Estimated costs as a % of revenue: Australian liquor wholesalers
Item Cost as a % of revenue
Depreciation 0.7
Other 10.2
Purchases 80.6
Rent 0.7
Wages 5.3
Returns 2.5*
Source: IBISWorld (2004): F4717- Liquor Wholesaling in Australia, 13 July

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IBISWorld (2004) has studied the Australian wholesale liquor industry in depth.
70.
Exhibit 18 presents some direct extracts from its report. (35)

Exhibit 18: Some key characteristics of Australia’s wine wholesaling industry


 The wholesale industry operates on very low gross profit margins ranging
from 4 per cent to 12 per cent, after discounts, depending on the product.
 These extremely low margins mean that many liquor wholesalers are
associated with grocery wholesaling, which also operates on low margins.
 Combining these activities allows for greater efficiencies and economies of
scale in operation and reduces costs. Due to these low margins the strategy
for profitable operation is to achieve fast turnover of stock and to minimise
stock holdings.

 Having a number of contracted outlets for the alcohol products is also


important and competition amongst wholesalers for the signing on of these
outlets is intense.
 These low margins, as well as changes in liquor consumption and
expenditure, have also led to a consolidation of among operators, a process
which is still continuing.
 The level of barrier is high. The trend of barrier is increasing.
 There is a high level of ownership concentration within this industry, with
the top four wholesalers having over a 70 per cent share of total industry
revenue.
 Over the last few years the wholesale liquor industry has undergone
significant consolidation. Currently, the wholesale liquor distribution
industry is dominated by Australian Liquor Marketers Pty Ltd, owned by
Metcash Limited, a South African company. The top four wholesalers have
over 70% of the industry’s total revenue.
Source: IBISWorld (2004c): F4717- Liquor Wholesaling in Australia, 13 July, p. 32-33.

Wine retailers

71.The final level of the wine industry value system is the retail sales one where
consumers purchase wines from a selected retailer.

72. Traditionally, wine retailers have been classified as either off-premise — e.g.
supermarkets or hypermarkets, specialist wine retailers, discount liquor stores, drive
through bottle shops attached to licensed hotels, and on-line wine merchants — or
on-premise. The latter category includes licensed restaurants, hotels and bars, where
consumers purchase wine to consume on the premises.

73.The nature of the wine retailing part of the industry’s total value system has
changed rapidly over the last decade or so. (38)
Our recent market analysis suggests a 3-D market segmentation is becoming
increasingly necessary to provide greater clarity for brand positioning.
Overlaying the on/off- premise demarcation is a need to segment by the consumer’s
purchase impetus, i.e. Convenience or Destination. This change is being driven by
consumer lifestyle changes and increased consumer sophistication; and the growing
dominance of the grocery channel in the off-trade and consolidated pub, restaurant
and hotel chains in the on-trade, at the expense of specialists and independents.

For large and mid-sized producers with the capability to service both the Convenience
and Destinations market, development of differentiated brand portfolios may

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increasingly become the norm. For a brand with volume aspirations, the ability of
producers to seed a market utilising on-premise/Destination retailers will become
imperative.

74. The above noted growing dominance of the grocery channel in wine retailing is an
international phenomenon (37) The industry researchers that compiled the survey noted
that such an increase in buying power by the major grocery chains ‘requires an
increased level of sophistication of category knowledge and account management’ (37)
by wine producers and / or wine wholesalers that are trying to secure sales contracts
with these ever-stronger retail monoliths. In turn, the wine producers as ‘brand
owners’ will more and more ‘need to adopt FMCG (fast moving consumer goods)
marketing and selling techniques to survive and thrive in this environment, and the
broader Convenience category. (37) The need for such new skills and understandings
would seem clearly to favour the larger and better resourced wine producers.
A concern to winemakers should be the potential for consumer confusion when the
same bottle can be $7.99 at a major retailer, $15 at a smaller retailer and $15 at
cellar door. The retailer’s power has increased and if consumers are not to be
disillusioned by cellar door pricing (especially if a WET rebate is involved), this
gap will need to be narrowed. (20)
75. The top ‘three players’ in liquor retailing in Australia in 2004 were Coles Myer
Limited, Woolworths Limited, and Australian Liquor and Hospitality Group Limited,
that collectively ‘have an estimated 45 per cent share of total (liquor) industry
revenue. (39) Both Coles and Woolworths have very recently signalled their desire to
increase their selling of own or in-house wine brands. One industry analyst notes that
if the supermarket chains become successful in selling more of their own house brand
wines, this 'could have a huge impact on the lower to mid-range price points at which
the bulk of wine sales occur and on the ability of any but the largest of companies to
maintain profitable brands in the sub-$15 a bottle segments.' (41)

76. The growing dominance of supermarket chains, or more traditionally termed


‘grocery chains’ is probably attributable to a range of reasons. Chief among such
reasons however are greater shopper convenience and probably lower prices, given
the supermarket chain’s enormous buying volume and therefore buying clout. In
respect of the convenience factor, market research has shown that ‘consumers usually
purchase liquor from between one and three outlets, generally within a radius of four
kilometres from their home or on their way to work, and most importantly, they
usually do not make a decision between what product or brand they will buy until
they have actually entered the shop.’ (39)

77. Another highly convenient way for retail consumers of wine in Australia is
through specialist wine clubs. Nowadays it is very easy to purchase a wide range of
wines —from the relatively very cheap to the ultra-premium priced wines — on-line.
One estimate declares that is that ‘wine clubs in Australia account for around 10% of
bottle sales”. (5).Another innovation in wine retailing is the launch of an online
business that ‘allows people to buy their wine through Ms Walton, who can also
provide personal cellar appraisals and palate assessments to check that subscribers are
drinking the wine they like and at a price they are willing to pay. (61)
78. Another recent trend in wine retailing in Australia has been the rise of sales of
‘clean skin’ wines from wineries within major wine producing areas in Australia
under .a specific retial liquor stores own retail label at a reduced price (39). Such wines

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are usually sold as premium wines, but with a higher profit margin to retailers,
compared to branded (wine) products. (39) A poignant case in point of such a move to
the selling of clean skin wines is the direct result of the loss of jobs among many
Southcorp employees as that company struggled to regain its profitability in 2002-03.
(42)
Two such executives formed BackVintage, in late 2003 as‘ (39) a "virtual wine
company", that uses word of mouth and the internet for direct marketing and that
deals with small wineries, taking surplus wine that it says would normally sell for
about $25 to $30 a bottle.’, BackVintage bypasses the middlemen in the distribution
chain to cut prices. It outsources production to the contract bottler Vinpac, which
belongs to Foster's. BackVintage ‘bottles it, slaps a BackVintage label on it and sells
the stuff by the caseload for $10.99 a bottle.’ ‘(42) The company has around 1500 retail
clients, and in late 2004 started selling direct to corporations. ‘(42)
Australian wine market

79. Australians up until very recently have been relatively moderate consumers of
wine. Wine consumption / capita in Australia fell marginally between 1989 and 1996,
with an average of 18.1 litres of wine consumed per head of population in 1996. This
figure was up from the 13.1 litres per capita of wine consumed in 1976-77. By 2002,
wine consumption per capita had risen to hitting 21litres. (12) Exhibit 19 tracks wine
consumption per head over the years 1990 to 2004.

Exhibit 19: Per capita wine consumption: Australia 1990 to 2004

Sources:
1. 1990-1996 figures from WFA Statistical report OIV HM Customs & Excise
as found in Salomon Barney Aust, Australian Wine Industry, Grape
Expectations May 1998 p. 17.
2. 1999 data estimated to be same as for 1998
3. Data from www.winespectator.com/Wine/Daily/News/0,1145,2052,00
4. IBISWorld (2004): Wine producers
5. : http://wine.about.com/library/bl_consum.htm down loaded 06/09/04

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80. Wine consumption in Australia has recently been encouraged by the favourable
movement in wine prices relative to beer prices. In part, this resulted from the
relatively favourable treatment of wine for tax purposes. (4)

81. Wine consumption according is felt to be both relatively price elastic and is
income elastic and so has increased with income. (4) Exhibit 20 shows that the rate of
increase in retail wine prices is the same as the average annual rate of increase in the
Consumer Price Index (CPI) of goods (excluding volatile items) in the year 2000-01.
It is lower in 2001-02, but considerably higher in 2002-03. One of the key reasons for
wine prices to fluctuate is as a response to ‘the availability, and hence, price of
grapes’. (4). In turn, the price of wine grapes is affected by both seasonal conditions
and market conditions for alternative uses of grapes — especially for use in dried
vine fruits (4).. Further data on price increases are provided by the Australian
Bureau of Statistics. (60)
The wholesale price index of total wine recorded a 4.4% decrease in 2003-04, while
the price received by winemakers for table wine and fortified wine recorded an
increase of 0.5%. The wine group retail price index for 2003-04 increased 1.5%, with
the general, all groups consumer price index increasing 2.4%.

Exhibit 20 : Retail Price index for wine and changes

Retail % change % change


Price in Index (1) in Quarterly
Index (1) CPI for Goods (2)
1997-98 128.6
1998-99 130.3 1.3%
1999-00 130.7 0.3%
2000-01 137.8 5.4%

5.4%
2001-02 141.8 2.9%
2.3%
2002-03 149.2 5.2%
1.8%

Source: (1) IBISWorld 2004 pp. 23-24.: Base year 1989-90 = 100
(2) Reserve Bank of Australia (2005): Quarterly Statistical release: Measures of Consumer
Price Inflation, 27 July 2005Quarterly percentage change Data 2200/01- 2004/05

82. Personaland household incomes in Australia have risen over the last decade or so,
and are projected to maintain this upward momentum at least in the near-term. In turn
eating meals away from home has increased. Since wine is usually seen as a
complementary product ‘such meals are more likely to be accompanied by wine than
meals eaten at home’ (4) Another discernable recent trend that is probably stimulated
by growing incomes has been a move among Australian wine consumers toward
premium wines, away from the cheaper, lower quality product that helped accelerate
wine consumption in the 1970s and 1980s in Australia. (4)

83. Changes in drink driving laws are also likely to have impacted negatively on the
consumption of wine, just as they have on other alcohol consumption. However, this
is difficult to measure and it is likely to be less affected than spirits (4)

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84.An executive of Southcorp (2004) offers an insider view on the impact of


Australia’s changing demographic profile on demand for wine.
Demographic change is providing a strong opportunity for growth in wine
consumption and there are two groups in particular who are providing most of the
impetus for wine growth. Fortunately, they’re at either end of the age spectrum.
You have the Baby Boomers – 40 to 60 year olds, who, as we are regularly reminded,
are becoming the biggest part of the population. … They are avid wine consumers and
collectors and buy up and down the price spectrum.

At the other end of the equation we have the Millenniums, the Echo Boomers, the
Nexters – call them what you will.
This group is in their 20s, they’re technologically savvy, they have a positive outlook
on life, they saw their parents work too hard and they want to have more balance in
their life, more fun. They are interested in quality and they seek out top brands. They
were introduced to wine by their parents and they already drink quite a lot of it. Wine
is their beverage of choice to have with food and they look to it for relaxing and
enjoying social occasions with friends.

85. Regardless of which demographic group the average Australian wine consumer
belongs, a discernible trend, according to an experienced Australian winemaker, is
that all over the world ‘people — new wine drinkers in particular — are looking for
these fresh, fruit-driven wines’ (58). In light of this, the same winemaker observes that
ageing the wine (before it is consumed) doesn’t play the part in the wine industry that
it did 20, 30 years ago’ (58).

86. Another observer however notes that ‘while 18-to-24 year olds represented 12 per
cent of the survey, they only made up 9 per cent of Australian-wine drinkers.’ (44)
One possible reason for this might be that consumers in this age group are just
beginning to drink wine, and are more likely at this stage of their lives to consume
RTDs (ready to drink pre-mixed beverages) or beer when they go out for a drink.

Several other trends in the first decade of the twenty first century are predicted by the
industry itself.

Many changes in the wine market which will occur over the course of the next decade,
for example new varieties, shifts in styles and varieties deemed fashionable and a
probable increased interest in organic and imported wines will represent a change in
the composition of demand rather than growth in the total demand. Nevertheless, these
shifts may well constitute a growth opportunity for some producers. 9

87. There are many ways to segment the Australian retail consumer wine market. At
the broadest level, liquor consumers can be segmented into either:
 individual or household purchasers: collectively around 80% of liquor revenue
at the retail level is derived from households (39), or
 corporate or business account purchases, who contribute the remaining 20% of
liquor retail revenue.
The purchasing criteria used by these two segments would most probably be
different, as would the volume of liquor purchased on a specific purchase occasion.

88.Most industry analysts, however, segment the wine market on a price per bottle
basis. Given the fact already noted that wine demand is relatively price elastic, this

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segmentation basis is appropriate. Exhibit 21 details the five market segments most
commonly analysed in the US wine market; these five segments are felt to apply
equally to Australian wine consumers.

Exhibit 21: US wine market segments and Australian equivalents

We define economy wine as wine sold in bottles or boxes of more than 1.5 liters, with
no small quantities available. These wines are priced up to $US3/liter, depending on
varietal, brand, and seller. From personal experience and observation, these wines have
found comfortable markets in consumers that drink wine with most meals and use wine
as a complement to food and other purposes around the home.
The Australian wine industry labels this segment the Basic segment. Its indicative price
range is <$AU5. It accounted in 1999 for 50% of the volume market share. 9
Sub-Premium Wines: The sub-premium wine segment has its roots in the economy
wine sector, but has become its own market by virtue of international competition.
Economy wine is normally a blend from many different sources and areas. Sub-
premium wine differentiates itself by selling in lower-volume bottles and provides
wine drinkers a low-cost, varietal-specific alternative for everyday use. These wines
sell from $US3.01 to $US7 per liter, and fulfilling the needs of moderate wine drinkers
looking for low-cost, quality alternatives to our next group, premium wines.
The Australian wine industry terms this segment the Premium segment. Wines
ranging in price from $AU5-$AU9.99 fall into this segment. Indicative Australian
brands are Banrock Station, Jacob’s Creek, Oxford Landing and Lindemanns Bin
Range. The Premium segment in 1999 accounted for some 34% of volume market
share9
Premium Wines: This segment answers the call for inexpensive, varietal-specific
wines. These wines are more expensive than sub-premium wines, ranging between
$US7 and $US10 per liter, but differentiate themselves more decisively by using
varietal specificity as a marketing tool.
The Australian wine industry terms this segment the Super Premium segment.
Wines ranging in price from $AU10- $ AU14.99 fall into this segment. Indicative
Australian brands are Jamieson’s Run, Penfold’s Koonunga Hill Range and the
LEASINGHAM Bin Range. The Super Premium segment in 1999 accounted for some
10% of volume market share. 9
The super-premium sector contains the largest amount of firms and the most variety.
These wines have become the focal point of marketing campaigns seen in magazines,
on televisions, billboards, and radio commercials. The separation of premium wine
from super-premium wine is subtle. We claim that premium wine is always varietal-
specific, and is mainly sold on the premises of the winery itself 7 Super-premium wines
sell anywhere from $US10.01 to $US14 per liter. These wines are believed to be
consumed with complementary goods and not on a regular basis.
The Australian wine industry terms this segment the Ultra Premium segment.
Wines ranging in price from $AU15- $AU49.99 fall into this segment. Indicative
Australian brands are Wolf Blass grey Label, Orlando St Hugo and Pipers Brook. The
Ultra Premium segment in 1999 accounted for some 5%of volume market share. 9
The deluxe sector is reserved for those wines that command more than $US14/liter.
These wines differentiate themselves in two key ways. First, the production process
mocks that of the classic French competitors, such that the product marketing reflects
their attempt to seem more European. This allows higher prices, an alternative to fine
European wines at home. Second, using marketing and tastings allow these firms to
enter the super-premium market worldwide. Their infiltration into fine restaurants
worldwide leads to even higher pricing, making these deluxe vintages reap major
rewards. Many firms exist like this in the US, and it is an extremely prohibitive market
to penetrate.

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The Australian wine industry terms this segment the Icon segment. Wines priced
in excess of $AU50 fall into this segment. Indicative Australian brands are Penfolds
grange and Henschke Hill of Grace. The Icon segment in 1999 accounted for some
1%of volume market share. 9
Source: Eyler 1999

89.An alternative way to segment the wine drinking market was briefly discussed in
the Wine industry’s 2002 The Marketing Decade document. (9) It is based on the
empirical data that suggested that the Australian alcoholic drinkers ‘can roughly be
divided into thirds:
 31% regular wine drinkers
 30% occasional drinkers, and
 39% who do not consume wine.
Of these three groups, the non-wine drinkers were regarded as being ‘unlikely to be
converted from beer, spirits or other beverages’ and thus ‘does not justify a
substantial investment in market development.’.(9)

90. The regular wine drinkers group itself can be segmented into three sub-groups:
(i) Beverage (drinkers): these wine drinkers seek quantity rather than quality of
wine, and are influenced by the perceived ‘safety’ and consistency of specific
wines. They regard wine as a drink not an experience.
(ii) Aspirational (wine drinkers): these consumers regard wine as ‘an indicator of
social status and self image’ .(9) ; or
(iii) Connoisseur (wine drinkers); these wine consumers are ‘highly knowledgeable,
have sophisticated tastes, and are information seekers’ .(9)
The second and third segments were not regarded by the wine industry as being ‘a
substantial category for market development.’ .(9)
The third group of alcoholic drinkers — occasional wine drinkers — was split into
two types of drinker:
(a) Special occasion (wine drinkers): these consumers ‘rarely drink wine’ .(9) and
(b) Social (wine drinkers): these consumers limit their consumption to certain types
of social occasions. .(9)

91.The wine industry saw this third group as holding the ‘greatest potential growth’
since this group ‘has the highest pre-disposition to wine and the greatest potential to
increase its regular consumption of wine.’ .(9) Overseas research identified women as
‘key influencers and consumers in this category.’ .(9)

Issues for the future: late 2005

92. How is the wine industry placed in late 2005 relative to the strategic objectives it
set in 1996? Exhibit 22 compares the industry’s perceived or actual status near the
end of 2005 with the objectives developed in1996 in the Strategy 2025 document.

Exhibit 22
Objective Perceived / actual in late 2005
Increase wine consumption to 22 litres On track: 21.2 litres / capita in 2003
/ capita by 2025
Be industry leader based on integrity, Industry cohesion is still evident but current
pioneering/ innovative sprit, customer exchange rate problems and financial pressures

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focus and commitment to financial may impede rate of innovation.
success
Be well represented in elite category On target: Australian wines still have high
of world’s best wines quality reputation in key overseas markets
Target 6.5% world wine production by Australia projected to produce 5.3% of wine
2025 produced by 12 leading wine producing nations
in 2004 (47)
Expand industry capacity: doubling of Already exceeded 2025 target: excess supply
grape production between 1997 and forcing prices and margins down ward.
2025:i.e. grape production of 165,000
tonnes in 2025, compared with
806,000 tonnes in 1997.
Improve profitability Erratic performance: Middle sized participants
struggling to maintain financial viability
To participate more fully as an Industry overall still seems keen to work with
industry in complementary business tourism industry, but this on-going cooperation
sectors. may become more challenging if either eating
away from home or tourism demand dampens.
93. Perhaps the greatest challenge facing the Australian wine industry over the next
several years will be how to maintain the momentum in export sales that has
propelled the industry’s growth over the last decade or so. The Chief Executive of the
Winemakers Federation of Australia summed up the challenges facing the industry. (45)
These are challenging times for the wine industry, with growth in competition in
Australia and from our global competitors, retail consolidation, discounting and the
strong dollar restraining growth in winery margins.

While we are selling greater volumes of wine, the value of those sales is not increasing
as the industry would like it.
The other key challenge, not mentioned by the CEO of the Winemakers Federation of
Australia is the industry’s ongoing over-production of wine grapes.
Australia’s wine grape harvest will decline by 1 per cent this year, but the nation is
still producing far too much wine.

….most wine producers were managing their yields down, with 2-3 per cent of the crop
likely to be left on the vine because of the low prices.

The quality of the harvest will also further enhance Australia’s reputation for
producing premium-quality wines (according to the Australian Wine and Brandy
Corporation report).

In an effort combat the retailers’ growing strength and to lift exports, the AWBC and
the Australian Winemakers Association have launched an industry review, which is
scheduled for release in April next year (68)
94. Anotherindustry observer (4) echoes these challenges, but sees a slight prospect for
listed wine companies at least to overcome the recent negative financial market
sentiment that has wiped significant value from several smaller listed wine
companies’ share prices.
The wine industry, however, has bumped along the bottom of its own cycle and is now
possibly in a position to have an upturn for those willing to bet the worst is over. But
the share prices are wallowing.

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POST SCRIPT

Anon (2006): “Wine exports up, but prices down”, The AgeAugust 8, 2006 -
11:19AM
http://www.theage.com.au/articles/2006/08/08/1154802860411.html accessed
11/08/06
Australia is exporting more wine, but prices have dropped.

Australian wine exports grew nine per cent in the year to the end of July, but average
prices fell eight per cent.

The 743 million litres exported in the 12 months to July was valued at $2.79 billion, the
Australian Wine and Brandy Corporation says.

Sweden has developed taste buds for Australian cask wines and was the largest contributor to
value growth - up 33 per cent to $50 million.

Exports to China also grew, but were offset by a 65 per cent drop in the average price a litre,
to $1.64.

"The key driver of the price decline was an increased share of bulk wine in the mix," the
corporation's July 2006 wine export approval report says.

The report says 80 per cent of Australian wine shipped to China is bulk wine valued at $0.66
a litre.

The United Kingdom remains the number one destination for Australian wine - despite a one
per cent drop in volume and three per cent price slump, the market was valued at $958
million for the year to the end of July.

The US ranks second with $899m, followed by Canada ($244m), New Zealand ($91m),
Germany ($76m), Ireland ($55m) and Sweden ($50m).

© 2006 AAP

Foster's calls time on wine strategy


- Advanced Markets access
Foster's Group will tomorrow announce a major overhaul of its key Rosemount wine
brand, and outline plans to hive off its troublesome offshore direct-mail wine clubs as
it struggles to turn around its flagging fortunes.
Source: afr_markets_overnight@newsletters.fairfax.com.au accessed 28/06/06

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Anon (2006): “Grape glut sobers McGuigan Simeon result”, The Age
Accessed on August 23, 2006 - 7:14PM
http://www.theage.com.au/articles/2006/08/23/1156012604032.html
A glut of Australian wine has washed out McGuigan Simeon Wines Ltd's 2005/06 profit, with the
company forced to write down almost $30 million in excess red and white wine.
Australia's second biggest listed winemaker on Wednesday reported an annual net loss of $11.55
million, after worse-than-expected net writedowns of $29.09 million.
Before the writedowns, net profit was $17.54 million, a decline of 53.6 per cent on the same
period a year ago.
McGuigan, whose brands include Tempus Two and McGuigan Black Label, also pointed to flat
earnings this financial year as the oversupply drove down prices and the industry faced one of the
worst crises in its 200-year history.
"In the 2007 financial year we are targeting net profit to be similar to the 2006 year, before significant
items," chairman David Clarke said.
"But we are very cautious, particularly given the weakening in the market over the last six to eight
weeks. If anything, we see more risk on the downside."
McGuigan flagged an initial $20 million stock writedown in May, but was forced to increase that
amount as conditions worsened in the last six weeks and prices tumbled even further.
Almost a billion litres of excess wine is believed to have flooded the Australian market as a result
of three years of record vintages.
Mr Clarke said the cycle was yet to bottom out and only the big low-cost producers and a number of
small boutique growers would be able to ride it out.
"We don't believe we are yet at the bottom of the cycle," he said.
"In fact, unless the 2007 vintage is low yielding, we don't think that we will see an upturn before
2009."
But he said McGuigan was in a strong financial position, with very strong cash flow and some real
opportunities ahead of it.
McGuigan chief executive Dane Hudson said wine consumption and demand for Australian drops
continued to grow solidly around the world, and the vintner - which was the fastest growing wine
brand in the UK last year - would tap further into export markets.
"We have a tremendous international business ... and although we're doing well internationally, I see
tremendous future potential," Mr Hudson said.
He said the Australian market was very competitive as the estimated 2,000 winemakers
discounted brands to clear excess stock and retailers gained more pricing power as the industry
consolidated.
But he said McGuigan would continue to grow sales and lift market share, targeting a six per cent
increase to 10 per cent.
"It (the market) is very cluttered and very competitive but I think four per cent (market share) is well
below where we should be," he said.
The company plans to introduce more brands into the higher margin $10-$20 a bottle wine market,
possibly through acquisition.
Mr Hudson said the $10-$20 bracket, in which McGuigan has only a one per cent share of the
market, was the fastest growing segment of the bottled wine industry in Australia.
"Maybe filling that gap is an acquisition, but there are also things internally that we can do to seize that
opportunity," he said.
McGuigan Simeon shares closed down two cents to $2.30.

Australian wine industry 2005 09/03/2019 33


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The Australian Wine Value System: Industry/ alliance


based resources
Department
of Supplier Winegrape Growers'
Meteorology value chains Grape producers Council of Australia Inc.

Department of Winemakers Federation


Agriculture of Australia
Fisheries and
Forestry Manufacturer Wine manufacturers Australian Wine and
Australia Brandy Corporation
value chain
CSIRO
Grape and Wine Research
State government and Development
tourism/ regional Corporation
development etc
agencies
Channel
Australian The National Australian Wine
Tourism Export Value Wine wholesalers Tourism and Tourism Alliance
Council chains Wine Export (AWTA)
Forum
Wine retailers (NTWEF)
Restaurant and
Catering Australia
Australian
Australian Buyer, end- Wine consumers Regional Wine
Hotels user value and Food
Association chain Network
11/09/2006 BUSM1488 LECTURE 5 02 06 13

Welcome to the Winemakers’ Federation of Australia (WFA).

WFA is the national peak body, existing to advance and protect the interests of Australia's winemakers.
Voluntary membership currently represents more than 90% of wine produced in Australia .

WFA is:
independent - not aligned with any public or private organisation
accountable - to you, the member
democratic - each member has equal voting rights (whether large, medium or small operations)

... and the only body positioned and resourced to deal nationally with the most critical issues affecting the
Australian wine industry.

WFA represents the industry's interests on national and international issues, on issues that may be local but
have national implications, or on issues where a State Association has sought WFA's assistance.

As the industry has grown since WFA's inception in 1990, so have the breadth and depth of issues in which

Australian wine industry 2005 09/03/2019 34


_________________________________________________________________
WFA has become involved.

WFA's role falls under three major categories:

 Issues - responding to industry demands

 Positioning - promoting the wine industry

 Programmes - activities to boost your business

WFA is totally reliant on voluntary membership levies to respond to major, national threats and opportunities
on behalf of wineries. If left unchecked, these issues would result in anything from higher tax and crippling
regulation to restricted export market access and erosion in the quality of our research and development. Any
or all of these threats could significantly harm wineries.

Membership information is available here.

Structure
The WFA structure reflects the whole of industry philosophy and all decisions made by the WFA Executive
Council (our board) require a clear 80% majority, with each Executive Councillor having one vote, regardless
of the size of the winery they represent.

The WFA Executive Council is made up equally of representatives from two electoral colleges:

 Australian Wine and Brandy Producers Association - representing large producers

 Australian Regional Winemakers' Forum - representing small and medium producers

Welcome to the Winemakers’ Federation of Australia (WFA).

WFA is the national peak body, existing to advance and protect the interests of Australia's winemakers.
Voluntary membership currently represents more than 90% of wine produced in Australia .

WFA is:
independent - not aligned with any public or private organisation
accountable - to you, the member
democratic - each member has equal voting rights (whether large, medium or small operations)

... and the only body positioned and resourced to deal nationally with the most critical issues affecting the
Australian wine industry.

WFA represents the industry's interests on national and international issues, on issues that may be local but
have national implications, or on issues where a State Association has sought WFA's assistance.
Winemakers Federation of Australia (WFA)
As the industry has grown since WFA's inception in 1990, so have the breadth and depth of issues in which
WFA has become involved.

WFA's role falls under three major categories:

 Issues - responding to industry demands

 Positioning - promoting the wine industry

 Programmes - activities to boost your business

WFA is totally reliant on voluntary membership levies to respond to major, national threats and opportunities
on behalf of wineries. If left unchecked, these issues would result in anything from higher tax and crippling
regulation to restricted export market access and erosion in the quality of our research and development. Any
or all of these threats could significantly harm wineries.

Membership information is available here.

Australian wine industry 2005 09/03/2019 35


_________________________________________________________________

Structure
The WFA structure reflects the whole of industry philosophy and all decisions made by the WFA Executive
Council (our board) require a clear 80% majority, with each Executive Councillor having one vote, regardless
of the size of the winery they represent.

The WFA Executive Council is made up equally of representatives from two electoral colleges:

 Australian Wine and Brandy Producers Association - representing large producers

 Australian Regional Winemakers' Forum - representing small and medium producers

Australian wine industry 2005 09/03/2019 36


_________________________________________________________________

Why is WFA involved in wine tourism?


Participation in wine tourism activities is an area that has the potential to provide greater financial security
and growth for businesses that are able to capitalise on the opportunities available.

It is becoming increasingly clear that unless many regional winemakers diversify their winery activities
to develop additional income streams through a commitment to winery tourism, then their chances of
growing and even their very survival could well be at risk.

The Australian Wine Industry's Strategy 2025, released in 1996, identified the importance of tourism in
stating:

'The wine industry and the tourism industry share a major common goal in capturing and presenting a unique
sense of place to consumers, whether they be wine drinkers or tourists.'

Our vision for the industry


To deliver higher returns for wineries and wine tourism operators through improved products and services and
heightened awareness, with an emphasis on an increase in wine tourist visitation and higher yields from these
visitors.

How will we achieve this?


Three year funding was obtained by WFA through the Australian Government Department of Industry,
Tourism and Resources for implementation of wine tourism projects, due to conclude in August 2005.

Additional funding is now being sought to finance the important wine tourism activities, with strong industry
support for these activities to continue.

What has been delivered in this area so far?


To aid in developing the capabilities of Australia's wine tourism businesses, a number of initiatives have been
undertaken since 2002 including:

 Development of a Wine Tourism Strategic Business Plan

 Review and restructure of the Australian Wine Tourism Alliance (AWTA)

 Production of a Wine Tourism Snapshot fact sheet

 Development of a research and publications database for wine tourism

 Input into the development of a Wine Tourism Training Package through Tourism Training Australia

 Production of a series of fact sheets titled 'Your Guide to Wine Tourism'

 Production of a case studies booklet titled 'Wine Tourism Uncorked'

 Development and delivery of cellar door and wine tourism training material for WineSkills II

 Dissemination of information to industry through regular presentations at workshops, seminars,


conferences and through written articles and papers

 Development and distribution of a resource kit in the form of a CD-ROM

 Development of a Cellar Door Research Kit

 Reinstatement of a National Wine Tourism Conference, incorporating the food sector

What activities are we undertaking to achieve the vision?


There are several areas identified for progress over the next three years:

1. Develop a wine tourism workshop programme focused on collaboration and strategic cooperation
across regions

Australian wine industry 2005 09/03/2019 37


_________________________________________________________________
2. Develop, maintain and update an industry website, including information on business planning,
research, cellar door, marketing and promotion, events and resources

3. Implement a cellar door benchmarking research project to measure profitability

4. Develop a 'Regional Tourism Ready Kit', providing a framework for regional wine associations to
work with other key businesses in their local area to identify tourism assets, strengths and gaps

Background and other information

 Wine Tourism Toolkit CD-ROM

 National Wine Tourism Strategic Business Plan 2002-2005

 Wine & Food Tourism Conference, 3 August 2005

 Wine Tourism Fact Sheets

 Wine Tourism Uncorked

 Wine Tourism Publications & Research Database

Australian wine industry 2005 09/03/2019 38


_________________________________________________________________

Other world wide trends

Source: Winemakers Federation of Australia and Australian Wine and Brandy Corporation (2002):
TheMarketing Decade: Setting the Australian Wine Marketing Agenda 2000-2010, down loaded from
http://www.wfa.org.au/PDF/Marketing%20Decade.QXD.PDF P. 8

›› This increased wealth in both Western and Asian cultures will encourage existing wine consumers
to trade up to premium categories, reducing the demand for low priced/low quality wines.
›› Consumption of premium wines (above US$5 per bottle) and super premium wines (above US$8
per bottle) is growing in most Western wine markets (Australia, UK, US, France, Canada, Ireland
and New Zealand).
›› The significant lifestyle shift in favour of wine will continue – people will entertain more
informally, they will make health a priority, shift to accumulating experiences rather than
possessions and will reward themselves more frequently to compensate for their time–poor lives.
›› The globalisation of consumer preferences will extend these Western behaviours and needs to Asia,
providing even greater market growth opportunity.
›› The New World product offer – flavour, consistency, reliability, accessibility – is better suited to
this shift in demand because it is more enjoyable and easier to choose and understand. This has
been reflected in a doubling between 1992 and 1997 of the New World’s share of world wine exports
(from 8 to 17%).

Australian wine industry 2005 09/03/2019 39