Overview of the 1990’s – Stuart Hutton, Manager Agribusiness, KPMG Sydney

The 1990’s have been a decade of great development and unprecedented expansion in the Australian Wine Grape Industry.

Grapes crushed for winemaking have almost doubled from 600,000 tonnes in 1989/90 to 1.17 million tonnes in 1998/99. Exports have increased five-fold during this time from 41 million litres to 223 million litres in 1998/99.

At the beginning of 1999 there were 1,104 wineries operating in Australia, 106 of which opened during 1998. This means that a new winery was born approximately every 84 hours. Only 38 wineries processed more than 10,000 tonnes of grapes per year, whilst 171 processed 99 tonnes or less.

Grape production in Australia is still dominated by South Australia, whilst Victoria and NSW fill the minor placings, each with over 20% of the national production.

The unprecedented expansion of the industry during the 1990’s gives rise to the question:

• Is this a boom to be followed by the inevitable bust?; or
• Is this the emergence of a substantial export industry?

The establishment of new vineyards has also accelerated during the decade, with plantings from 1995 through to 1999 at unprecedentedly high levels. There is now approximately 100,000 hectares of wine grape vineyards in Australia, 27,000 hectares of which have been planted in 1997, 1998 and 1999. It can be assumed that almost none of these plantings contributed towards the 1999 vintage therefore a staggering one quarter of Australia’s vineyards are yet to get into production.

As a consequence of all of this, the increase in production graph is set to rise even more steeply during the next few years.

In response to increasing demand for red varieties, 75% of the plantings from 1997 through to 1999 have been red varieties. This will no doubt have a significant impact on the market place as these vines reach full production.

Domestic sales of Australian wine has increased only moderately through the decade from 310 million litres in 1988/89 to approximately 340million litres in 1998/99. Whilst this increase did not significantly exceeded population growth, there has been a shift in preferences towards premium wines. Cask wines still account for about 40% of Australian consumption, down from approximately 60%.

As mentioned before, exports have risen dramatically during the decade but will need to rise even more dramatically through to 2003 to account for the expected production increases. The Winemakers Federation of Australia recently published a pie-chart graph titled "Year 2003- Reconciliation". This assumed current upward trends in both export and domestic sales as well as production would continue while still leaving a potential over-hang of 196 million litres.

The United Kingdom remains our principal customer accounting for almost 50% of wine exports. USA, Canada and Germany are seen as international markets with the potential to take increasing volumes of Australian product.

Wine consumption in Australia and in the countries that are our principal customers is well below the large European consumers of France, Italy and Portugal. This, no doubt, provides some marketing opportunities for Australian exporters.

Risk management in the Australian Wine Grape Industry

Bruce McDougall, General Manager, Supply & Business Development, Southcorp Wines

In 1995 the Australian Wine Foundation sponsored the development of a 30 year industry plan, usually referred to as the 2025 vision. This document produced with input from all sections of the industry was the catalyst for a number of changes within the industry.

Six years ago relationships between growers and winemakers was adversarial and supply agreements were generally negotiated annually in an atmosphere of mistrust. Since then Southcorp have endeavoured to manage their enormous production growth by managing the supply-chain by improving relationships with their growers and entering into partnership agreements with them.

Initially, they recognised they needed to have a balance between company grown product and that supplied by contracted growers and annual purchase agreements. The higher the quality of the end product necessitated the higher percentage of company grown grapes. This percentage decreased as the quality stairs were descended.

Long term contracts and supply agreements were written with their loyal suppliers having regard for consistency of quality of product and reliability of supply. These contracts were either:

• Fixed price;
• Verbal market price; or
• Annual purchase agreements.

Growers were encouraged to expand the size of their operation and were able to use the long term supply contracts as an aid to additional financial resources. Technical and agronomic advice was also part of the package.

 The wine market has now changed and now like most businesses is a global business. Australia produces only 4% of the world’s wine yet relies heavily on export markets for its sustainability. Mr McDougall added that although we as a country are a relatively small player, we lead the world in many instances, in technological advances and in particular with the quality of education provided to those entering the industry from our various tertiary institutions. He added that it was not uncommon for graduates to find good employment opportunities in many of the world’s largest winemaking regions.

The 2025 Vision produced a Vision Statement via a consultative process that involved the entire industry. Notwithstanding the fact that it would have been regarded as highly ambitious in 1995 it has unified the industry to some extent who are now endeavouring to focus on its outcome.

It stated:

"By the Year 2025 the Australian Wine Industry will achieve $4.5billion 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."

The words in italics are regarded as the chief drivers of this vision which centres around the increase in the proportion of branded or premium wines and emphasising that wine consumption is essentially a lifestyle choice.

Mr McDougall said the industry faced a number of challenges, one of the most significant of which was the branded product versus commodity product. The profitability of the industry will continue to be enhanced by the export of quality branded product. It has to continue to strive to differentiate its product from that of a bulk commodity which would be marketed throughout the world at bulk commodity prices.

One of the significant challenges in this area will be the large increase in volume as the newly planted vines come into full production during the next few years. By 2000 there will be a surplus of red wine over current demands and during the following years there will be a large quantity of uncontracted fruit at the mercy of the market. Variable quality and production associated with young immature vines will exacerbate the problem.

Strong growth in export markets will assist with the uptake of this product however it is likely that some will be at the mercy of the international buyers of commodity wines therefore attracting only commodity prices ($1 per litre).

Fifty percent of Southcorp’s bottled sales are exported. Southcorp are vigorously promoting their own brands into a number of international markets, particularly UK, Germany and USA. Exports of red wine will need to increase by 40% per year over the next few years to account for the increase in production.

 Environmental issues are a concern to everyone involved in the food and beverage industries. The Australian industry was generally regarded as clean and green with low chemical usage. However, genetically modified organisms (GMOs) were a "no-no" and Southcorp was asked by British retailer, Marks & Spencer, to provide a statutory declaration there were no GMOs in its wine. Southcorp in an audit found one supplier of acid was generating its acid from GMO maize, necessitating the need to change suppliers.

In regard to the debate on water use and the sustainability of our river systems, the wine industry was in a good position as one of the most efficient and profitable users of water. Most of the industry adopted modern irrigation practices however some areas were still using flood irrigation.

One of the challenges in the global distribution of product was the high concentration of ownership of supermarket chains around the world and therefore the reduced number of wholesalers. Unless wine companies expanded their business at the same rate as supermarket chains they ran the risk of being marginalised and not being part of supermarket companies shopping lists. Southcorp had recently negotiated a marketing arrangement with the large British retailer First Quench which has 3,500 stores. To service these stores with more than a few cartons each requires substantial product volume.

Companies in the wine industry also had to be innovative with packaging and managing the concept brands that were filling market niches. Remembering that wine is a lifestyle product, companies need to be aware of changing lifestyle demands and fashion changes. A selection of innovative packaging including pink and silver bottles was demonstrated.

Responding to questions on grower contracts, Mr McDougall warned that intending wine grape growers should first find a winery that wants its product before planting any vines. Southcorp have not signed a new contract to buy wine grapes for two years.

He said the greatest threat to Australian wine exports might not come from competition from new world countries such as Chile or South Africa but from Southern France. Winegrowing was still mostly a cottage industry there but the region was starting to switch to varietal wines and was beginning to market aggressively through grower cooperatives.

The large increase in volumes of product available to wineries would also be an opportunity for Australian companies to more aggressively market around the globe. Previously many wine companies had to struggle to find the product to fill orders. Southcorp believe that Germany has a great potential for Australian wines and Mr McDougall gave the example of a German client who took 80,000 cases this year as a trial shipment and has since ordered 800,000 cases for next year.