As 2007 turns over, a retrospective on Australian wine

As 2006 drew to a crackly dry and frosty close in Australia, it was difficult not to recognise that here lies a wine industry in turmoil. I remain as buoyant as anyone else who might lack the ability to control global climate could possibly be about the longer-term future of Australian wine. However, it’s simply not possible to under-estimate the magnitude of the various challenges lining up one after the other to confront it.

Economics:



Wine oversupply

There is, at present please note the underline, too much Australian wine. This is why the average price per litre of exported wine for the year ending September 2006 was the lowest for nearly the last decade, why exports of bulk wines grew by 35 over the same period, and why many street corners in Australian capital cities are occupied by ‘cleanskin’ retail outlets or clearance houses, all stocked to the rafters with wine labels waiting to die. That is why between 100,000-200,000 tonnes of fruit were left on the vines in 2006, why growers feel they are being left to slide into bankruptcy by the industry and why some are, in most un-Australian fashion, calling for government intervention.

Australia’s wine glut, however, is anything but terminal. Even at the reduced rate of export growth, which was 8 by volume for the year ended December 2006, Australia is trading out of its surplus. If all things were equal, the major winemakers are beginning to expect they will have traded through most of their difficulties within eighteen months, and that grape prices would begin to rise again a year later. Sure, market forces are likely to lead to a large number of closures and rationalisations, for there are simply too many vineyards planted in the wrong places to the wrong grape varieties.

Strangely, and not without some trepidation, one is beginning to recognise that the entire landscape of Australian wine could be altered within a single vintage. Blighted by ongoing drought and severe vine stress, plus a season of unprecedented earliness and hitherto unimaginable frost damage, it is estimated that the 2007 Australian vintage could be short by anything between 20-35. Were this to happen at the extreme end of expectations, the Australian wine glut would instantly be a thing of the past. This might be an exceptionally brutal way to resolve an issue, given that a significant number of businesses would have to survive another year without an income, but the heavy yoke that has been hanging around the neck of Australian wine for some years and significantly reducing the industry’s optimism, would suddenly be lifted.

Growers vs makers

The levels of distrust between Australian grape growers and wine makers are presently at an all-time low. Amid a series of confrontations between the two sides of the industry, the last year has seen one of the country’s largest producers, McGuigan Simeon, controversially suspend contracts with a number of its grape suppliers, equating to around 75,000 tonnes of fruit, roughly equal in size to the entire output of the Barossa Valley. Winegrape growing organisations are working overtime to standardise the means by which winemakers are evaluating and paying for fruit, as well as attempting to initiate new collective bargaining and dispute resolution mechanisms. One of the key lessons from the current glut is the clear need to better marry future plantings of winegrapes in Australia with genuine demand.

Drought and frost affect 2007 and 2008

On top of its inevitable reduction in volume, 2007 is also going be a challenge in the quality department. In most regions, grapes will ripen early and unevenly. 2006 saw a number of varieties ripen concurrently, in what was the earliest vintage ever recorded in Australia, but 2007 is likely to be even more of a challenge. The dry conditions are also leading to serious cuts in irrigation allocations, which will further dampen yields. And, because of the extensive frost damage across vineyards in Victoria, inland New South Wales and the southeast corner of South Australia, the number of buds being laid down by vines for the 2008 season is likely to be reduced rather seriously. The outcome? 2008 is also likely to be a small vintage. That, however, is not necessarily bad news for the industry at large.

Businesses



Keeping an eye on the biggest player!

Australia’s largest wine maker remains the Foster’s Group, with around 25 of the domestic Australian market. While its integration with Southcorp has resulted in a very strong technical group which is delivering wines of strong quality across its expanded and not insignificant range. I perceive two areas that need very urgent attention, namely the company’s weaknesses at the trade or wholesale level, plus its loss of focus on key brands such as Penfolds and Lindemans.

Foster’s has attempted to amalgamate a beer sales force and a wine sales force with limited success. In the process, it has lost a large percentage of its key ‘wine people’ in its distribution arm, and this is certainly inhibiting its ability to gain placings on key restaurants lists for its premier wines. Frankly, it is a sad reality that some of the country’s best and most prestigious labels are rarely, if ever observed in high-end on-premise situations.

The Lindemans brand has been left to stagnate, even to the point that the company has said that it will be used as a masthead for wines sourced from different countries. This news has not been greeted with gay abandon by the many Australian growers presently struggling to sell their grapes. Lindemans’ former flagships, the key Coonawarra labels of St George Cabernet Sauvignon, Pyrus and Limestone Ridge, have virtually disappeared off the radar, as indeed has its former stable of classic Hunter Valley shiraz and semillon. To suggest that Lindemans simply now represents a brand of no national identity is a damning admission that it has failed to maintain a presence where it is needed. Lindemans was and should be an iconic Australian brand. The fault that it is not does not rest entirely with Foster’s, which only acquired it with the Southcorp purchase in April 2005. But that does not mean they should give it the death rites currently being prescribed.

Of even greater concern is what is happening to the Penfolds brand. There seems to be a significantly higher work rate in the marketing department for the cheaper end of this label, whose number of lines appears to be expanding exponentially. Penfolds has only ever worked as a brand in the past because of the excellence of all the wines under its label, from top to bottom. The Penfolds red wines always used to be the most sought-after release on the Australian calendar, but enthusiasm for them is waning. Much work needs to be done.

Why is Foster’s so important? To Australian people, its brands of Penfolds, Wynns, Lindemans, Seppelt and Leo Buring represent much of the heart and soul of Australian wine. Other than Lindemans, the wines currently sold under these labels generally remain at a high level, but from a marketing perspective, they are generally bought off premise and on promotion. Frankly, this is deflating to many people involved in Australian wine, not just those at Foster’s.

Brands



Rosemount Estate

Rosemount was one of the key Australian export brands before the amalgamation of distribution in the US of the former Southcorp brands and Rosemount portfolio through a single agency. That was when the wheels began to fall off, and it became clear to the brand’s new owner, Foster’s, that a reinvention was necessary. This has been achieved at the Diamond Label level at least, with a bright and flavoursome serious of juicy, early-drinking wines that have been bottled inside a new proprietary diamond-shaped bottle. The early signs are very encouraging for Foster’s. One hopes that this former cutting-edge export and premium domestic brand can return to the winner’s circle.

Hanging onto the [yellow tail].

This wine phenomenon continues to amaze. This year’s sales will top 10.5 million cases, of which the US will account for more than 8.5 million. Canada is its next most popular market, taking more than 750,000 cases, while the UK is likely to top 350,000 cases in the next year. Even in Australia, where the wine’s owners, the Casellas, had no intention of ever selling it, the wine will top 300,000 cases. Without the impact of this remarkable brand, the value and volume of Australia’s recent growth in wine exports would look rather different.

Highs



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