Tax – wine pricing and export (part 1)

With the introduction of the GST we now pay more tax on a bottle of wine than almost any other country in the world. Take the typical bottle of wine that costs $27.50. The fiscal fiend is collecting about $6.44 or almost 24% of the purchase price of that bottle of wine in tax.

However, this article isn’t a bitch about having to pay to much tax, it’s the side effects of that taxing policy that I want to highlight. When the GST was introduced one of the intended benefits for industry was to make our exports more competitive by eliminating tax on products exported. Well it’s certainly done that! Now, when wine is exported no GST or WET is charged, so wine companies are in a position which not only actually encourages them to export their products, many can make a heap more profit by forsaking the local markets.

Add to that the effect of the low Australian dollar and you have a position that disadvantages local wine consumers. (As an aside do you know that the $A is one of the most traded currencies in the world, yet in relative terms our economy is the size of a pimple on an elephants behind. Why is it so highly traded? The answer is simple. Its got little to do with our economy, its because its a small currency that fluctuates easily and people can make lots of money from the fluctuations.)

Back to the wine pricing issue - let me illustrate why we as Australian consumers are the ones being disadvantaged by the current system by providing some examples. If you live in Singapore you can buy a case of 98 John Riddoch from Winestar delivered to your door including polystyrene packaging, airfreight, local Singapore tax, and insurance for $884 a dozen which is about $5 a bottle less than we could buy that same wine locally from Bert. But it gets a lot worse than that!

Lets take the ultimate example in the UK recently. 96 Grange was recently being sold for sixty quid a bottle which converts to about A$180. Here it sells for $300-$350. Why? Well tax on wine is £1.16 duty or about $3 a bottle (flat rate,) plus VAT (their equivalent of GST 17.5%.) As a result, the higher priced wines in the UK actually represent better value than they do in Oz.

The UK wine market is one of the most competitive and price sensitive in the world. The majors like Orlando direct import and don’t use agents. The low end wines like Jacobs Creek and Rosemount Diamond label sells in the UK for almost the same as it does here, however wines like St Hallets Old Block Shiraz and most other higher priced wines sell for substantially less than they do in Oz. That’s due to the tax difference and the price sensitivity.

As there is no shortage of the bulk mass produced wines, the export of Jacobs Creek etc does not lessen the amount available for local consumption, so the price in Oz is not effected by exports of the low cost wines. However the same can’t be said for the premiums and super premium wines. The greater the quantity of these wines exported, the less that’s available for local consumption. The lower the quantity available here the greater the opportunity for the wine companies to increase prices in Oz.

And don’t the (large) wine companies love that problem. They can sell all they produce by diverting a percentage of production to overseas markets and increase profit in the local market at the same time. That advantage for the wine companies is just one of the benefits of the current situation. The opportunities afforded by exporting to the US is another huge profit opportunity to wine companies and one that will be examined in the next issue of the Journal.

Keep drinking

Ric ©

Tax – wine pricing and export (part 2)

Last week I covered the impact on local wine prices caused by the GST and low A$ in general. In this issue I will address the huge windfall profits that are available to wine companies by exporting to the US and the effect that has on local prices.

Prices of most wines in the US are far higher than they are in OZ (and the UK as mentioned in last weeks Journal) and that represents a huge opportunity for increased profits for our wine exporters. In most cases, if a bottle of wine sells for “x”$ in Oz, it will still sell for “x”$ in the US, but then the US$ is worth twice ours, and wine taxes in the US are far lower.

Lets take one example in detail. (The figures may not be exact, but the principle is the important factor, not the exact dollars.) A bottle of wine that sells for $50 in Oz like say Balmoral, assuming Rosemount distributes the wine direct, would return them about $25 net after taxes per bottle.

Now lets assume that they export that same bottle to the US where it would sell for US$50 a bottle. Unlike OZ, each state has their own sales tax and all prices quoted EXCLUDE state tax, so state taxes have been excluded from this example.

The US has a more complex three-tier distribution system so lets work backwards. The retailer would buy the wine for about US$35. The wholesaler would buy it for about $29 from the importer (which may or may not be the same company as the producer.) 

Federal tax on wine is $1.07 a gallon (six bottles). (Don’t you just wish…..) Now lets be very generous and assume that freight and tax to get the wine to the US is US$2 a bottle so that means that the wine company gets US$27 net. Even if their costs were a bit higher, the producer would still get about US$25 a bottle net or A$50. So, by exporting their return will be substantially higher than if they sold the wine in OZ. Yes, there is no doubt that they would have additional overheads but these are more than compensated for by the increased profits.

Not every one has set up a US subsidiary and many of the smaller companies use agents and that leads to some “very interesting” prices. For example, Peter Lehamnn’s Clancy is selling in the US for $23 a bottle. Now Peter Lehmann may not be getting rich from this transaction, but his agent must be making a killing. From this example you can see that even mid priced wines represent huge profit opportunities.  In some cases, its still profitable for dealers to purchase wine for “retail prices’ in Oz, claim back the taxes, export to the US and still make a profit.

Recently we have seen huge increases in prices from BRL Hardy (and others) for their premium wines. Eileen Hardy for example went up over 30% in one vintage. The reason is that in reality BRLH no longer cares if the wine sells in Oz or not. They can export it all if necessary. Australia is a market of 18 million, the US is a market that more than 10 times that size and has an economy with a higher disposable income.

There is a huge focus on exporting to the US. It benefits Australia’s balance of payments as well as the bottom line of the major wineries that are maximising their returns through this opportunity. But for every action there is an opposite and equal reaction. The negative reaction in this case is the price increases and restricted supply of many premium wines locally. Not a criticism, just the reasons behind the facts of life.

Keep drinking

Ric ©