Short term reaction versus long term thinking

In many ways wine companies, especially the larger ones have never had it better. The value of the Australian dollar makes export markets attractive and offer unprecidented opportunities for the smart players, but some players are smarter than other. It’s the smart players, not the greedy ones that will wind up winning in the long term.

Many exporters are making a huge push and expending their efforts to gain a foothold in the lucrative and larger overseas markets. The Australian market is tiny in comparison to Europe or the USA so making the most of the opportunity created by the low dollar makes a lot of sense. The wineries also have to consider that production is increasing at a rate that will make absorption in the local markets impossible, no matter how much extra wine you or I drink to help out (grin.)

Obviously there are a number of ways to capture the export business, but how they do it and more importantly what they do with their pricing when they capture a piece of the pie is the most critical factor of all.

Take two examples, the first we will call “Brand A.” In this scenario lets assume they are doing fairly well in the US market and their wines are seen to be very good value. Although Aussie wines are not that well known in the US by the majority of consumers; because of the price points in comparison to world competition, Brand A is starting to gain a bit of a reputation as being good vale and sales are increasing.

Brand A is building market share slowly but surely, (just like Orlando did with Jacobs Creek in the UK.) Brand A’s plan is to build market share by keeping the price a bit lower than their competitors. They have a long-term outlook knowing that sooner or later the Oz$ will go up and things will get more difficult in this market.

Brand B takes a different approach. They come in during a series of great vintages, gain publicity and favourable ratings from the major press for their wines. They price their wines “at a US market price” and the wine sells due to the positive press. The initial profits generated are excellent. Brand B is feeling euphoric as it has increased profits at home too. This has been achieved by diverting a fair amount of the supply overseas and increasing price substantially in the Australian market.

So who is smarter, Brand A or Brand B that has made more money? Time will tell, but I know which company I would be buying shares in if I was a betting person.

Let me delve back into history about 10 years and give you one real life corporate example. Short-term profit driven pushes to make the financials look better is a formula for a disaster. A certain nameless multinational company had that been in Australia for over twenty-five years, had an enviable reputation and was well managed and profitable. Over a period of time the "push for short term results" to make the financials look better started.

Business was brought forward; bad deal were done, short term solutions were implemented. The result was that in one year this company lost more money than it had made in its entire twenty five year history in Australia. In reality, it was not all lost in one year, it was the results of some years of bad decisions and short term thinking that came home to roost.

And that’s what SHORT term thinking gets you! If the Oz arm of this company was not a huge multinational, the doors would have been closed! That’s a lesson that some of wine companies should keep in the back of their mind.

Cheers

Ric ©