The Impact of the Rising Aussie $

It doesn't seem all that long ago that the A$ was worth about 50 cents to the US dollar. Around that time many investors thought the low value of the A$ and the tax schemes available for planting vines suddenly made making and exporting wines very attractive, especially to the US. It was also around that period that Robert Parker discovered he liked the big fermented Oz juice styles of wine and low and behold, everything is rosy in the winemaking garden.

Many new invertors decided to take advantage of this opportunity and joined the existing ranks of more established wineries in a concerted export push. What's more, many of them did remarkably well in gaining a beachhead in overseas markets and expanding out from there. That applied to both old and new producers.

The older producers tended to be reasonably conservative in their approach whilst many of the new boys on the block went after the Parker followers. The export market allowed some of the larger producers (who had been mainly reliant for moving their premium and icon wines) to shift volume overseas. This lower availability in Australia also enabled the producers to raise the price of many of their wines. Hardy, for example, had a 60% price increase in their top wines overnight in Australia. The volume they had to move of these wines in Oz was now lower and the demand would soak up the supply, even at the higher prices. Suddenly wines that were available freely at $25 were now hard to find at $45 and wines that used to cost about $50 had a RRP of $90. The 1998 vintage was hot, everyone was scrambling for the wines and the wine companies and their shareholders were laughing all the way to the bank.

Many of the newer players were making wines that were full on rich, sweet fruit driven wines which really appealed to Parker and many of the Americans. These buyers have a higher disposable income than we do in Australia and some of these producers did very well. Also, in many cases wines that were selling here for $40 were being sold in the US for $40 and when you consider the exchange rate, these new guys were also laughing all the way to the bank. 

As an aside, the increase in the local price of the icon wines raised the "glass price ceiling" and that left room for the middle market to rise. Because the $50 wines were now $90, the $25 wines became $40 and many of the $17 wines became $25 wines. 

Then the terrible events of September 11 took place which rocked the American economy and suddenly it became a bit harder to move Oz wine in the US, in fact it became harder to move almost all high priced wine in the US (except possibly well established French wine). In many cases margins were reduced, especially in regard to the "fashion trend" wines. Suddenly these wines which used to be almost impossible to find were much more easily available and the feeding frenzy of "I must have it at any price" seemed to be over. Sanity was staring to prevail in the US market. The lower priced everyday Australian wines still tended to plug along and gain ground.

Some of the smart players have been taking a long term approach to exports and these are the wineries that will be least affected by the rising dollar. Sure they may not have made as much during the last few years as they possibly could have but because of their prudent long term forward thinking they will not be as badly affected as many others. These are the companies that did two things. Firstly they were not greedy with export prices and didn't gouge their US customers and secondly they did not shaft their Australian customers with huge price rises and lack of availability.

Over the past two years the Australian dollar has been steadily rising against the greenback, or possibly it would be as accurate to say the greenback has been sliding against everything else. There is no doubt that the A$ was artificially low for many years and the true value should be around 75 cent US. All wineries that rely on export will to some extent be affected, some to a greater extent than others. Those players that relied on a combination of tax breaks, the artificially low dollar and exported a large percentage of their wine, especially those in the "fashion wine business", will now be the most troubled. Those that took a more conservative approach less so. The longer the dollar is around the 80 cent mark the harder it will be because we now a situation where the $ is at the top of its realistic range.

Australian wine shipments to the US have fallen because of the strong Oz dollar but the US wine market is still growing strongly. By way of volume, it may surprise many people to learn that Yellow Tail now represents over 33% of the Australian wine exported the US, almost double the share of Lindemans and nearly three times Rosemount's. Yellow tail at number 12, is now the only imported wine in the top 15 brands in the US. Yellow Tails profit margin will have to hurt as almost all its production is export.

As if things are not difficult enough for small local producers there is another factor to which they now have to contend with; most readers would are probably unaware that some large wine companies are importing Chardonnay wine into Australia in Flexitanks (Bulk), from California, to be blended with the Australian Chardonnay wine. This is due to the wine being more cost effective to IMPORT from their sister companies California vineyards, this material can be blended in the Australian wine at a rate of up to 14.99% without requirement to declare the USA wine component. In turn this will reduce the requirement for Australian Chardonnay grapes. More bad news for our smaller producers.

No matter how well run a winery is, many Australians are going to be in for some tough times, some more so than others. There will be more mergers and consolidation with the mid to larger players. There will be increased takeover activity. Unfortunately some will fall by the way side that those with the largest reliance on export will obviously be the hardest hit. However there are many small dedicated hard working new players still trying to establish themselves in the market and these guys will find it very hard too. For example one of these wineries (who makes some very credible wine) who charged about $40 a bottle for the last release will be dropping their price to $25 a bottle with their next release. Painful? Absolutely but its survival time.

PS. Since posting this article I have received the following information.

Copyright © Ric Einstein 2004