The following is an extract from pages 40-43 of "Len Evans Complete Book of Australian Wine” (and happened to be originally written by my sister, Jaki Ilbery in 1972); it may sound familiar.

"In 1919-20 the South Australian Vintage was 22.5 million litres; by 1923-24 it passed 45 million litres for the first time. The expansion was too rapid to be digested, and it was realised that wine was being made which could not be sold. Before 1924 was over, reaction had set in. Its first manifestation was a glut of Doradillo - fat white grapes of neutral flavour which yielded heavily and was suitable for distillation and maybe for sherry-making. Grapes that two or three years before had been selling at £12-14 a tonne fell rapidly to fetch only £4 a tonne or less. It was a story of excess enthusiasm and optimism that led to production far in excess of demand.

…… the Commonwealth Government established the Australian Wine Board in 1929 under the Wine Overseas Marketing Act of that year. Its charter was to supervise and promote exports of Australian wine and to promote wine quality and research……. In 1937, for example, more Australian wine was exported, mainly to the UK than was consumed at home…… Recovery from the depression was slow, and although the situation gradually improved from 1932 to 1938 the industry was in a generally unstable position.

…… The boom came with the 1960s. Annual consumption of wine increased from five litres a head in the early 1960s to 8.2 litres a head in 1969, and this increase was almost entirely because of the greater popularity of table wines. Evidence of this boom was everywhere – the proliferation of books and articles on wine, the shortage of premium wines and the unbelievably high prices they commanded, and a wave of new plantings all over the country, mainly in previously untried areas. Why? Why after so many years did wine drinking become the ‘in’ thing?

…… If wine became ‘trendy’ in the 1970s, a decade of tremendous change, the single most dramatic happening was a swing to white wine, and the virtual collapse of the red wine market.….. The effects of the white wine boom of this period on the industry were traumatic. Some companies went under, marketing strategies had to be changed and plantings altered -- dramatically it was boom-bust-boom, before some semblance of stability appeared in the 1980s.

….. the Trade Practices Act of 1975 opened the way for subsequent price-discounting wars which appeared on the surface to be of benefit to the consumer, but was hard on profitability in the industry. Costs were such that many companies lost money on cask and flagon wines, but discounting continued. The industry remains increasingly divided: the mass market, with casks and flagons which involve volume drinking at a low price; and the premium end, with an emphasis on quality varietals from top areas. And this led to another trend -- the dramatic growth of boutique wineries in areas such as the Hunter Valley, Western Australia and many areas of Victoria. These are small concerns often run by enthusiastic amateurs on a part-time basis, many of whom intend to produce top varietal wines (with varying degrees of success).

…. At the end of the 1980s and the beginning of the 1990s, the Australian wine industry appeared to be slowly settling down. About 85 percent of Australia's wine was being sold by about ten or a dozen of the country’s 560 winemakers, leaving the other 550 makers to split up the specialised, higher-priced, high-quality, cellar-door end.”

The more things change, the more they stay the same!

Fast-forward to 2006. With the absorption of Southcorp by Foster’s, approximately 30 percent of all wine produced in Australia today is controlled by one giant company. The top dozen companies are probably still producing about 85 percent of Australia's output, and the top 100 account for approximately 93 percent of wine sales, leaving the rest of the players fighting over seven percent; but now there are not 550 makers to split up the rest as there was a mere 25 years ago, there are now over 1,900 vying for a slice of this pie.

Whilst a company like a Foster’s does have a large number of boutique brands under their umbrella of 37 Australian brands listed on their web site; labels like Coldstream Hills, Devils Lair, Mount Ida, Seppelts etc, the vast majority of their volume and revenue comes from global large-scale production brands. The same but to a lesser extent could be said for the Hardys Wine Company and the balance of the top dozen producers. Most of these companies are concentrating on large volume brands, where they may not make much per bottle, but they move a lot of bottles; these brands are well-known and appeal to a major segment of the market.

If we go back to the problems that started in 1975 with the advent of discounting and the increase in the sale of wine because of the acceptance of casks, the industry in some ways finds itself in a similar situation today. Cask wine still represents a large chunk of the market, but it has competition from cleanskins and low-priced, mass produced, bottled ‘vin ordinare’. This is not just a large segment of the market, the cask segment alone represents over 50 percent of wine consumed in Australia today; and when you add in the low-cost bottles, that combined segment of the market is huge.

In order to compete at the low-end of the market, large economies of scale are mandatory, hence only the large players are involved in that market; it is their bread and butter, and in many cases their major corporate focus.

Make no mistake about it, the top end of the market, by way of volume, is a drop in the ocean of Australian wine production, and even the premium segment (say over $20 a bottle) is a small percentage of the total production. As a result, the industry is fractured into two segments; the lower cost high production end, and the small volume, higher cost segment. In many (but not all) ways, these two segments can almost be seen as mutually exclusive in the way they are marketed.

Foster’s has elected not to be represented at Wine Australia 2006 later this week, an event that is seen by many as a critically important potential sales opportunity, so why have Foster's elected not to attend? To find out, I spoke to Rell Hannah, Director of Corporate Affairs at Foster's Wine Estates.

The first question I asked Rell was, “Don't you think that Foster's has a moral and leadership obligation to support the industry at this event?” The answers and our conversation were lengthy and were essentially broken up into two areas, ‘industry leadership’ and ‘business decisions’.

In terms of industry leadership, Foster’s believes they do have a moral responsibility to provide a guiding and leadership role. As one example of this leadership role, Rell stated that up until recently, there was no formalised guide that spelled out the responsibilities between growers and producers; Foster’s has recently developed one, and in their leadership capacity, has made it available to the industry. Foster's magnanimous gesture in making it available to the industry is to be applauded, but I could not believe that any successful company, let alone a large public company, could run their business in a sound and prudent fashion without a well-documented understanding of what is required by both parties when dealing with essential suppliers, especially where long-term relationships are involved.

Many other assurances were made about recognising the seriousness of their leadership role within the industry and naturally enough the subject of not attending at Wine Australia came up again. The bottom line was that the decision was based on the bottom line. Foster's sees Wine Australia as an opportunity to market the smaller boutique brands, and feel that the attendees are there to discover new and exciting brands, as well as taste the current releases from their favourite small producers. No argument there! Foster's also feels that exhibiting their lower-priced core brands was not justified at this event.

Like a dog with a bone, I did not give up that easily; “what about the boutique brands like Coldstream Hills, Seppelts, Devils Lair and all the others that you have” I asked, “couldn't you support to the industry by exhibiting those brands at Wine Australia?"

Rell stated that a huge amount of thought and soul-searching had gone on prior to the decision not to attend had been made, and that decision was based on business factors. Essentially, or due to the fracturing of the industry between the top dozen players who move over 85% percent of production, and the other 2,000 producers who are fighting over the rest, the division between the two groups is widening and what is good for one group is not necessarily good for the other. And this is where it gets interesting; Rell told me about a Direction Task Force which had been established by the AWBC and the Winemakers Federation to develop a new strategy for the Australian wine industry.

According to the Media Release, the Australian Wine and Brandy Corporation Chief Executive, Sam Tolley, said the Directions strategy would provide a roadmap for the continued sustainability of the Australian wine industry, and will be developed in extensive consultation with all facets of the Australian wine sector – producers, exporters, grape growers, suppliers and retailers.

Clearly the industry now recognises there are major issues to be resolved. The major ones being:

• Oversupply of grapes and the follow-on issues this causes

• Different objectives by the two different market segments

• Increased competition by other emerging southern hemisphere wine producers

• The dominance of two major players in the domestic retail chain

as well as many other strategic questions that need to be answered.

The situation that the industry faces today in many ways has been faced previously, only this time the stakes are higher and the divide even greater, and domestically there is the dual-edged sword of two major grocers controlling about 60% of the retail market. The industry lives in interesting and uncertain times.

Copyright © Ric Einstein 2006