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Copyright © Ric Einstein 2009
Where To Now? (22 January)
The start of a new year is always a good time to look back on the past and reflect on the future; in this case the Australian wine industry.
Most of the woes of 2008 were completely predictable, as anyone who has been reading TORBWine would understand. Australia’s chickens returned home to roost in 2008 from the generally unsophisticated US wine market. A market that was driven by ‘fashion’ trends, drug-like ‘point’ fixes, and recommendations from the wine Gods. The devastation was made worse by ‘greedy pirates’ and others in the supply chain who saw a way to make a quick buck at the long term expense of the Australian producers.
The Australian industry did an atrocious job of building brand Australia in the US. The only thing that mattered was South Australian, and especially Barossa Shiraz. Now we are left with an ‘all Australian wine tastes the same’ mentality. Many US wine consumers have probably never tasted Cabernet from Margaret River or Coonawarra, or some of the more subtle examples of Shiraz from places like Victoria.
To see how bad things really are for Australian wines in the US, here are some of the deals available recently.
Penfolds 2004 Bin 28 Kalimna - US$12 single or $10 bottle for a six-pack
Winter Creek 2003 Shiraz - US$15 or $13 a bottle for a six-pack
Penfolds 2004 Bin 389 - US$15
Petaluma 2002 Shiraz - US$12
Penfolds 2004 St Henri US$26
Lindemans 2001Limestone Ridge for US$8
DeLisio Krystina Shiraz at US$20 (was about US$40)
Australian producers, large and small, are having the stuffing knocked out of their prices as the supply chain tries to dump Shiraz faster than a plane can crash-land into the Hudson River. And crash landing pretty well sums up what’s happening too much of the Australian category in the US market. Surprisingly, in some ways very surprisingly, sales of Oz Riesling to the US are gaining in leaps and bounds. Possibly this is because the average drinker of Riesling in the US has a sophisticated enough palate to be able to make up their own minds about the wines they enjoy, and are not afraid to experiment and taste for themselves. Also, these wines are modestly priced, and hopefully not managed by rogue importers who are only interested in making a quick buck by selling ‘fashion’ wines, and are prepared to try and build the category sensibly.
The smart producers started to lessen their reliance on the US market years ago. Winter Creek (whose wines are now being dumped in the US for about half price), is a great example. When they started, they exported exclusively to the US and did not even have a license to sell in Australia. They very quickly saw the risk in the US market and within a few years had stopped exporting and had built a network of local agents, with a heavy emphasis on restaurant sales.
For a small producer of value priced wines, making that switch is not insurmountable and those that did it should survive. But what about ‘cult’ producers who have been heavily reliant on the US market? I am willing to bet some of these producers will wind up in real trouble.
Jon Rimmerman (Garagiste) is a smart retailer that knows his plonk and has been selling Oz wines for ages. A regular reader of TORBWine, Jay Cain told me that Jon put him onto Bindi Pinot, so Jon is not only flogging the ‘fashion’ wines. In a recent email Jon wrote…..
“For now, many excellent examples from high-end labels have been relegated to the bin-end rack. There is such disinterest from the consumer’s point of view that it’s even spilled over to tasting events. Last week, I offered to open a 1999 Clarendon Hills Astralis for a visiting collector - he politely asked if I would open something else. When asked why, he said “Been there, done that”. I don’t recall anyone ever saying “been there, done that” when a bottle of 1994 Harlan or 1990 Leroy Les Beaux Monts was offered, no matter how many times they’ve tried them? Consumers are still buying Barbaresco at $50 or more, likewise Champagne? Why not Shiraz? The carnival ride that once enticed is precisely the same reason there’s currently no gullet to glide down - people find too many of the wines to be alcoholic and tiring, even beyond what many would classify as “wine”.”
That is one heck on an indictment and speaks volumes about the attitude towards top end Oz wines in the US.
The only way for Australia to gain traction in the US market again, and its an important market as it is both expanding and a wealthy one, is for Australian wine to completely reinvent its image. We need to push regionality, other grape varieties etc, so that the US begins to understand there is more to Australian wine than big Barossa Shiraz.
Figures from the Australian Wine & Brandy Corporation show our wine exports for the calendar year 2008 fell eleven percent by volume, and more worryingly, fell eighteen percent by value, and recorded the first fall in the fifteen years that the AWBC has been compiling export data. Exports to the US fell by a whopping 26.5% and the UK was down 18.2%. These are Australia's two biggest wine export markets, (and over 60% of our total production is exported.)
On the domestic consumption front, things are also not a bed of roses. In November 2008, the sale of local wine was down 2.2% over the previous year. To make matters worse, the single biggest selling wine in Oz was a New Zealand Sauvignon Blanc!
The two largest wine producers in the world, both of which have large interests in Australia are not happy little chappies. Fosters are undergoing a serious amount of navel gazing whilst trying to work out what they should do with their wine empire, whilst Constellation has closed a number of wineries and are trying to sell off some assets. Needless to say, profit levels are not what these two gigantic wine producers deem acceptable. Unfortunately for these two, size is not the be-all and end-all saviour they had hoped.
The industry may have ended 2008 with a whimper, but in 2009 the pain will increase.
The effects of the global downturn are still to be fully felt. In reality, they have hardly started to bite and the knock-on effects will take time to filter through. Unemployment will rise and consumer confidence will continue to wane. Wine exports will continue to drop. The ‘R-word’ may become a reality.
To make matters even more interesting, 2009, at this point, looks like its going to be a very good season, by way of volume, for local producers. Believe it or not, that is not good news! The amount of excess to requirements wine in stock is already an issue, and will become a bigger problem after the 2009 vintage. We don’t need another wine lake, but we are getting one! The last time this occurred, and it was only a few years ago, the worst of the excess was not in the low cost, irrigated ‘plonk’ grown in the warmer areas. It was primarily made up product from the more expensive, premium grape growing areas.
My mate Murray Paterson in NZ and I have been corresponding about the New Zealand situation and as there are some parallels here for small growers, it is worth sharing his comments with readers. Murray wrote….
“The “majors” (Pernod Ricard, Constellation, Delegat’s, Villa Maria) have dropped their prices for Sauvignon Blanc from $2,400 a tonne to $1,700 a tonne. In addition, far from their past habit of demanding more fruit from a particular area, they are now enforcing a strict yield restriction of twelve tones to the hectare. Apart from the usual winemakers’ bullshit about maintaining “quality”, their aim is simply to maintain the high price by scarcity marketing (they have agreed – non-verbally or in any traceable form of course ), to limit production to winery capacity in the region – being 140,000 tonnes.
Unfortunately, there seems to be about 195,000 tonnes out there (which is why I am counting damned bunches every day). It is obviously an opportunity for the likes of Coles to buy up cheap fruit from desperate growers …… but there is simply not the capacity to crush more fruit.
They came to this decision as a result of seeing the Aussie industry continue to crush every tonne until there was a gross oversupply (we also have an oversupply, as last harvest we did this too,) and the consequent need for inventory control … i.e. massive discounting. Tesco’s, Coles et al, are not renowned for being philanthropic and they have demanded significant reductions in price from Australian producers – to allow them the “Buy 1, get 1 free” routine. By restricting the crush to the available tank-space (and not putting in too much more), NZ producers hope to avoid this problem.
It leaves the growers in an invidious position – they cannot enforce a contract as they will simply be “let go” – so they have to comply. Some were growing 20+ tonnes/hectare though most were about 17 tonnes. That is a significant drop in income from $40,800 (17 x $2400) to $20,200 (12 x $1700) per hectare, especially as it has happened in one season. Many are highly geared and may not survive.”
Many small Australian growers in premium areas will find themselves in similar circumstances to our Kiwi neighbors. However in Oz, we have a huge number of very small growers that also produce wine under their own brand, but being a producer as well as a grower will not exempt them from the pain. Small producers will need a supportive mailing list of customers, and/or a reasonable presence in restaurants, as well as gaining a foothold in specialist or high quality wine stores if they are to survive.
The big two supermarket chains, Woolworths and Coles, with their assorted wine store chains, are gaining a tighter stranglehold on the retail market. Almost all reasonable sized producers must find space on the shelf in one of the majors (or more than one) if they are to survive domestically.
Exports will continue to remain tough but some markets are doing better than others. Denmark and parts of Asia (including China) have enjoyed excellent growth, although in some cases the starting volume is relatively small.
Long-time grape growers are farmers, and farmers are used to boom and bust cycles. They know all about the vagaries of the weather and how crop prices can vary dramatically over time. Long-time farmers are smart enough to survive. In many cases their families have been doing it for generations. But we live in a new era when many growers and producers, especially in premium grape growing areas, are ‘lifestyle’ farmers and/or boutique producers. These are the people that are at greatest risk, because unless they are damn good at what they are doing, or have very deep pockets, they will find it bloody hard to survive in 2009 and beyond.
Once upon a time, Penfolds was owned by a ‘steamship’ company, then a US cigarette company; that was followed by a company that was also heavily involved in the manufacture of water heaters. A company like Fosters can close wineries, lay-off staff, sell assets, flog off brands and they will still survive. And there is nothing to say that Fosters will even be in the wine business this time next year, but Fosters will survive. If push comes to shove, long-time farmers with reasonable size plots of land can diversify, and whilst it might be painful, they can survive. Many have done it before. But the small grower or producer does not have these options and their pain will be the greatest.
For wine lovers, many of the smaller, boutique producers make the most interesting wines, so it will be a real shame if these guys go down the tubes. Unfortunately, it is not a question of if; it’s a question of how many. And the makeup of many of the medium sized producers may well look very different by the time the industry works through this tough time.
Feel free to submit your comments!
Copyright © Ric Einstein 2009