While a case can always be made for international promotion of brands and Australia’s family wineries, an ever increasing number of analysts argue that publicising regions will be a better yielding, long term investment for the industry.

The reason Australian wine exports fell marginally in both volume and value to the end of this year’s third quarter is instructive. Wine Australia’s Export Approval Report shows the 3% decline in volume to 648m litres valued at $1.78bn, down from $1.8bn, was driven by a halving of bulk wine exports to China to 4m litres.

No Worries!

And why shouldn’t this worry Australian wine producers long term? Essentially because mounting evidence makes it plain that bulk wine should no longer be their business.

High labor costs compared with South America and South Africa means they’ll never be price competitive in bulk wine production. But Australia’s premium wines are as good or better than the world’s best, so that losses in value and volume of bulk sales are generally being offset by bottled exports – for example a 6% (2m-litre) increase in bottled exports to China.

While Australian producers may rank second behind France in bottled wine exports, they achieve a higher average value than the French.

Reassuringly, Wine Australia reports that not only has growth in high-priced wines to mainland China and Hong Kong over the past five years been “extraordinary”, but wine exports above $10 per litre now account for 42% of higher value exports. The report adds, “Australia is well placed to continue this strong growth in these two markets”.

And Elsewhere?

In our largest wine market, the UK – where exports fell 1% to 242m litres – there was, contrary to elsewhere, a 1% increase in bulk sales to 196m litres. There’s been a growing tendency in Britain in recent years towards in-market bottling of imported bulk wine, so that unsurprisingly Australia’s bottled exports have declined 8% this year to 46m litres. 

However, herein was yet another indication of the need for Australia to focus on production of quality wines. Britain’s strongest decline in buying Australia’s bottled wine was in categories below $2.50 a litre (68% to 1.3m litres), but there were increased purchases (4% to 1.1m litres) in categories between $7.50 to $9.99 a litre.

So, all things considered, including a struggling UK economy and political turmoil in the US that hasn’t done the global economy any good, the 1% drop in Australia’s total wine exports to the UK is hardly an occasion for wailing and gnashing of teeth.

Again, as elsewhere, a fall in exports to the US (9% to 177m litres) was due largely to a drop in bulk wine (a whopping 20% down to 63m litres).

Changing US Outlook

What‘s particularly interesting about America’s decline in imported bulk wine are revelations from concurrent research commissioned in the US by Wine Australia and funded by the Grape and Wine Research and Development Corporation.

Key findings were:

• Regionality, diversity and premium price points are consistent areas of interest and opportunity for Australian wine in the US.
• The quality-to-price ratio Australia offers is a top attribute, while value at all price levels is seen as a key market driver. Traders say consumers seek value in mid-priced wines where they feel generally more confident they’ll find quality.
• Perception Australia makes only “jammy” high alcohol wines is changing and traders are becoming aware of high quality coming from Australia in styles matching changing American tastes.
• Traders have high regard for high-end Australian wines noting them as far removed from the “fruit bombs” with which Australia bombarded the US market in the past.
• Inventories of Australian wines are slowly rebuilding with new products and new blends, after elimination of unsuccessful wines.

Grape Supply Issue

But still retarding profits throughout Australia’s wine industry is reluctance to reduce the wine crush that increased 10% this year, and, according to Winemakers’ Federation of Australia (WFA) “remains too high and not in balance with demand”.

Australian wine companies crushed 1.83m tonnes of grapes, 170,000 tonnes more than last year, well above the average for the past six years.

Largest reductions in supply measured in hectares were made in the Riverland and Murray-Darling Swan Hill regions, but these were negated by data showing that in the Riverina, for example, land planted to vines between 2010 and last year grew by about 10%.

Accordingly the large crush is likely to increase inventory levels and maintain uncompetitive bulk wine exports, the very things current research and surveys indicate should be avoided.

While, as WFA chief executive Paul Evans admits grape prices had increased by an average of 9% this year, he also says it’s a trend that might be difficult to sustain next vintage as the market responds to the higher-than-expected 2013 crush and anticipated inventory levels.

Latest available WFA statistics indicate up to 70% of all wine production in Australia will be at breakeven or a loss. Clearly it’s a situation that will prevail until the structural mismatch between demand for our wines and the supply base is corrected.

Research suggests the glass is half full. It indicates the direction in which the industry needs to go to capitalise on its obvious potential, and how this can be done. 

There’s no question it can be done, provided collective will can be summoned throughout the industry for restructuring that will optimise its potential indefinitely into the future.