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AUSTRALIA REPORT: Down but not under

Australia has battled to maintain its position in the UK off-trade. Following the lowest-yielding vintage in seven years, it faces price rises that could jeopardise its dominant entry-level position. Fionnuala Synnott reports

Australia continues to dominate the UK market, against all the odds. Despite a decade of drought, a well-documented wine surplus and growing competition from other winemaking countries, Australia is still top dog in the UK off-trade and accounts for 22.5% of light wines sold by volume (MAT 24.03.07). Like other major winemaking countries, growth is virtually static at just under 1%. However, the category is still comfortably ahead of its nearest competitor, France, which has a 16.7% share of the UK off-trade.

But Australia is having to fight harder than ever to maintain its market share. The UK market – Australia’s most important export market by volume – is more competitive than ever before, with countries such as Chile and South Africa clamouring for more market share, particularly at entry-level price points, where Australia has been strong historically.

In fact, many of these countries have been quick to imitate Australia’s consumer-friendly labelling and marketing as well as its full-bodied, fruit-driven wines, making Australia work harder to distinguish itself in consumers’ minds

Balancing surplus
Surplus wine production has been an issue for many wine-producing countries but none more so than Australia, which – according to figures from Wine Australia – had an excess production of 460m litres at the end of 2005. Until now, this well-documented wine glut has enabled Australia to price itself competitively in the UK market, which thrives on promotional activity. However, that is set to change after this year, when a decade of drought led to debilitating frost causing the lowest-yielding harvest for seven years.

It is estimated that Australia produced 35% less fruit during the last harvest. It therefore seems inevitable that the price of Australian wine will rise – the question is, who will absorb these price changes? Unfortunately for Australia, UK consumers are notoriously fickle and tend to buy on price rather than by country so it seems unlikely that they will want to pay more for a product that they are used to thinking of as “good value”. It is also unlikely that UK retailers will accept a price rise when they can choose from an array of other countries prepared to deliver at a lower price point. Jon Pepper, marketing manager at Buckingham Vintners, says: “Any rise in price will pose a challenge in the high-discount wine market of infinite substitutions. No matter how difficult, there will always be someone who can meet that price.”

The most likely outcome is that Australian wine producers will have to absorb any hike in price and eat into their already slim profit margins, therefore increasing the likelihood of consolidation among Australian wine producers. Henry John, marketing manager at HwCg, says: “There will still be consolidation but people are a little nervous about going down that route as the most recent high-profile M&A deal, FGL, took a while to bed down.”

This year’s vintage could be a watershed in bringing supply and demand back into balance. Ross Brown, CEO at Brown Brothers Wines, explains: “While we don’t expect an immediate dramatic price rise, we do see some of the opportunistic dumping of stock and unsustainably low-priced house wines being considerably constrained.”

Alexandra McPherson, general manager of sales and marketing at McPherson Wines, adds: “A lot depends on how wineries have been dealing with surplus wine in previous years. The stronger brands should be able to maintain their pricing or allow for a small increase. I suspect there will be limited availability of very low priced wine at the bottom end of the market.”

This year’s vintage alone may not have a dramatic effect on wine surpluses (or prices), but a repeat situation in 2008 is likely to put some pressure on supply and pricing. Unfortunately, Kevin McLintock, chairman of the Directions to 2025 task force (see box on page 78), expects this year’s low yield to continue into next year as cycles of drought and frost often last for two years or more. He forecasts that the 2009 vintage will be down by 20%. Water is also an issue for Australia.

Paul Stratford, MD of Stratford Wines, adds: “The lack of water could have disastrous consequences for the long-term future of the wine industry. If water levels do not go back to normal there will be a real shortage of wine next year.”

More than brand Australia
It seems that the key to surmounting these obstacles is for Australia to focus on growing value rather than volume sales. At £4.31, Australia’s average bottle price is already higher than that of any other country apart from New Zealand. However, according to ACNielsen, this price has remained static and is the same as it was in 2005. Exports to the UK are also down by 2.1% since March last year.

But, as the most commercially aware of all the wine-producing countries, Australia has been quick to realise that it will have to adapt to changing conditions if it is to maintain its market share in the export markets. The country has therefore focused on educating both the wine trade and consumers that it has more to offer than heavily discounted iconic wines and, instead, has focused on its premium wines as well as its regional offerings. David Hodgson general manager, UK and Europe, Palandri UK, comments: “There is a lot more interest from the trade and consumers in trading up and there is no doubt that consumers are buying non-entry level wine.”

According to Pepper, there is an opportunity for niche, premium wines, “especially given the large shelf space allotted to Australia” (154 SKUs for Australia out of 758 total SKUs). Meanwhile, James Lousada, marketing director, Foster’s EMEA, thinks that consumers will pay a premium if the brand proposition is strong enough and the wine quality delivers. He explains, “Wolf Blass has an average unit price that is more than £1 above the average for Australia and £1.30 above the whole category, yet the brand continues to grow over 25% year on year.”

Australia has to balance the value offered by its more niche offerings with the volume that only brand Australia can give the category. Clare Griffiths, VP brands marketing at Constellation Europe, says, “Big, iconic brands such as Hardys are the foundation of brand Australia. The industry needs to nurture this base and build upon it, while developing an awareness of Australia’s more niche offerings.” Adrian Atkinson, wine development director at Pernod Ricard UK, agrees and says, “If the Australian category is to keep growing value the focus needs to be on achieving the right balance between the ‘brand champions’ and the smaller regional producers; both have a role to play for the future success of our industry. The ‘brand champions’ set the wider consumer perception of the category in total and create a fertile ground for the smaller producers, helping them to grow, which in turn adds value and diversity to the category.”

Although the latest vintage is likely to mean less promotional activity in the category, it is unlikely to put an end to it completely. Foster’s Lousada says: “A few brands have certainly looked to build for the long term by investing heavily in brand building activities and not just price promotion. But there remains a strong element of price promotion activity, which continues to drive the Australian category.”

In fact, Australia may find that its success at entry-level gets in the way of persuading consumers to trade up. According to Fiona Tiller, brand manager, premium brands, Evans & Tate Wine Group, Australia has succeeded so well in its marketing that it has pigeon-holed itself. She says: “Because Australian wine has built its reputation on its value and reliability it has created the misconception that it is only a ‘mid-week’ wine. We need to show consumers that if they’re looking to drink something a bit more premium and special, we’re able to offer a wine that fits that situation also.”

According to Pernod Ricard’s Atkinson, one of the biggest challenges currently facing Australia is the need to start communicating diversity within the category across all price points and products “from the ‘brand champions’ and regional producers to the iconic wines that have put Australia on the wine map”. Catherine Boot, category manager at Waverley TBS, adds: “Everyone is talking about moving away from entry-level wines and getting the consumer to trade up but the question is how to do it. Jacob’s Creek is a classic example. It does so well at entry level that it makes it difficult to sell the ranges above. It is difficult to know how to sell it apart from saying that it’s better.” Boot is trying to get this message through to her suppliers. She says, “Please give me a marketing story that takes the discussion away from price. For instance, Wolf Blass sponsoring the rugby and the cricket – this is easy to relate to on-trade customers.”

This need to look beyond price explains why Australia has been promoting its regions of late, with Margaret River, Barossa Valley and MacLaren Vale becoming mini-brands in their own right. How effective this strategy has been is open to debate. Adam Marshall, commercial director at Bottle Green, thinks that, at consumer level, the regional message has been drowned out by the big brands.“Both the trade and Wine Australia want to change focus but the big brands are making more noise,” he says. Tiller adds, “We still have a long way to go to educate the mid-week quaffer, who possibly categorises wine by nation and has the generalised misconception that Australian wines only offer ‘value for money’ but I feel that the foundations for regional awareness are being built.”

Moving with the times
Although the vintage is down, the quality of the fruit is excellent, which is good news for consumers. Hopefully, this year’s low yield will also go some way to compensating for the excess production we have witnessed over the past few years. “We believe this correction will bring things into balance, which will leave Australia in a strong position in the future”, says Martin Strachan, MD of Negociants UK. But Brett Fleming, European manager at Rathbone Wine Group, predicts tough times ahead for the bottom-end of the market. “People tend to trade up rather than trade across. We could see a resurgence of own-label wine because of concerns about Australian supply,” he explains.

If Australia is not to lose out to rival categories at entry-level, there will have to be some sort of consensus among suppliers regarding price points. “All Australian producers will have to look at the price issue. If suppliers take the decision to absorb prices it will create challenges for the whole of the industry,” says Jane Hunter, marketing director for Western Europe at Gallo.

In these challenging times, Australia’s future lies in promoting its premium and regional offerings, because ensuring good value growth in the UK is of critical importance. “Australia should employ a short-, medium- and long-term philosophy and look at the consumer opportunity within each country and develop the most effective marketing strategy accordingly,” says Hunter. 

Paul Schaafsma, regional director, UK & Europe, McGuigan Simeon Wines, says: “We built our position in the UK market by giving the consumer what they wanted. We must continue to listen to them and continue to innovate. The real challenge for Australia will be innovating at a commercial price point.” 

© db May 2007

Working together

Unlike France – Australia’s nearest competitor in the UK off-trade – Australia is good at presenting a united front. Directions for the Australian Wine Sector is a classic example of Australian teamwork. Directions, the details of which are announced in Sydney this month, is the follow-up to the Strategy 2025 document developed by the Australian wine sector in 1996. The document set an industry goal of achieving sales of A$4.5 billion (£1.9bn) by 2025. Now that this goal has been surpassed, the Australian Wine and Brandy Corporation and the Winemakers’ Federation of Australia have come up with a framework for ensuring that the industry remains profitable and sustainable in changing global conditions.

“Clearly, the factors that drove Australia’s success between 1985 and 2005 have significantly altered during that period. Other wine producing nations have analysed Australia’s success in areas such as consumer-friendly labelling and marketing and our emphasis on full-flavoured, fruit-forward wines,” says Kevin McLintock, chairman of the Directions task force.

In the past decade, the number of wineries in Australia has grown by 124%, from 892 to around 2,000. Meanwhile, Australian wine exports have grown by 374%, from 148 million litres to 702m litres. McLintock comments, “Value should be growing at the same rate. The Directions will help us to ensure that we capture that gap.”

The key aims of the Directions are to drive business profitability and promote the overall sustainability of the industry. The document includes a study of the market opportunities in key export markets such as the UK, the US, Canada and Japan. Directions will also include an interactive financial calculator to enable wine producers to analyse indicative sustainable cost of production figures at nominated retail price points across domestic and international markets, insights into global consumer trends as well as action plans for industry organisations such as the AWBC and WFA.

The report will be launched in Sydney on 2 May 2007 with an international launch on 2

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