The road ahead: What’s next for Australia?
Following the removal of punitive tariffs imposed on Australian wine imports into China since November 2020, where do the country’s winemakers go from here? Jamie Goode reports.
IT WOULD be fair to guess that ex-Australia Prime Minister Scott Morrison is not the first name on the Christmas card lists of many Australian wine business owners. It was back in April 2020 that he famously called for an international probe into the origins of Covid-19. The Chinese were furious, and shortly afterwards announced punitive wine import tariffs that were officially labelled “anti-dumping” measures, but were widely seen as retaliation against Australia’s proposed investigation, just when things had been going so well.
In June 2015, China and Australia had signed a free trade agreement (ChAFTA), which included gradual reductions in import tariffs for wine and other products. This reduced tariffs from more than 20% down to 3% in December 2015, and then dropped them to zero at the beginning of 2019, which gave Australian winemakers a 14% cost advantage over their competitors.
Australia’s share of bottled wine imports into China rose from a healthy 28% in 2018 to a positively glowing 37% a year later. In that same calendar year, Australia sold wine to China to the value of AU$1.24 billion.
In March 2021, the Beijing government imposed anti-dumping duties of between 116.2% and 218.4% on bottled Australian wine imports for a five-year term. These punitive tariffs, which built on the 107.1-212.1% duty hike already announced by Beijing in November 2020, were sufficient to remove China as a realistic export option for Australian wine. The resultant figures are striking.
In 2010, the US was Australia’s main export market for wine by value at AU$569.1m (according to trade body Wine Australia), followed by the UK at AU$535.1m, Canada at AU$205.8m and China at AU$164m.
By 2015, the US was still top of the tree at AU$444.6m, followed by the UK at AU$375.5m and China at AU$370.3m (up from AU$223.6m in 2014).
By 2020, China was firmly in the lead at AU$1.01bn, followed by the UK at AU$455.4m and the US at AU$434.5m.
The latest figures, from 2023, show the impact of the tariffs: the US is in the lead again at AU$363.6m, followed by the UK at AU$361.4m. China is nowhere to be seen, but Hong Kong is the third-biggest export market at AU$289.8m, up from AU$166.3m, perhaps suggesting some anticipation of a return of the Chinese market.
It’s all over
But this is now all over. On 28 March 2024, China’s Ministry of Commerce (MOFCOM) announced that the antidumping duties on Australian wine exported to mainland China were to be removed the following day. Australian wineries no doubt breathed a sigh of relief, after three years of being squeezed out of their most significant export market. However, not all wineries were equally exposed to Australia.
One that was significantly impacted was Treasury Wine Estates (TWE) with its Penfolds brand.
TWE seemed to have modified its range with the Chinese market in mind, and even moved back to using corks for red wines destined for China and the US, aware that screwcaps were not universally loved by consumers in these countries. When the tariffs were imposed, TWE pivoted spectacularly, producing Penfolds wines in Bordeaux and California (as part of its ‘multi-country of origin’ portfolio), as well as making special bottlings blending Australian wines with local ones.
Post tariffs, TWE still maintained an onshore team of 120 staff in mainland China, switching its focus to expanding the multi-country of origin wines and also its Chinese luxury wines. Now TWE is busy re-establishing its Australian portfolio, re-allocating some of the Bin and Icon wines back to China.
The company says it is looking to expand production of the Bin and Icon portfolio through increased sourcing in the 2024 vintage, because global demand exceeds supply. The bigger volumes of these wines won’t hit the market until 2027, though, so the business expects that its re-entry to China will lead to slow and steady growth.
“At its peak, the China market accounted for less than 10% of total exports for Hill-Smith Family Estates [which owns Yalumba and others], at a time when total Australian wine exports to China were around 40% by value,” says Hill-Smith CEO Karl Martin. “So we were not as directly impacted as some…
“Having said that, the indirect effects that followed have had a significant impact on all Australian wine businesses, including Hill-Smith. Although we were under-indexed in China, it was an important premium wine market for us with a higher average net sell price per case than other markets, and sales of premium wine were difficult to redirect and replace in the years that followed. As a result, we’ve had to rebalance our inventories and grape supply over the last few years, and therefore it will take time to rebuild our premium brands for the China market.”
A different market
Indeed, it’s not a case of brands simply picking up again where they left off. Since Australia was forced to exit China, the Chinese market for wine has changed considerably, and returning producers are facing very different prospects than in 2020.
France is now the leading player with a 47% share of imported wine, followed by Chile with 17%, and then Italy and Spain. But the most significant change is that this market has shrunk: the Chinese aren’t drinking as much imported wine as they once did.
Wine imports into China have fallen in value from US$3.3bn to US$1.5bn (there has been a steady decline since 2018), so the incoming Australians will face stiff competition in a smaller market. It’s likely that a return to China will provide some relief to Australian producers, but it is not a complete solution to the oversupply they face.
Even halved, China is still a potentially lucrative destination.
“The market may have shrunk by half, but that’s still a AU$400m market,” says Stephen Jones, commercial director of McLaren Vale winery Wirra Wirra. “So, in terms of sheer size, there will still be plenty of opportunities. We know there is still strong positive consumer sentiment towards Australian wine in China.”
Jones adds that there is help for wineries wishing to return.
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“Given the recent announcement by the South Australian Government to provide a AU$1.85m China Re-Engagement Support Package for South Australian wine exporters and grape growers, this should go some way towards helping to re-position South Australia as a market leader in China.”
Channel mix
According to Jones, much has changed in the China market over the past four to five years.
“The market has shrunk [by] half, imports have reduced to a third of what they once were, and much of the corporate entertaining and gifting has gone away,” he says. There has also been what Jones calls a transformative “channel mix”, meaning that ecommerce now dominates, and consumer preferences have shifted.
“Our focus over the next six months will be to try to understand the China market, our place in it, the size of the prize and the best go-to-market strategy,” he concludes. And what of that wine oversupply situation? It’s worth noting that it isn’t all down to exiting China.
“Australia, like some other wine-producing nations, is currently managing an oversupply situation,” says Paul Turale, Wine Australia’s general manager for marketing. “However, not all of this can be attributed to the reduction in exports to mainland China. While the reduction had an influence, the sector had been in a perfect storm of operating challenges for a few years, including a very large vintage in 2021, the Covid-19 pandemic and associated changes to consumer preferences, and a global shipping crisis, just to mention a few.”
This isn’t only a difficult time for Australian wine; it’s a difficult time for every wine-producing country, with the most challenging conditions for a generation. The OIV’s figures suggest that, in 2023, global wine production exceeded demand by more than 10%, which is a significant figure.
How much unsold wine is Australia sitting on? Turale says it’s not possible to come up with an accurate figure, but explains: “We know from our survey results from last year that inventory levels remain above the 10-year average, with around two years of wine sales in stock.”
He adds that tariff removal, alongside “a historically low vintage in 2023”, will help to rebalance supply and demand.
Segmenting the wine market in sensible ways is often helpful for understanding better what is actually going on. While many consumers still have a tendency to view Australia through the lens of large producers and inexpensive wine, it is a country of small wineries, with about 2,400 producers spread across its varied regions. And, when it comes to the China tariffs, Australia wasn’t exposed equally across all segments.
“Mainland China was primarily a premium wine market,” says Turale.
“Prior to the tariffs, the average price of a bottle of Australian wine in China was the equivalent of US$19 per bottle, compared to all other importers at around US$14 per bottle, and China’s own domestic wine, priced at US$5 per bottle. Furthermore, Australia held a 34% share of the premium (classed as CNY100 or more) category.”
Diversification is now the key when it comes to targeting export markets for Australian wine. Returning to China is important, but so too is the focus of the last few years, which has been nurturing other export markets.
“Wine Australia is supporting wineries seeking to re-enter the mainland China market with a range of activities,’ says Turale. “However, we will continue to focus on building a balanced export market portfolio, with activities that support global market diversification.”
One market that has relatively underperformed of late is one of the current top two for Australian wine: the US. “Australian wine is more exposed to the commercial segment (less than US$10 per bottle) than other imported wines in the United States, and this segment of the market is declining,’ says Turale.
“According to IWSR, the value of commercial imported wine sales in the US declined by 8% between 2020 and 2022, and this segment represented 37% of total imported wine sales value in 2022, down from 41% in 2020. On the other end of the scale, premium (US$10 or more per bottle) imported wine sales over the same period increased by 6%, and this segment represented 63% of total imported wine sales value in 2022.”
He continues: “In comparison, the value of Australian commercial wine sales in US between 2020 and 2022 fell by 21%, and this segment accounted for 59% of the total value of Australian wine sales in the US in 2022, down from 68% in 2020.
Australian premium wine sales value in the US actually increased by 21% over the same period, with the premium share of Australian sales value growing from 32% to 45%. There is scope for further growth in premium Australian sales, given Australia’s lower share of this segment of the market. Australia held a 17% share of the value of commercial imported wine sales in the US in 2022, but only 7% of the premium imported wine segment.”
Perhaps Australia’s biggest opportunity is to tell the world about its fine wine dimension, and thus raise the overall image of its wine offering, rather than allowing it to be seen through the lens of affordable critter wines (cheaper offerings with pictures of native Australian animals on the label).
This process of premiumisation has been happening for some time, but in the last year three significant books have been published on Australia’s fine wines, suggesting a renewed interest in the category.
The first is How to Drink Australian, by Jane Lopes and Jonathan Ross (Murdoch Books), a doorstop of a tome, beautifully produced, and written by two American sommeliers who both spent time in Australia. The second is even weightier: the long-awaited three-volume history called The Australian Ark by famed auctioneer Andrew Caillard MW (Longueville Media and The Vintage Journal). And the third is the Classic Wine Library’s The Wines of Australia by Mark Davidson, a Canadian who is well-known for his US market work on behalf of Wine Australia.
It’s not an easy time for any export-focused wine country to be selling wine, but with the removal of the Chinese tariffs and the benefits that will no doubt come from being forced to work hard and smartly on expanding other export markets over the last three years, there are definitely grounds for optimism for Australia’s wine producers.
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