Into the Next Century
The Australian wine industry has set itself an ambitious vision:
By the year 2025 the Australian wine industry will achieve $4.5 billion in annual sales by being the world’s most influential and profitable supplier of branded wines, pioneering wine as a universal first choice lifestyle beverage.
The industry will achieve its vision by adopting the mission statement:
Total commitment to innovation and style from vine to palate.
The vision is both achievable and also worth achieving — it outlines the scope of industry opportunity ($4.5 billion), the industry’s position in the world market (not the biggest but the most influential and profitable), the key product (branded wines), the existing competitive advantage of innovation, and Australia’s leadership in securing the image of wine as a preferred choice beverage.
Most importantly, the vision provides a focus for the future but does not preclude a wide scope of opportunity.
The wine industry has identified a number of key objectives which will be critical in the ultimate realisation of its vision. Those objectives are to:
- Enhance the image and reputation of Australian wine
- Entrench innovation as the growth driver of industry competitive advantage
- Enhance wine style in quality, purity, uniqueness and diversity
- Establish global leadership in specific branded market price segments
- Capitalise on market growth opportunities by expanding industry capacity
- Extend the scope of industry participation in complementary business sectors
- Improve profitability.
In adopting these objectives it is important to realise that industry growth and development will occur in stages. Over the thirty years 1996 to 2025, wine industry growth is expected to occur in the following time frame:
- Volume growth (1996-2002) during which the rapid vineyard expansion of recent years will overcome product shortages thereby enabling expansion in existing markets and penetration of new markets.
- Value growth (2002-2015) which will place increased emphasis on building brand strength, sector share and margins.
- Pre-eminence (2015-2025) when Australia will have established brand leadership in specific market segments.
The focus of the wine industry Five Year Plan, 1997-2001 is, of course, on the first ‘volume growth’ period, where the industry must fully exploit its competitive advantages to firmly entrench itself as a significant participant in the world wine industry.
The thrust of the five years 1997 to 2001 will be to:
- accelerate penetration of international markets
- initiate domestic market development
- increase Australia’s competitiveness through an upgrade of grape supply security and quality, further reduction in costs, a shift in investment priority, and an improvement in Government policy support and facilitation.
In order to accelerate these changes the industry must optimise its operating environment by ensuring: its internal structure is appropriate and dynamic; its relationship with governments and regulators is constructive and pro-active; and its communications with media, government, investors and the community are forthright and reliable.
International market penetration will require industry focus on specific market segments in targeted countries. The industry strategy on international market development will cover two major areas:
- continued growth in existing markets, with a focus on further market penetration of established brands, and the introduction and promotion of competitive new brands; and
- identification of new markets, and the commitment of suitable strategies and resources to facilitate sales growth in these embryonic markets.
The established markets presenting the greatest opportunity in the immediate term are the UK, the USA, Germany, Sweden and Japan.
United Kingdom. Australian exports will capture almost 10% of the UK market by continuing to build on the strong brand strength in the UK. New brands will also enter the UK market, taking advantage of opportunities created by the ongoing repositioning of existing brands into higher price categories. Exports to the United Kingdom will increase from 61 ML ($211 m) to 90 ML ($291 m) in 2001.
United States. By 2001, Australian exports to the United States will more than double, to 35 ML. Export growth into the United States will be driven by stronger brand recognition, in conjunction with an increased commitment of industry resources to generic marketing. At 35 ML ($163 m), Australian exports will represent almost 2% of the USA market.
Germany, Sweden and Japan. Exports to Germany will also grow, and Sweden will re-emerge as a major market for the Australian industry, although with a renewed focus on branded premium wine. Exports to Japan will increase fourfold, as the industry, backed by renewed supply availability, commits the required resources for market development. Exports to Germany will increase from 3 ML ($10 m) to 12 ML ($41 m); Sweden from 6 ML ($17 m) to 14 ML ($34 m); and Japan from 3 ML ($11 m) to 10 ML ($40 m).
The industry will also need to build on the gains made in a number of smaller but growing markets over the last twelve months, as it moves out of the supply-constrained situation of the last two years. Substantial collaborative and individual resources will be required for additional development. Key market opportunities include:
- high income Asian markets such as Hong Kong, Singapore and Taiwan
- emerging Asian markets with substantial income growth potential such as Thailand, China, India and Vietnam.
The existence of wealthy sectors in these markets, the enormous potential income growth of other sectors, and the propensity to adopt specific lifestyle products of western cultures presents an outstanding opportunity in these markets for increased wine consumption.
However, industry and government must work closely to dismantle the prohibitive tariff and taxation regimes which prevail in a large number of Asian markets.
The Australian industry will need to ensure that it devotes the required resources and mobilises appropriate assistance to ensure these opportunities are fully realised.
Overall, Australia’s exports are expected to grow from 130 ML (valued at $471 m) in 1996 to 259 ML ($896 m) in 2001. The opportunity for volume growth will be substantial, as the industry overcomes the product shortages of recent years. The industry’s challenge on international markets is to deliver high quality, competitively priced wine. The industry will need to ensure that any existing competitive advantage is supported by a substantial increase in resources devoted to promoting Australian wine and facilitating infrastructure development.
Australian wine export projections: key markets
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Due in part to the relative maturity of the Australian market, and the outstanding opportunities offshore, there has been minimal industry focus on developing new wine consumers in the Australian market in the last 10 years.
This attitude has prevailed despite the existence of significant opportunities for increasing domestic wine consumption as a result of:
- population growth in prime wine-consuming age groups (above 25 years)
- forecast growth in discretionary income
- growth in the dining out market
- growing evidence of the positive link between moderate wine consumption and health
- tourism growth
- growth in demand for more individualised lifestyle (beverage) experiences.
While the growth opportunities are promising, the industry must be fully prepared to counter any potential threats such as adverse social pressure regarding alcohol abuse, prohibitive legislative changes and import growth.
By properly addressing the opportunities and managing potential threats, domestic wine sales will grow from the current annual level of $1.10 b to $1.21 b by 2001. Domestic sales growth will come as a result of:
- per capita consumption increasing from 18.0 L/head to 18.6 L/head.
- population growth.
To address some of these issues the industry has created Wine Australia Pty Ltd, and assisted the creation of the Australian Society of Wine Education with a focus on promoting the unique aspects of Australian wine and Australian wine regions to the domestic and international community.
A series of further market development strategies for the international market and the domestic market have been identified. These strategies encompass positioning, market research, distribution, product development, promotion and regional branding.
Upgrading grape supply quality
Winegrape supply is projected to reach almost 1 million tonnes by 2001, with premium varietals showing the strongest growth, increasing from 495,000 tonnes in 1996 to 733,000 tonnes in 2001.
However, an abundance of premium varieties alone will not provide a sufficient foundation for industry expansion. Additional prerequisites include consistently superior product quality, available at a relatively low price.
Whilst premium grape intake will continue to increase as a share of total winery intake, wineries will also become more discerning in their requirements for premium grapes.
There will be substantially greater differentiation between grapes on the basis of acknowledged quality attributes and this will be reflected in winegrape prices.
Wineries will develop more sophisticated payment systems whereby final prices to grapegrowers are determined by measurable quality attributes, and by the ultimate arbiter-the wine consumer. Price signals from the market to the grower will thus become increasingly transparent.
To ensure appropriate returns to grapegrowers, new vineyard investment will have to meet best practice parameters on cost efficiency, quality specification, environmental sustainability and on identifiable regional characteristics.
As grape prices become increasingly determined by quality attributes, the variability in prices resulting from supply fluctuations alone will be diminished.
The much higher proportion of premium varietals in the Australian crush over the next five years, in conjunction with measured quality improvements, will give the Australian industry a substantial advantage relative to its competitors.
Wineries will benefit from lower costs as the ‘shortage premium’ built into grape prices over recent years is diminished. Prices for grapes will reflect the underlying market demand for the processed product, based on quality, consistency and variety.
Wineries will also endeavour to take advantage of increased economies of scale, new technology, and innovation to reduce costs of other important inputs such as packaging and capital equipment.
Shift in investment priority.
In a quest to ensure supply security for growing sales opportunities, vineyard investment has assumed a high priority in the wine industry over recent years. Although continued investment in vineyards will be necessary for sustained growth beyond the next five years, (particularly redevelopment of existing vineyards), the investment priority must now shift. The rate of vineyard development will need to slow down to compensate for the high annual rates of the last two years. Immediate investment priorities include:
- Increasing processing and storage capacity. Following the record 1996 vintage, winery processing and storage capacity is currently fully utilised. Substantial investment will be required to successfully process and store anticipated supplies from the 1997 vintage onwards
- Increasing working capital. In addition to the increased financial requirements for funding working capital based on the increase in winegrape supply, working capital requirements will be compounded by the increase in red wine produced, and the associated costs with its longer holding period
- Accelerated human capital accumulation. Investment in human skills development will need to be accelerated at all levels including vineyards, wineries and marketing
- Market development. An increased focus on targeted market development (particularly for international markets) will be essential if the industry is to fully realise the opportunities both at home and in international markets.
Improving government policy support.
Industry and government must work closely to ensure a positive policy environment is created and nurtured. In addition, government must also contribute by creating a positive and secure investment climate, facilitating infrastructure development and legislating for the industry’s formal institutional progress. The key areas of support include:
- certainty in retention of the current taxation level and structure for wine and brandy
- reviewing trading stock valuation, particularly the maturation of trading stocks geared to premium wine production
- increased support for industry R&D (basic and applied)
- sound macroeconomic management, particularly to ensure stable and realistic exchange rates
- lower tariff and non-tariff barriers via multilateral and bilateral negotiations
- continued close collaboration on health issues and community alcohol education programs
- enhanced support for wine export promotion
- acknowledging industry’s requirements for an appropriate industry statutory structure
- adopting appropriate water access and pricing policies and other resource management issues.
A series of strategies has been identified to maximise Australia’s competitive advantage and to optimise the industry’s operating environment.
Between 1992-93 and 1994-95 almost 11,000 hectares were planted to vineyards, with 6,000 ha planted in 1994-95 alone. Preliminary estimates also suggest a substantial area planted to vineyards in 1995-96 (spring 1995).
With an approximately four year lag between planting and vineyards bearing, winegrape supply is set to grow substantially between now and the end of the century.
Based on forecast sales growth on domestic and international markets, winery grape requirements are projected to reach almost 1 million tonnes by 2001.
The period 1997 to 2001 will signal the end of the winegrape supply shortage that has been evident for most of this decade, and particularly since the low yielding 1993 and 1995 vintages.
Quality, consistency, region and variety will become increasingly important to wineries, as they attempt to match available winegrape supply with market demand.
The composition of winery grape requirements falls into three main categories: premium red grapes; premium white grapes; and non-premium and multipurpose varieties.
Premium red grapes
Strong market demand for Australian bottled red wine will ensure that wineries’ requirements for premium red grapes remain strong throughout the five year period.
Premium white grapes
Exponential growth in premium white grape supply between 1996 and 2001 is likely to outpace sales growth (domestic and international markets) of existing premium white wine brands.
As a consequence, wineries will look beyond existing brands and existing markets for additional premium white wine sales. The available options include:
- expanding existing markets
- developing new markets for premium white wine
- resuming bulk wine sales (mainly offshore) at low margin and low unit values
- developing the fresh grape juice concentrate market (domestic and international)
- substituting premium grapes for non premium and multi-purpose varieties in the lower priced bottle segment, and in some cask segments
- relocating multipurpose varieties back into the dried vine fruit industry
- rejecting poorer quality grapes for winemaking purposes.
A substantial proportion of the increased available white winegrapes will need to be sourced at lower prices in order to:
- enable wineries to expand international market penetration beyond projected levels
- compete on the international bulk wine market at price parity with low-cost competitors such as Chile and South Africa
- ensure that low priced bottle and cask wine retain their price competitiveness.
Non-premium and multipurpose varieties
The increase in available supply of premium red and white varieties will reduce wineries’ requirements for non premium and multipurpose varieties. It is likely that a significant proportion of these varieties will be redirected to the dried vine fruit industry (mainly sultana) or grubbed for replacement with premium varietals.