The launch document of Strategy 2025

The winner has been wine, the late 20th century lifestyle beverage of moderation. It is more than a beverage, it has become a lifestyle product with a high degree of complementarity with food, hospitality, entertainment, the arts and tourism.

In 1966 Australian domestic wine consumption amounted to a little more than two bottles per head of population per annum. 78% of wine consumption consisted of fortified ports and sherries while premium varietal table wines barely ranked in the statistics (just 700 tonnes of Cabernet Sauvignon was processed in Australia in 1966 and Chardonnay did not exist).

These statistics underscore the enormous change which has occurred in the wine industry in just 30 years. Since 1966 wine production has tripled (from 156 million litres to 572 million litres), Australians now consume 24 bottles of wine per head of population per annum, 80% of which is now table wine. In a far cry from the 1960s, the classic world grape varieties of Cabernet Sauvignon and Chardonnay contribute 165,000 tonnes or nearly 19% of total production.

What has created such a revolution? Innovation in viticulture and wine processing technology allied with changing consumer preferences towards a Mediterranean diet stimulated by European immigration; an increased incidence of dining out; a growing concern about health and social responsibility relating to activities such as driving; and a series of complex demographic and sociological factors such as the changing role of women and the aging of Australia’s population have all contributed.

The winner has been wine, the late 20th century lifestyle beverage of moderation. It is more than a beverage, it has become a lifestyle product with a high degree of complementarity with food, hospitality, entertainment, the arts and tourism.

Despite this increasing domestic consumption of Australian wine and a massive growth in exports, the industry’s successful development should not be seen as a recent unrepeatable phenomenon.

Vines were introduced by Captain Arthur Phillip in 1788 and wine production was carried on by the English gentry in NSW, Victoria and SA for the first half century of settlement. The influx of European immigrants to the Gold Rushes of the 1860s and the accompanying waves of cultural migration by settlers such as the Silesians to the Barossa Valley provided the necessary skills to grow better quality grapes and make good wines. It has also left Australia with a legacy of 100 year old vines, historic buildings and a vast accumulation of expertise.

The Australian wine industry, with acknowledged leadership and a proud heritage of innovation, has come of age in the 1990s. It is now a mature industry with a global focus, a significant presence in world markets and international product successes ranging from Grange to Jacobs Creek.

The wine industry … transforms an agricultural commodity into a quality, branded image product which is securing a growing share of the oversupplied and very competitive global wine market. 

Although Australia is one of the world’s smaller wine producers (2% of world production) and has a relatively low domestic consumption of 18.3 litres per head, it exports more than 27% of its production — 10% more than the key world wine producing nations of France and Italy. This achievement has come without government subsidy or trade protection measures.

Australia has also developed an industry structure with considerable economy of scale. Despite a large number of wineries (nearly 1000) just ten of those dominate the industry with an 84% share of the national crush. In fact 6% of the labels on the Australian market account for more than 75% of sales. Nevertheless the contribution of small producers to the industry’s success has been out of all proportion to their size.

Growth for Australia’s wineries has been rapid in the last five years, with the then seven publicly listed wine companies recording a net increase in profits from $55 million in 1992-93 to $87 million in 1994-95. A large part of this success was due to a twentyfold growth in exports in the last ten years, but domestic consumption has also grown slowly — defying the national trend towards declining alcohol sales.

Increased vineyard plantings of premium grape varieties, especially in NSW and Victoria, have helped to accommodate this growth and a substantial rise in production is already underway as new plantings start to bear.

Consumers in Australia and overseas are ‘trading up’ to quality alcohol consumption rather than quantity. This is reflected in declining sales of bulk or cask wines and an increase in sales of bottled semi-premium ($7 to $10) and premium ($10 to $15) red and white wine categories. This stronger demand allied with a tightness in supply have increased prices and improved margins.

The wine industry has achieved this success by following a classic value adding model. It transforms an agricultural commodity into a quality, branded image product which is securing a growing share of the oversupplied and very competitive global wine market. The industry adds an estimated $910 million to purchased inputs or seven times farmgate value.

Much of the industry’s success can be attributed to a series of human and natural competitive advantages. It is a world leader in innovative technology which ensures cost competitive-high quality grape and wine production; it produces a product with intense flavour; it is flexible in its production structures untrammelled by Old World appellation restrictions and traditions; and it has managed to achieve a value for money reputation across all price points.

Other advantages are its clean, green physical environment, the engaging personality of its winemakers who have featured strongly in promotion, the geographical and technical diversity of its viticulturists and the nation’s long viticultural and winemaking heritage.

As a result of this commitment to value adding and its world competitiveness, the wine industry is one of a few genuine national industries concentrated outside the metropolitan areas. It plays a major role in regional development, contributing to employment, business growth, tourism and corporate investment.

The healthy image of wine (supported by recent research on its effects in reducing cardio vascular disease) has distanced it from other alcohol beverages. The industry is also strongly committed to environmentally friendly production.

THE GLOBAL MARKET
The global beverage market is large and diverse with an ever increasing range of products which aim to satisfy the health, image and individuality requirements of consumers as well as basic thirst and price needs.

The US beverage market is valued at US$165 billion per year and in Australia 3% to 5% of household expenditure is on beverages. The US experience indicates that market growth is dominated by soft drinks, bottled water, fruit drinks and coffee.

Although there is a strong trend away from alcohol beverages and alcohol consumption, quality table wine occupies a unique position. It is the most appropriate food accompaniment beverage, it has image and status, has acknowledged health attributes, provides variety, engenders high consumer involvement and has a range of flavour complexity. It is therefore a stronger alternative to other non-alcoholic beverages than is beer or spirits.

Wine’s natural product character, its positive lifestyle associations and its links with food and tourism are expected to stimulate modest sales growth from $65 billion to $69 billion by 2025. However, strong growth will occur in the commercial and premium segments at the expense of commodity wine beverages. Australia will be a contributor to and a beneficiary of this restructure.

Global product branding with multi-variety and multi-country sourcing will develop, but on a micro-scale there will be a paradoxical interest in premium wines with a specific regional and sub-regional identity. Globalisation also will see the widespread extension of wine company alliances and joint ventures across national boundaries.

Australia has an opportunity with its innovation leadership to drive the global wine industry much as Japan did with cars. It now needs to add marketing and investment to achieve its destiny.

A GROWING PREMIUM DOMESTIC MARKET
There has been minimal focus on developing new wine consumers in the Australian domestic wine market during the last ten years. The industry has concentrated on expanding export markets initially as a reaction to weak domestic demand and unprofitable discounting practices in Australia during the late 1980s.

Although domestic wine consumption peaked in 1988, domestic sales of Australian wine have continued to expand in value rather than volume reflecting a switch from cask or bulk wine consumption to higher priced bottled wine. Imported wine sales have been low (less than 5%) due to the variety, quality and value of Australian wine.

Significant opportunities exist for increasing domestic wine consumption as a result of population growth in prime wine consuming age groups, growth in the dining out market, increasing popularity of the Mediterranean diet, tourism growth and the quest for more individualised beverage experiences.

However, threats to be countered include social pressure regarding alcohol abuse, legislative change and globalisation of distribution which could see an increasing influence of imported brands and swinging consumer fashion loyalty.

The industry’s Vision 2025 recognises that the domestic market is critical to the industry’s long term success. The aim is to lift Australian per capita consumption from 18.3 litres/head to 22 litres/head (realising a market value of $2 billion) by 2025. This will be achieved by extending the occasionality of consumption by the marginal wine consumer segment and by developing consumption in the prospective wine consumer segment.

Although Australia has a positive wine culture, ranking 18th in the world in terms of per capita wine consumption, the industry must continue to reinforce the community acceptability of the product by highlighting its natural, food accompaniment and health attributes.

A series of market development strategies have been identified which encompass positioning, market research, distribution, product development, promotion and regional branding.

WINE TOURISM – AN OPPORTUNITY TO ENHANCE WINERY VIABILITY
The wine industry and tourism industry have a common objective of capturing and presenting a unique sense of place to consumers, whether they be wine drinkers or tourists. An anticipated growth in self discovery tourism in the next century, prompted by the maturation of income and time rich Baby Boomers and the increasing affluence of Asian consumers, means that a number of opportunities exist. Wine tourism in Australia is currently estimated to be worth around $400m with potential to grow substantially to $1100m.

In the past the economic benefits of tourism have often been captured by tourism operators and other non-wine businesses while wineries bear the costs of providing the experience. Nevertheless, small wineries already base a substantial part of their business on tourism. These operators prefer the cost effectiveness of cellar door sales to wholesale/retail distribution and value the opportunity to create brand awareness and loyalty, along with immediate cash flow. For many small wineries, especially those with strong lifestyle business motivation, wine tourism can be the core business focus.

Strategies to increase the wine tourism market and capture a greater share of the tourist dollar include increased collaboration between wineries and tourism operators, enhanced tourism services at wineries and joint promotion with State Tourism authorities.

STRONG EXPORT MARKET GROWTH
Although the world wine market is estimated to be A$65 billion (wholesale) the international wine trade accounts for just 20% of this total at A$13 billion.

With exports of 125 million litres Australia has already seized a significant share of this small but valuable market. Although it only has a 2.4% share of world trade by volume, at $449 million in wholesale terms it has 3.5% of trade by value.

The export challenge over the next 30 years is to capitalise on the dynamic changes anticipated in world income and population growth and its effect on wine markets.

The expectation is that while the volume of wine sales will drop, the value of the world wine market will rise to $69 billion in 2025 as consumers demonstrate a willingness to pay more for consistently higher quality wines. As a result the indicative average per litre value will rise from A$2.55 to A$2.98.

There is also expected to be a relative shift in world wine consumption from traditional wine producing countries to emerging, import dependent countries. Factors influencing this will be declining consumption trends in traditional wine producing countries such as France, Italy and Argentina; growing consumer markets in the UK, Scandinavia and North America where wine sales will reach a broader community base and a substantial increase in emerging markets such as Asia, South America and Africa.

Australia is well placed to capitalise on the demand for consistent, higher quality wines. As wine consumption emphasis shifts towards non-traditional import dependent markets new market opportunities will arise.

Most of the projected growth will come from four major markets:

  • The United Kingdom, which is highly import dependent, will experience an increase in per capita consumption to 16.4 litres head and wine sales above £3 will increase at a faster rate than total sales. This will work in Australia’s favour as 95% of Australian sales are over £3.Australia will supply 120 million litres (ML) representing an 11% market share by 2025.
  • The United States is the world’s third largest wine importer and 90% of consumption is in the ‘popular’ or above segments (i.e. > $US4.25). Australia will capitalise on market growth in this sector to achieve export sales of 88ML (4% market share) by 2025.
  • Germany is the world’s largest importer by volume but the majority of imports are low in quality and price. There is expected to be a relative shift in consumption from lower to higher priced wine (above 7.5DM), with Australia supplying 80ML for a 4% market share in 2025.
  • Japan has the fourth fastest growing wine market and 60% of wine consumed is imported. A substantial increase in per capita consumption is expected to increase this market four fold and Australia’s share is expected to grow to 7% (50ML)in 2025.

Overall Australia’s exports by 2025 are expected to grow to 600 million litres equating to A$2.5 billion in sales annually.

Export growth is expected to occur in three phases:

  • Volume growth (1996-2002) during which the rapid vineyard expansion of recent years will overcome product shortages thereby enabling expansion in existing 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 Australian wine industry seeks to forge a strong partnership with Government to implement its Vision 2025. Achieving the target – $4.5 billion in annual sales by being the world’s most influential and profitable wine producer in the Year 2025 – is not something the wine industry can do by itself. It needs the support of the Australian community through its elected governments.

Wine has become a model for value adding and it has achieved success through the genuine competitive advantage of Australia and its people.

The current and future benefits to all Australians of the increasing global influence and growth of the wine industry are:

  • improving Australia’s export performance and redressing the Current Account deficit
  • stimulating employment growth
  • fostering regional development
  • enhancing tourism prospects
  • adding value and income returns to rural producers
  • enhancing water use efficiency and environmental management
  • assisting the development of a technically sophisticated overseas image for Australian industry
  • demonstrating best practice in international marketing
  • encouraging social responsibility in alcohol consumption.

What can Government do to assist the wine industry in this quest? Providing a positive investment climate and facilitation infrastructure are the key contributions Government can make. Specifically the Government can provide the following support:

TAXATION

  • certainty in the retention of the current taxation level and structure for wine and brandy
  • review the method for valuing trading stock, particularly the maturation of wine stocks geared to premium wine production
  • maintain the current vineyard depreciation provisions
  • vary other taxation provisions which inhibit growth or prejudice quality.

FACILITATION

  • maintain support for industry research and development
  • enhance support for wine export promotion
  • upgrade Government contributions to training and to strategic data collection
  • continue the commitment to industry’s pro market self regulation
  • adopt appropriate water access and pricing policies.

IMAGE AND INFLUENCE
1. Progress and sustain the community acceptance positioning of wine (health, environment, lifestyle)
2. Adopt a targeted publicity strategy to communicate the uniqueness and capabilities of the Australian wine industry.
3. Extend the influence of Australia in world wine forums and institutions.

COMPETITIVE ADVANTAGE
4. Increase research and development effort and application to the priorities of quality and specification improvement, cost reduction and supply security.
5. Further develop the existing wine industry ‘learning’ culture of innovation and cooperation to compete.
6. Benchmark industry production and management processes to assure world best practice.
7. Accelerate the adoption of environmentally sustainable policies and practices in all aspects of the industry.
8. Maintain the existing minimal regulation to ensure market respon-siveness and production flexibility .

MARKETS
9. Broaden the appeal of wine so it is more accessible and attractive to the occasional and prospective consumer segments.
10. Gain via market research a better understanding of consumer behaviour and attitudes relating to wine.
11. Enhance and expand market distribution channels for wine.
12. Develop new products to create new market opportunities and evolve existing products to anticipate and meet consumer needs.
13. Develop promotional initiatives to increase the loyalty of the existing wine drinker segment; extend occasionality of consumption in the marginal segment; develop consumption in the prospective segment.
14. Utilise wine regions as defined by geographic indications as a brand marketing opportunity.
15. Increase cooperative export promotion effort and focus on specific branded market segments in targeted countries.
16. Improve access to export markets by small and medium wine companies.

WINE TOURISM
17. Capitalise on wine tourism opportunities by stimulating wine tourism and improving the profitability for wineries.

RESOURCE CAPACITY
18. Encourage viable expansion in vineyards, wine processing storage and packaging capacity and supplier capability to meet market projections.
19. Influence water access and pricing policies to ensure that the wine industry can secure its additional water supplies.
20. Implement a national, industry driven training initiative to expand quickly the supply of skilled person-nel and to broaden and upgrade the skills of existing employees.
21. Undertake a major investor education programme to attract equity investment and loan finance into the wine industry.

PROFITABILITY
22. Institute periodic benchmarking of the financial performance of the industry by relevant categories.
23. Pursue cost reductions through productivity improvement and adoption of world best practice in packaging and logistics.
24. Introduce a risk management strategy that identifies and formulates contingencies for industry wide risks.

GOVERNMENT PARTNERSHIP
25. Establish a policy and facilitation partnership with Government to create a favourable business climate for wine industry investment and growth.
26. Continue, in partnership with Government, alcohol and health programmes to reduce alcohol abuse.
27. Ensure that State and Local Government land use planning policies, infrastructure provision and regional development strategies are supportive of the wine industry.

INDUSTRY INSTITUTIONS
28. Review wine industry bodies’ structure to ensure that they enhance a ‘whole of industry’ strategic focus, to amplify market influence, to clarify roles and to ensure resource efficiency.
29. Redesign Australian wine industry internal communication processes, forums and media.
30. Improve the scope and reliability of data utilised for forward production and market planning.

FIVE YEAR PLAN 1997 – 2001

The thrust of the five years 1997 to 2001 will be to accelerate penetration of export markets, to initiate domestic market development, and to increase Australia’s relative competitiveness through an upgrade of grape supply quality, a reduction in costs, and an improvement in Government policy support.
Industry aspects of the plan include:

  • Australian exports will capture 8.3% of the UK wine market, and will more than double their share of the US market to 2%. Exports to Continental Europe will also grow significantly, especially to Germany, Sweden and Switzerland.
  • Growth in domestic wine sales with an anticipated per capita consumption of 18.9 litres/head by 2001.
  • Aggregate winery stocks are expected to grow to exceed 1 billion litres by 2001 requiring substantial increases in working capital.
  • Winegrape supply is projected to reach 1 million tonnes by 2001, with the strongest growth in premium varietals up from 485,000 tonnes in 1996 to 715,000 tonnes in 2001.
  • The composition of winery requirements will change, with a decline in demand for non-premium and multi-purpose grapes, a softening demand for lower quality premium white varietals and continued strong demand for premium red varietals.
  • Wineries will benefit from lower input costs as grape prices adjust to normal levels.
  • Investment priority will shift from vineyards to processing capacity, storage and working capital to utilise increased grape supplies from the 1990’s vineyard planting surge.

To make the 2025 Vision a reality will require the commitment of the wine industry to implementing the above strategies.

The scenarios specify the scale and scope of growth opportunity which is feasible and desirable. It will be up to the individual commercial entities in the winegrape, wine and supplier industries to determine how they can use the framework of opportunity identified by the Vision to create their own business future.

The Winemakers’ Federation of Australia (WFA) on behalf of the Australian Wine Foundation, will take responsibility in consultation with the Winegrape Growers’ Council and other wine industry bodies for implementing, monitoring and revising Vision 2025.

The final supporting documentation of the Vision 2025 strategies and a detailed plan of action will be derived during a discussion process within the Australian wine industry.

This will culminate at the Australian Wine Industry Outlook Conference in Adelaide on September 19, 1996.

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