Strategy 2025

1. The Australian Wine Revolution 1966-1996
2. The Success Story of Australian Wine
3. 2025 Trends Favour Wine
4. Vision 2025
5. Australian's Wine's Competitive Edge
6. Market Opportunity
7. Resources to Achieve Growth Scenarios
8. Government Partnership Critical to Success
9. Strategies
10. The Next Five Years
11. Implementation of Vision 2025

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7. Resources to Achieve Growth Scenarios

For the Australian wine industry to achieve the vision of 6.5% of the value of world wine production by 2025, grape production will need to rise from the existing peak of around 850,000 tonnes (1996) to 1,650,000 tonnes. There will also need to be a significant investment in storage capacity, expanded processing facilities, transport and human skills.

Development of this magnitude will require productivity gains from existing vineyards--an estimated investment of $1200 million. The average annual planting rate will be 1500 hectares. Ongoing investment in redevelopment of existing vineyards also will be required.

The history of the grapegrowing industry has not been a simple transition. Each shift in consumer preference from fortified to red to white wines and then to export table wines has been reflected in 'boom and bust' cycles which had serious financial implications for growers.

The relationship between grapegrower and winery is undergoing significant change which will be accentuated by future market demand for a substantial lift in fruit flavour intensity and complexity, and for more stable pricing undistorted by cyclical shortage premiums. A higher degree of sourcing from winery owned vineyards particularly for premium bottled products and greater reliance on robust longer term contractual arrangements will be manifestations of this change. There will be substantially greater differentiation between grapes on the basis of measured quality attributes and this will be reflected in prices.

New vineyard investment will have to meet best practice parameters on cost efficiency, quality specification and on location.

Dryland regions are likely to increase their share from 53% to 60% of total vineyard area although major plantings are planned for inland irrigated areas as well. More intensive viticultural management will be required in inland areas to meet quality specifications. Central NSW, central Victoria and the South East of SA are the most attractive locations for new plantings in terms of water availability, climate, scale cost efficiency, and proximity to existing wine infrastructure.

Environmental management will also be an important factor in the increase in grape production. The environmental problems associated with increased irrigation can be resolved through Land and Water Management Plans and more effective timing and water scheduling. However, other issues such as spray drift, the qualified use of agricultural chemicals, noise pollution, consumer attitudes to chemical use and occupational health and safety issues will have to be addressed.

The increase in grape supply will also require a lift in production capacity and storage to cope with an estimated doubling in wine volume. Crushing capacity is expected to be adequate in the Riverina, Sunraysia, Riverland, Hunter Valley and Barossa, whereas expansion will be needed in the South East of SA and the Cowra and Mudgee regions of NSW.

Red wine fermentation facilities are currently at capacity and wine storage will need to double.

Technology and improved management will reduce additional winery waste associated with increased processing capacity.

Water is a priority issue in wine industry planning, not only for grape supply expansion but also for the long term sustainability of existing supplies. It has a major impact on the industry's cost competitiveness, the risk management of vintage variation and fluctuation, grape quality enhancement and flavour complexity. Its use also impinges on the wine industry's performance and image as environmentally friendly.

Vineyard expansion will create an additional demand for water estimated at 68,000ML by 2025. Processing expansion will generate demand for an additional 2000ML. This water will come from efficiency gains in vineyards and wineries (40,000ML), crop diversion (20,000ML) and new sources (10,000ML).

Water management policies now in place recommend the trading of water entitlements from low value broad acre agriculture to higher value crops such as viticulture. This, along with improved irrigation management, will improve water use efficiency and reduce salinity impacts in inland irrigated areas.

There is unlikely to be an increase in water provisions in existing dryland viticultural areas and increases in water availability will come from greater water use efficiency.

To achieve the required water outcomes, the industry will pursue a strategy of influencing government policies relating to water access, transfer and pricing.

The employment implications of the growth scenario will be the creation of an estimated 10,500 new jobs (full time equivalents) in the grapegrowing and wine industry alone. It is expected that a similar number of additional jobs will be created in supplier companies and associated industries such as tourism.

Another requirement of the growth scenario is an increased supply of skills. The increasing automation of winemaking processes and mechanisation of vineyard procedures, means that there will be a declining requirement for untrained manual labour and an increasing demand for employees with problem solving skills, who are willing to take greater responsibility and who are also prepared to learn scientific methods.

The increasing globalisation of the industry will also put pressure on workers to increase productivity through more efficient work practices.

Achievement of the necessary highly skilled, multi skilled and highly motivated workforce will require quality, relevant and accessible training. This training will encompass the full range from tertiary degree to vocational on the job and from the vineyard employee to corporate management.

It is estimated that, as an order of magnitude, training demand for new and existing employees could total 25,000 person years over the 30 year Strategy horizon.

A national industry driven approach will be required to set the agenda and coordinate the provision of this training.

The industry will require about $5 billion in funding to achieve its 2025 Vision. This will come from corporate retained earnings ($1.4b), private grower investment ($0.8b), the equity market and borrowings (together $2.8b). There will be some flexibility in the mix of debt and equity but the latter will be the dominant requirement.

To attract global capital the wine industry must offer better, or at least comparable returns, to other sources of investment.

Listed wine company profits have grown from $55m in 1992-93 to $92m in 1994-95, buoyed by strong margin growth in domestic and export markets. Gross margins for all listed companies increased from 15.1% to 17.8% over the same period.

The corresponding return on equity (ROE) has increased from 9% to 12%. With a ROE of 13% in 1994-95 for all industrial companies, the wine industry compares favourably, given the massive investment program and adverse seasons of recent years.

Indeed, the financial markets have acknowledged the outstanding longer term prospects of the wine industry, with much stronger growth in share prices for the listed companies than for all industrial companies. For instance over the last 12 months, capitalisation for BRL Hardy, Petaluma and Mildara Blass (est.) has increased by 60%, 47% and 35% respectively, compared with 10% growth for all industrials.

However, given that wine represents such a small proportion of share market capitalisation and turnover, the industry will have to increase its efforts in communicating to investors its superior long term growth potential over the majority of listed industrial stocks.

Apart from the normal risks faced by any production business the wine industry has an extra dimension of uncertainty associated with its agricultural base. The importance of image to wine industry profitability also increases the industry's vulnerability to adverse impacts. Moreover its high dependence on exporting magnifies normal trading risks due to its exposure to exchange rate fluctuations.

This Vision and its market scenarios are based on a range of assumptions. The suggested outcomes are not predictions or forecasts--they are achievable possibilities subject to the implementation of effective business strategies.

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