What’s next for Australian fine wine in the US?

With many eyes in the Australian wine industry having turned toward opportunities in Asia over recent years, the huge American market may be seen to have lost the interest of exporters. But despite the allure of ‘greener fields’ closer to home, the US still offers rich rewards for producers willing to put in the time and investment to build a market presence. With American wine consumers focusing more on premium products, could smaller Australian winemakers find a stronger place in the US market? In this article from the August Grapegrower & Winemaker magazine, Hans Mick asked about the future of Australian fine wine as the country sheds its in-market reputation for low cost ‘cheap and cheerful’ wines.

For Australia’s small and medium sized exporting wine producers, the US market can seem to be a paradox. Its size, scale and affluence would appear to offer a golden opportunity for any winemaker with a quality product to tap into a stable, albeit highly competitive, marketplace. But, arguably, for all those without the deepest of pockets, the American market remains a somewhat daunting if beguiling export destination.

The well-known complexities of America’s three-tier distribution system and an intricate series of state-based regulations and restrictions covering the import, sale and delivery of alcoholic beverages across the country’s 50 states — in effect creating 50 separate markets rather than a cohesive national one — can be enough for all but the most committed of exporters to run away from in frustration.

With Asian markets — and China in particular — providing an ostensibly voracious appetite for Australia’s fine wine, has the appeal of targeting American consumers at all simply become unnecessary for Australian winemakers? Or, could it be that smaller producers could stand to benefit with the US market taking a renewed shine to Aussie wine? According to some, there are indeed rumblings of a potentially lucrative new demand for higher valued wines beyond the ‘cheap and cheerful’ stereotype epitomised by the so-called ‘critter brands’ that became popular there decades ago.

As a former CEO at McLaren Vale’s Chapel Hill Wine and a one-time executive at BRL Hardy which later merged with the US-based Constellation group, Marc Allgrove has known firsthand the workings of the American market. At one time he also represented Constellation Wines Australia’s interests in the UK and European markets.

Now a wine business consultant with the Adelaide advisory company Evans & Ayers, Allgrove said the US market is often “quite sensibly” held up as a great opportunity for Australian wine exporters due to its scope and economic performance.

“On a macro level it ticks a lot of the boxes as a destination culturally too,” he said.

 

Complexity, cost and commitment

“But once you scratch the surface there’s an enormous amount of complexity, cost and commitment that’s required to succeed in that market, and that’s only if a genuine demand for Australian wine exists.”

Allgrove said as a result local wine producers do tend to approach the market with a level of caution and trepidation.

One Victorian winemaker is also wellacquainted with both the opportunities and the challenges of doing business in the United States.

“You’ve got the massive population of affluent people obviously which is the prize,” said Matt Fowles (pictured above), from Fowles Wine, located in the Strathbogie Ranges of Central Victoria.

“It’s just immense, with regulation in every state; importers typically have a full book from all over the world, so you know you’re crowded,” he explained.

“If an importer is being sent a thousand emails [every day from other wine producers] how the hell do you stand out?

“It’s just an enormous beast and very competitive but if you can crack it, it’s a good place to play.”

The difficulties of “cracking” the American market are understood by many across the Australian industry.

“Although we’re not producing wine specifically for the overseas market, we’d like to have a consistent export market to underpin our overheads and the like, but as everyone knows it’s not that easy,” revealed New South Wales winemaker Mark Kirkby, who owns and runs Topper’s Mountain Wines in the New England region on the state’s northwestern slopes.

Kirkby said his products have found niche markets in Japan and Germany, but he said the process of finding and holding international markets in any part of the world can be difficult for a smaller wine producer.

As part of its overall sales, the small producer has for the past four years sent two to three pallets of its wines overseas. These include a mix of alternative varieties such as Gewurztraminer and Tempranillo as well as the more mainstream Pinot Noir and a sparkling Chardonnay, all of which retail locally for between $14 and $20 per bottle.

 

Barriers and obstacles for small wineries

On the prospect of tapping into the US, Kirkby said the barriers and obstacles to wider distribution there have simply placed it off the radar for many smaller Australian winemakers.

“The way their system works, you can talk to an importer in New York and he can bring it in there and he might be able to get it into a couple of other states but that’s about it.”

He said although his business had considered selling into America, the idea never progressed beyond that.

“We’ve never really had a proper go at it, partly because we’ve been of the opinion that it’s probably easier in Asia and Europe,” he said.

Paul van der Lee, a wine business development strategist and adjunct lecturer for the University of Adelaide’s Master of Wine Business degree, said the way the American distribution system is structured can also act to block smaller scale producers from reaching the consumer market.

“You need to have enough critical mass to potentially generate enough revenue for the distributor to actually motivate them to have a conversation with you.

“Whereas there are other markets around the world where you know there are niches where you can go in with 200 cases. In places like the UK you’ll find there are people who are more than happy to deal with you on the basis of having 200 cases.

“But those sort of small lots are, I think, very difficult to place in the US.”

For winemaker Fowles, the main difficulty faced by those Australian producers who have put their toes in the water in the American market over recent years has been uneven, “choppy” sales.

“I mean, you get a national retailer on board and you can sell 50,000 cases and then if they drop off well then you’re back at your baseline, so it is a bit like that. [The US market] is a beast but that will work for some people and for others it won’t.”

But it’s far from all ‘doom and gloom’ when it comes to finding success in market in the States, with many recognising that there are opportunities on offer — but these will require sustained commitment and investment.

Marc Allgrove is currently advising wine businesses in South Australia on general business strategies, including handling exports, and he said having a long-term approach is the key.

 

Marc Allgrove

 

Long-term approach key

“There’s no doubt that there are opportunities [in the US]. It’s the ability to find them and the ability to commit to finding them […] and once they are found the ability to commit to supporting them for an extended period of time.

“I know one producer who’s been successful in the market who’s said unless you’re prepared to commit to getting into the market and servicing the market for a period of 10 years or more without real return, then you’re not going to succeed in the US market.”

He said that commitment should be ongoing.

“As an individual operator, whether it’s five years or 10 years, I don’t think it ever stops. If you’re committed to a market, those investments and that presence need to continue to be made.

“You can’t think that over two to three years […] that you’ve set the wheels in motion and you can just continue to build on that.”

Marketing and sales strategies are two central components of Fowles Wine’s growing success in America. But Matt Fowles said there’s one other very important consideration.

“Arguably the most important one is time. The Yanks are so used to seeing people come in and then go, ‘it’s all too hard’; there’s a lot to be said for staying power.

“We’re now eight years into it and I thought we’d be further down the track by now, but I’m happy with where we are. [The distributors] know me by name; I take my two to three trips there a year, I’ve lived in the market; we’ve been able to elevate ourselves in their mind over time,” he said.

Fowles currently sells two brands into the US with what he describes as “effective national distribution”. The business initially targeted America back in 2011, with Fowles taking the unusual route of incorporating as an importer in the US.

“I felt we had got our affairs organised in Australia and I felt like we wanted to branch out into another part of the world to supercharge a territory,” he explained of the business’ direction.

Fowles moved with his family to the country for an extended stay to focus his efforts on developing relationships with in-market distributors — a strategy that’s resulted in continuing sales, with Pinot Noir and Sauvignon Blanc leading the way.

“We are [now] principally selling Ladies Who Shoot their Lunch and Farm to Table.

“Farm to Table is about US$19.99 and Ladies Who Shoot their Lunch is $US35. “Even if we’re not active in every market, we’d be active in 35 [state] markets probably.

“To do that you’ve got to be 100 per cent committed to the market because it’s been tough at times; and you’ve got to love the market which I do.”

 

Australian fine wine not in mindset

Paul van der Lee said there’s one other major stumbling block for Australian wine as a whole that needs to be overcome: that being that the most interesting and differentiated Australian wine is not readily available on American retail shelves. He said the average US wine consumer doesn’t have Australian fine wine as part of their “choice mindset”.

“That comes out from the market research: that even if you can get consumers motivated to search out some of the more premium Australian wine, they find that difficult to obtain and that’s a bit of a dilemma,” van der Lee explained.

“Some of the wines they might be looking for probably are in relatively short supply and there are other markets that have perhaps gobbled those up before they have actually got to the US.”

Marc Allgrove agrees that the Australian market presence is not what it could be.

“Of the 408 million 9L cases sold in the US in the last year, over 60% of them were produced in California. If you look at the numbers […] then Australia would be less than one percent of that.

“And if that’s scattered across 50 different states — or 50 different markets — the likelihood that there’s a cohesive and recognisable presence in any one of those markets is understandably low.”

“If you’re looking at the market broadly, Australian wines aren’t always on a wine list or aren’t always in a retail store,” said Matt Fowles.

It’s a predicament that Fowles says is a ‘hangover’ from what he calls the “Yellow Tail phenomenon”.

“I don’t say that Yellow Tail is a bad thing, I don’t think it was. The reality is it put Australian wine into the market in a volume that we’ve never seen before. There was a great opportunity for Australia to capitalise on the fact that people had been introduced to Australian wine and have them trade up; and in a sense some of that opportunity has been lost with the passing of time. We didn’t have the resources to tackle that opportunity as an industry.”

Van der Lee said that Australia’s “reputation barrier” remains an obstacle.

“We’re known for wines that are ‘everyday’ and less expensive and we haven’t got either the trade or consumers to shift perceptions to the fact that yes, we do make serious wines, sophisticated wines, luxury wines,” he said.

“All the market research testing that’s been done — and Wine Australia has been running market research for five years on this — looks at what people’s perceptions are of Australia: kangaroos, outback desert, ‘g’day mate’, all these sort of laid-back, relaxed, easy-going stereotypes; but they don’t correlate with high quality wine experiences.”

However, many observers agree that change is happening, with a so-called “premiumisation effect” underway in markets globally, including in the United States.

“If you look at the USA, the segment of the market which is going backwards is the under $10 retail per bottle segment, whereas the market which is showing the most growth potential is the $15-$25 retail price which Wine Australia has identified as the sweet spot,” said van der Lee.

“That lines up reasonably well with the sort of price points that some of the smaller wineries need to hit in order to be profitable. [Although] I would qualify that by saying that if you’re a really small winery you need to be aiming at prices even higher than that of course.”

 

Consumers and distributors trading up

With several years of expanding US sales under his belt, Matt Fowles said in his experience US consumers and distributors are indeed “trading up” in terms of wine quality.

“One very clear anecdote I have [was] in Texas where I walked into a distributor there and it was my first meeting with the guy. He said, ‘Matt, we’re not doing this sub-$10 s**t are we?’ and I said, ‘no sir, we are not’.

“So it’s the case that even in their minds playing sub-$10 is just not where they want to be. I think that’s a dying price point. Even if I could I literally wouldn’t play in that space.”

Fowles said another significant factor at play is generational change.

“A lot of the older or more experienced wine buyers who have been in their seats for a longer time, are perhaps tainted by us being victims of our own success. We got known for producing affordable wine in a favourable exchange rate at around 50 cents, so they were able to get extreme value.

“But […] the gatekeepers we’re now seeing are typically younger; they didn’t experience the Yellow Tail phenomenon and the ‘sunshine in a bottle’ kind of stories that you had.

“They come to it with fresh eyes and I think that’s a generation also that are interested in spending more on wine and understanding more about wine.

“I think that there is a great opportunity for Australia at the moment.

“I feel like there’s a bit of a vacuum at those higher price points and so if you can figure out your path to market, there is opportunity there without a doubt.”

Fowles said more Australian players entering the US market with premium quality wine products can only enhance Australia’s position.

“I’ve been doing my best to encourage people to get over there. I’ve shown that it’s a market worth supporting.

Paul van der Lee

 

A market worth supporting

“The whole of France is over there, the whole of Spain is over there and for whatever reason, it’s something like 250 wineries from Australia. That’s extraordinarily low; if you look at how many wineries export to the UK, I bet you it would be at least three or possibly four times that.

“And that’s part of the problem we need to be collectively telling our story [in the US] all the time.”

In overcoming any lingering reluctance on the part of Australian producers to engage with the perceived complexities of the US, Paul van der Lee sees “disruptive” or unconventional paths to market as potentially favourable options for smaller producers.

“The conventional Australian export model of an importer and a wholesaler working through the three-tier system, you really need to go outside of that and find some other way into the market. There are some new USA distribution players with more innovative business models that offer alternatives worth exploring.”

“As a means of tackling the profitability challenge of small volume export offers to US trade partners, there have been a few attempts of people to do some aggregation, so if you were a brand owner who had a good wine which had proven itself successful in the US, you might then try and get a couple of other producers who have got complementary wines not in competition which will give an obviously stronger offering and a more relevant offering to a distribution partner.”

Although van der Lee admits that such a grouping of wineries has its own management challenges in making it work to the advantage of all of the participants involved.

In the long run, many believe that quality, higher-priced wines produced by Australia’s smaller winemakers can and will find a stronger place in the American market, helped in part by their relatively lower shelf price compared to similar wines produced domestically or imported from Europe.

On the question of changing perceptions, it’s also widely agreed that Wine Australia’s marketing and sales initiatives in the US, funded under the Federal Government’s $50 million Export and Regional Wine Support Package, have made a real and positive difference.

With that funding due to run out in mid2020, some believe the industry must step forward to ensure such beneficial programs can keep going.

“I think the dilemma is going to be that we’ve geared up for some quite serious marketing which we’ve always needed to have done, but never in the past did we have the resources,” said van der Lee.

“And you can only hope that the industry says, ‘well, we see the value of such investment [and] we need to continue to have significant investment.

“We are going to have to look at ways in which we can fund it from our own resources.”

 

Australian wineries must keep up the good work

Matt Fowles said it will be up to individual operators to keep up the good work of lifting the exposure of Australian wine in America which according to him is having a definite effect.

“I think the mood has definitely shifted. I’m getting way less resistance than I did in 2013-14 when I was living over there… way less resistance.

“We’re sticking to our guns. Every year we get better brand health which is what I typically measure our business on, which is we get more distribution in the market and so as long as that’s improving I’m happy.

“We have flirted with the idea of perhaps taking other [Australian] wineries over there with us because we’ve navigated all this now. We have something of value so it’s something we’re flirting with, but I have to make sure I keep the team focused as well.”

 

This article was originally published in the August issue of Grapegrower & Winemaker magazine. 


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