Introduction to the Australian wine industry

The First Fleet brought grape vines to Australia when they arrived in Botany Bay in 1788. Since then Australia has developed a history of producing and exporting wine. The first reported wine export occurred in 1822 when a barrel of fortified wine was sent to London. The export market has grown substantially from these humble beginning. In 2004 Australian wines exports were worth $2.7 billion. As a result of substantial growth over the past ten years, Australia is producing more wine than ever before. The 2004 vintage was about 1.9 million tonnes of grapes, with about 65 per cent of the wine that was produced form these grapes being exported.

Australian wine producers are diverse and that tastes are evolving, no doubt reflecting the increasingly diversity of the Australian population and changing lifestyle factor, which reflects a stronger preference for wine. Since the 1970s, there has been an upward trend in wine consumption per capita from less than 10 litres to more than 27 litres. However, while Australia’s per capita rate of consumption has grown substantially, nevertheless we still lag behind consumers in “Old World” wine producing countries, where per capita consumption has fallen.

As discussed above, Australian wines have increased in both volume and value over the past 30 years. Australian wines are now highly regarded internationally in terms of quality and consistency and price stability. One reason for this expansion in exports is the fact that Australia produces consistently fresh wine styles that mach the needs of its major export markets, that is, the UK and the USA.

• Icon: price range over $50, for example Penfolds Grange, Henschke Hill of Grace, 1 per cent of the market.

• Ultra-premium: price range $15 to $50, for example Wolf Blass Grey Label, Orlando St. Hugo, 5 per cent of the market.

This introduction is based on the material presented in Quester, P.G., McGuiggan, R.I, Perreault, W.D.Jr. and McCarty, E.J. (2007) Marketing: Creating and Developing Value, 5^th ed., McGraw-Hill, Sydney, Case Study 18, In vino veritas: Australians viticultural industry, pp. 730 to 738.

Topic 1

The remaining 240 acres of the farm is divided into six 40 acre paddocks that are leased to local farmers. The land is then used to grow a variety of broad acre crops, such as wheat, barley, oats and canola, depending on who leases the paddocks.

James, who is now 64 years old, has two children. Matthew, who is 28, recently completed studying oenology at Roseworthy. He is currently living at home with James and is working as a wine maker at a large local winery. Matthew was named Australian young wine maker of the year at the Sydney Wine Show in September. Zoë, who is now 32, has recently been promoted to Senior Lecturer in Economics at Roseworthy Agricultural College. Zoë returned to Australia in the late-1970s after completing her PhD in Agricultural economics at the University of Oklahoma. James was widowed in 1974.

Riesling makes a come-back

By Don Hog

Growers, particularly those in the high-yield, irrigated Murray Riverland region centred on Berri, Renmark and Loxton, were the scheme's primary targets; they had suffered hard times for years. The Government was telling them to get out of wine grapes, stay out of them and find alternative crops.

The industry expected hundreds of hectares of the lesser varieties pedro, grenache, doradillo and palomino to vanish almost overnight. And so they did, but along with them, and here's the rub, went shiraz, rhine riesling, some cabernet, even chardonnay.

Which is not to say that rhine riesling had ever been totally rejected by our nation of fledgling wine consumers. Rather, its image had taken a battering at the hands of the Johnny-come-latelys - chardonnay, sauvignon blanc and the hatful of verdelho that finds its way to the market.

When the demand for chardonnay struck, the winemakers knew they were on a good thing. There wasn't enough of it planted to scratch the surface of demand. Supply would remain restricted for some years and in the meantime they knew they could get silly prices for the stuff. They did, and still do.

From the consumers' point of view, the re-emergence of Rhine riesling as a force in the market-place is good news indeed.

And it is even being whispered that one or two of the major companies are actually planting the stuff. So much for the 1985 vine pull.

Financial Review 8 September 1989

Cork Pop On Prices

By Philip White

A look at the companies with big wine sales but few vineyards shows where the stuff goes. Orlando, for example, has Jacobs Creek claret, Australia's biggest-selling bottled red. The Jacobs Creek vineyard is tiny. Wolf Blass, maker of Australia's biggest-selling riesling, especially his Yellow Label, has just established his first vineyard, and that is pretty small. These people, among hundreds of others, buy most of their wine.

Lindemans has substantial vineyard holdings and is a traditional seller in this grey market. If one looks, and somehow can get them to admit it, it is possible to find wine makers who have had standing orders of, say, 100,000 litres of chardonnay from Lindemans of each vintage. It forms a handy supplement to the wine they have grown and made themselves. This year, quite suddenly, such wines are not available. It is being exported. The grey market is drying up.

The dollar's drop against the French franc has caused dramatic increases in wine-making equipment. Crushers, presses, bottling machines and the like are nearly double the old price. A new French oak barrel has risen from about $400 to nearly $700. Soon, the words "new French oak" on a label will mean an extra dollar on the price tag.

The industry captains are, at best, guarded about the extent of these hikes. Guenther Prass, managing director of Orlando, says "Yes, there will be an increase in the cost of premium wine. The increased production costs will have to reflect on the prices we charge the consumer."

Business Review Weekly 17 October 1994

So, Matthew has decided to use the wine making facilities that this father installed at Duloc as an outlet for his entrepreneurial talents. He feels that some of the older, unpopular bush varieties, in particular Grenache, can be used to make table wines instead of fortified wines. He has decided to produce a couple of premium wines, a rose and a sparkling burgundy, using Grenache. He sees this as a bit of a sideline and so he has decided not to resign from his day job. His limited production is sold thorough the cellar door or at a few local restaurants who support local small winemakers.

Prior to undertaking her PhD, Zoë completed a commerce degree, majoring in accounting and economics, at the University of Adelaide. So, it has been agreed that she will be the business manager for Duloc. She feels that at the moment she can do this on a very part-time basis in her spare time. However, she is strongly of the view that Matthew should make the fullest use of the grapes he produces and his father’s wine making facilities to make large volumes of low quality wines, that are readily sold in bulk to large wineries for blending into low end bottles, as cask wines or even coolers. Moreover, there is currently a real shortage of “grey wine” ands Zoë feels that Duloc can readily take advantage of this opportunity.

Wine Demand Hits Prices

Canberra -- OVERSEAS buyers cannot get enough of Australian wines but while the high demand is a boon for local wineries, it also means soaring prices for wine lovers back home.

Domestic sales of local wines were also up - to a record 336 million litres. White wine continued to dominate - selling 185 million litres - but red wine made strong inroads with bottle sales up 114 per cent to a total of 79 million litres.

Australians still prefer to drink wine from a cask - 168 million litres compared to 96 million litres sold in bottles.

Mrs Jens said chardonnay and sauvignon blanc was more readily available than many of the reds. Australian shiraz in particular was in big demand overseas.

"Ten years ago people were pulling the (shiraz) vines out - when chardonnay became the drink of the moment shiraz fell off the face of the earth," Mrs Jens said. "Now they have come back with a huge push and it is a much sought after because the variety is peculiar to Australia."

It is now late-1997 and the bad years of the mid-1980s are all but a distant memory to the grape growers and wine makers of the Southern Vales. The strong recovery in grape prices has been brought about by increased demand of Australian wines overseas, particularly in the UK and the USA. This growth in exports has spawned an amazing surge in investment in the Southern Vales. New vineyards are being planted all over the valley. The relatively small farms in the Southern Vales, and the consequent small sized fields, is making it increasingly uneconomic to grow cereal and other broad acre crops in the region. Cereal growers in particular simply cannot gain the economies of scale that are required to remain competitive in a context of increasing input costs and ailing world prices for agricultural commodities. The average farm in the Southern Vales produces about two tonnes of wheat per acre and the price of wheat seems to be stuck at USD $125 per tonne, while costs just seem to keep rising. Hence, many farms that previously grew wheat and other broad acre crops are being turned over to grape production.

The grapes that are being planted are mostly traditional red varieties, such as Shiraz, Cabernet Sauvignon and Pinot Noir. However, new varieties, at least to the Southern Vales, such as Malbec, Merlot, Cabernet Franc, are also gaining popularity. The Southern Vales is a rain fed and not an irrigated wine growing region. Consequently, vineyards produce between four and seven tonnes per acre, depending on the year’s rainfall. This is substantially less that the yields that are obtained in irrigated regions, such as the Riverland where ten tonnes per acre is the norm. Hence, there is a growing a ground swell of pressure in the Southern Vales to use water from the Christies Beach Sewerage Treatment Plant to irrigate the Southern Vales.

It is becoming increasingly apparent to Zoë that James indeed did not do anything by halves. Although the wine making facilities that Matthew’s father installed are a little outdated, they can easily accommodate the quantity of grapes that are currently being produced by the 160 acres of vines that have already been planted at Duloc. Indeed, these facilities could easily accommodate the total production if all 320 acres of Duloc were planted to grapes. James bought these wine making facilities from Harrys in the late-1970 for scrap when Harrys installed new equipment. He then subsequently re-assembled the equipment at Duloc. Nevertheless, Matthew continues to see his wine making operations at Duloc as a hobby, as way of developing his wine making skills that are not being used by his current employer. Hence, the vast majority of the grapes produced at Duloc are still being sold on the trailer trade or under contract to larger wineries.

Matthew’s reputation as wine maker has been growing since his decision to start producing wine at Duloc. However, this has not been recognised by his employer. His wines consistently win gold medals at important wine shows and he was even been shortlisted for the very prestigious Jimmy Watson Trophy in 1996.

It is now late-1999 and the wine industry in the Southern Vales just seems to be going from strength to strength. The industry is further consolidating its position as South Australia’s premium wine producing region as a consequence of the continued strong growth in export demand for red wine, especially to the UK and USA, and the consequent higher grape prices in underpinning the continued expansion of the wine industry, both nationally and in this small wine producing region. New vineyards just seem to be popping up all over the place, especially given that low wheat prices and rising cost of wheat production are forcing more and more farmers out of broad acre cropping in the Southern Vales. Interestingly, the number of wineries, both big and small, seems to have stabilised over the past few years. There have been no new entrants to the region since 1992. However, existing firms seem to be focussing on increased production.

On the other hand, the situation at Duloc seems to be coming to a head. CSM-Harrys has been bought by a French champagne house to form CDM-Harrys-Noet. The strategic direction of the company now seems to be following the French tradition of individual wine producing areas focusing on one variety of grape production and consequently one variety of wine. In this case soft red wines. This stands in stark contrast to the Australian tradition. Australian grape growing regions may specialise on one grape variety, but they grow many different varieties and hence produce many different wine types. Hence, the company is restructuring its grape growing operations and removing grape varieties that do not fit with this new strategic direction. Moreover, Matthew has been forced further down the food chain, with no opportunity to exercise his wine making skills. This is despite the fact that a wine he produced at Duloc won last year’s Jimmy Watson Trophy. Moreover, he is being forced to produce light fruity reds that are ready to drink now. These wine varieties are popular on the east coast and are the varieties on which the Hunter Valley built its reputation as a wine producing region. However, Matthew wants to make the full bodied, bold red wines on which the reputation of the Southern Vales was built.

Topic 6

Markets in action

About 3,500 tonnes of grapes will be left on the ground in South Australia's Riverland region because of a lack of buyers. An unusually mild summer helped the region produce a record yield of 360,000 tonnes of grapes in 2002, a 10 per cent increase on 2001. Riverland Wine Grape Growers Association chairman Malcolm Hill said a big increase in plantings since 1997, and the collapse of a local winery, had exacerbated the region's over-supply of grapes. South Australian Wine & Brandy Association president Vic Patrick said the nationwide grape surplus was only three per cent, which he did not see as an issue.

Taste of the grape to come from famous user of hops.

Mr Cooper said any potential wine brand would need already to have established a strong image as a premium product. Coopers already is selling premium home-winemaking kits in Canada and has a small market for the kits in Australia.

Meanwhile, sales of Coopers pale ale have jumped 26 per cent this financial year but Mr Cooper said there was no underlying reason why.

Duloc has also been affected by the bumper harvest. Total grape production at Duloc actually rose by a little over 20 percent this year through a combination of the good weather and the extensive plantings of the late-1990s maturing. Indeed, Matthew expects that grape production at Duloc will continue to increase by about five to seven per cent for the next for the next few as those vines continue to mature.

Over the past decade or so, Matthew has been experimenting with different wine styles, different grape varieties and has been further developing his wine making skills. As a result, Duloc now produces a comprehensive range of wines, from the lightest fruitiest whites to the biggest, boldest reds. He also produces a few sparkling varieties and a couple of nice ports. The growing range of styles means that wine production has kept up with the increased grape production, but that the amount produced of each variety remains limited and hence keeps prices up. However, Matthew is concerned that the projected increase in grape production means that he will need to increase the amount of each style he makes and that this will lead to lower prices and hence lower profits.

Topic 7

In its press release out yesterday, Palandri claimed the bigger profit was on the back of increased exports and a growing Australian market, with domestic sales up 15 per cent, sales in Britain, Australia’s biggest wine market, rising 82 per cent, and up 42 per cent in the US.

Chief executive officer Darrell Jarvis said: “Palandri’s 2004-05 exports grew strongly to be 65 per cent of total sales, a good record for a company that only launched into export markets in 2001. We have continued to make considerable distribution gains within the large supermarket sector in the UK and Europe, with product also recently introduced to Switzerland and Germany.”

In the area of related-party transactions, chief executive Darrell Jarvis has lent the company money.

The accounts also show that Palandri paid $416,656 in consulting fees to a company that had Palandri’s finance director, Chris Brown, as a director and shareholder.

It retained its long-term “buy” recommendation based on Foster’s plans to cut wine production costs and increase distribution scale to accelerate earnings per share growth.

“But our faith has been tested,” it said.

Foster’s shares eased 1.5 percent to A$5.40 in late morning trade on Wednesday in a wider market up 0.2 percent. ($1=A$1.35).

Reuters News 15 February 2006

Taste of the grape to come from famous user of hops.

By MEREDITH BOOTH.

"If we were to go into the wine area, it would definitely be at a premium top-image end," Mr Cooper said. "We would look to market that along the same lines that we market pale and sparkling ales."

Mr Cooper said any potential wine brand would need already to have established a strong image as a premium product. Coopers already is selling premium home-winemaking kits in Canada and has a small market for the kits in Australia.

"If you take the overall beer volumes in Australia, which were down by 3 per cent, we ended up nearly 3 per cent above the previous year," Mr Cooper said.

The company's new Regency Park brewery, operating since January, had almost triple the production capacity of the former Leabrook site and was producing in line with overall volume growth of 3 per cent.

By NIGEL AUSTIN.

16 August 2002 The Advertiser

Price competition has become so fierce so quickly that the proprietors of smaller outlets fear they may be forced out of business.

Woolworths has become the fastest-growing wine retailer in South Australia after its recent acquisition of part of the Booze Bros chain and Le Grog liquor chain.

BRL Hardy is offering some excellent quality wines at bargain prices.

Liquor Stores Association of SA president Martin Baily yesterday warned the wine market will become even tougher, with some retailers forced out of the industry.

But Skye Cellars owner John Mazzocato said the price war was severely hurting small family businesses and the industry needed to be regulated.

"This whole industry is falling about because Coles Myer and Woolworths are prepared to lose money to gain market share," he said.

The acquisition of Farquaad by Duloc solves one set of questions, that is, how to increase production in order to lower costs. However, it has created another set of problems. As all of the wine making, management and administration activities of the merged organisation will be centralised and performed at Duloc, all of the buildings and most of the capital (including the wine making facilities) at Farquaad are surplus to requirement.

CONSTANT BRAND

BRUSSELS

"The Australian industry as a whole does not believe a vine-pull is the best solution to our problems, and instead favours action to increase consumption of wine," he said.

He was commenting after EU Agriculture Commissioner Mariann Fischer Boel said growers should be paid A$3.4 billion to take low-quality vineyards out of production.

Ms Fischer Boel said Europe had to act because it was being hit hard by growing competition from Australia, Chile, the U.S. and South Africa.

"Exports from our main competitors have simply exploded," she said, adding that European wineries failed to attract young drinkers.

Advertiser 24 June 2006

It has been a year since Duloc acquired Farquaad wines, so Zoë and Matthew have recently reviewed progress over the past year. The labels were removed from the entire inventory of Farquaad wines and they were sold as clean skins, but not thorough Duloc’s usual distributor for fear of brand dilution. They were sold as a job lot to a large Sydney based discount wine warehouse that does thriving trade in clean skins aimed at the basic end of the market. Zoë and Matthew think that the people who bought these wines will be pleasantly surprised.

ADELAIDE, Dec 14, AAP - One of Australia's largest wine producers today pleaded guilty to charges relating to the pollution of the North Para River in South Australia's Barossa Valley.

Southcorp Wines pleaded guilty in the SA Environment, Resources and Development Court to the charges, brought by the Environment Protection Authority.

"The fault was identified and immediately repaired to prevent any repeat incidents," the company said in a statement.

"Southcorp Wines has taken full responsibility for the incident and deeply regrets its impact on the local area."

14 December 2006

It is early-2008 and many grape growers and smaller wineries in the Southern Vales are doing it tough. The grape glut is forcing down prices and the slow increase in demand is doing little to stimulate prices. More immediately is the knock on effects of a recent court case. Even though Southcorp’s wine making operations are centred on the Barossa Valley, the outcomes of the court case are reverberating around the Southern Vales. The Southern Vales has responded to the current low prices for both wine and grapes in two ways. First, it has recently embraced the State Government’s view that South Australian agriculture can generate a competitive advantage if it is seen to be a clean and green producer of top quality agricultural and horticultural produce. Secondly, the Southern Vales has undertaken a range of successful wine tourism ventures. Consequently, the Southern Vales is no longer the Australian wine industry’s best kept secret. Rather, it is emerging as a growing tourist destination, developing holiday options for both short getaways targeted at Adelaide residents and longer stays for interstate and overseas tourists.

After many years of painful negotiation, it has been decided that the water from the Christies Beach Sewerage Treatment Plant is no longer to be discharged into the sea. A pipeline is to be built to the Southern Vales and the water is to be reticulated and made available for irrigation. Proponents of the scheme argue that increased water will improve yields and be good for the district. However, opponents to the scheme argue that it is doomed to fail as it will need on-going subsidies from the government or prices that are too high, to be profitable. However, Zoë is of the view that this scheme could be profitable without government subsidies and the prices charged could be as low as if the market for recycled water was perfectly competitive rather than a natural monopoly.

Buyback dilemma for winegrape growers

Asa Wahlquist, Rural writer

Mr Arnold, who grows grapes and citrus at Loxton on the South Australian stretch of the Murray, is also deputy chairman of the Riverland Winegrape Growers Group, which put the buyback proposal to Kevin Rudd.

Mr Arnold welcomed the package, which also includes $10,000 to grub out vines and trees and a further $10,000 for retraining. While traditional farm exit packages require farmers to leave their land, under this model farmers can stop irrigating but stay on their farms and remain in their communities.

The Rudd Government has allocated $57.1 million to the irrigator exit program, which is expected to deliver up to 48 gigalitres back into the Murray-Darling system.

Mr Arnold estimated it would provide for about 360 farmers to leave the land. But he said the question many would be asking was: ``If I hang in here, what is my water going to be worth in three to five years' time when I want to retire?''

Opposition spokesman on water security John Cobb said many irrigators and water companies had contacted him about problems with the buyback.

``Either the Government hasn't got back to them, or people have walked away because there has been a lot of mucking around,'' he said.