Identifying the Main Challenges and Opportunities Facing the Wine Industry

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Identifying the Main Challenges and Opportunities Facing the Australian Wine Industry - Interview with Professor Kym Anderson, Associate Professor Peter Dry, Associate Professor Johan Bruwer, Dr Allan O’Connor, Dr Kerry Wilkinson and Dr Nicola Chandler By Huanmei Mushui Li

Huanmei: Kym, you are a worldrenowned international trade scholar and your contribution to wine industry economics is widely recognised. What do you regard as the biggest challenges facing the Australian wine industry? Kym: The Australian wine industry is not alone in feeling challenges at present. The common contributing factors include the global economic recession, chronic oversupplies of wine, consumer health and environmental concerns, antialcohol campaigns by health and road safety lobbyists, and climate change and associated policy responses. In addition, Australian wine producers are dealing with four other challenges. One is a high-valued currency. The Australian dollar will remain high relative to currencies in our key wine markets and of key competitors in those and the Australian domestic market.

Secondly, other New World exporters, especially Argentina, will continue to upgrade the quality as they expand the quantity of their wine exports. For example, Argentine Malbec may displace some Australian Shiraz sales, especially in the US, and New Zealand Sauvignon Blanc continues to pressure Chardonnay in the Australian market. Thirdly, major reform to water institutions and policies in Australia are adding to the cost pressures on warm-climate producers. There is also the possibility of a change to the method of taxing wine consumers in Australia. If the present 29% wholesale tax is switched to a tax based on the volume of alcohol, that will help sellers of wines retailing above $20 a bottle (assuming the extent of overall taxation is not raised) but it will harm producers of low-quality wines as their retail price would rise substantially. Huanmei: Kerry, you are an experienced winemaker and had worked for several famous wineries, such as Yalumba. I am pretty interested in one of your current research, the influences of environmental conditions on grape and wine. From your research and practice perspective, could you talk something about what the environment conditions affecting the Australian grape and wine sector like in recent years? Kerry: In recent years, the Australian wine industry has faced a number of challenging environmental conditions: not just the prolonged drought, but also irregular incidents of severe frost, grapevine exposure to bushfire smoke and the occasional flood event. The 2011 vintage tested many grape growers’ disease management strategies, with the unusually cool, wet weather providing favourable conditions for powdery mildew, downy mildew and Botrytis cinerea, albeit conditions which also enhanced varietal

fruit intensity. Huanmei: Peter, you have been involved in viticulture and oenology research for approximately 35 years. You work at Australian Wine Research Institute as a Viticulture Consultant after retiring from the University of Adelaide continuing your contribution to the wine industry? In your opinion, are there any methods to deal with the increasing temperature especially in hot regions of Australia? Peter: Well, we cannot plant our vineyards further south since there is no enough land in Tasmania to grow all our wine grapes. One thing we can do is to change the varieties that we grow. Some of our existing varieties are not optimal for a hot and dry climate. For example, instead of growing Chardonnay, Riesling and Cabernet sauvignon in our hottest regions, we should grow varieties such as Vermentino, Nero D’Avola, Verdejo and Negro Amaro, all of which can produce good wine, even premium wine, under hot conditions. We have a program called “Alternative varieties-emerging options for

a changing environment” at the Australian Wine Research Institute (AWRI). We have had this program now for approximately one year and we have been to different regions in Australia and have talked with grape growers about why they should plant these new varieties and the benefits of these new varieties. I am hopeful that gradually these better grape varieties will replace the less suitable varieties in our hot regions. Huanmei: Johan, you are a specialist in Wine Business and Wine Marketing and are currently Head of the Wine Business Group at the University of Adelaide. In 2011, around $18-$20 million were invested in various grape and wine R & D programs via the Australian Grape and Wine Research and Development Corporation (GWRDC). In your opinion, is the funding support adequate for wine industry related research and is the allocation of the fund reasonable? Johan: In my opinion, the funding support is not enough when considering it across the full spectrum of the wine value

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chain. Admittedly, they are working from a limited levy-based funding platform, which in recent years has decreased due to various reasons, so this is very difficult to solve. However, that aside, the funding has not been awarded very evenly at all across the wine value chain spectrum. The wine industry has three main aspects grape growing, winemaking and business management and marketing. The problem is that they have traditionally not funded the top end of the wine value chain relative to its importance to the wine industry at large. They spent millions of dollars on grape growing, viticultural research and winemaking, which is fine. However, they definitely do not allocate enough funds to the wine consumer research and marketing aspects. There is a saying that if you build a better ‘mousetrap’, the world will beat a path to your door. In the case of the wine industry, it is a fallacy to believe that if one knows how to grow grapes, deal with climate change and make wine better,

then, all would be well with the wine business. The organisation who deals with, basically, the appropriation and investment of the wine industry’s R&D funding has historically funded market and consumer research to the extent of 9% to 10% of total funding, and it is probably even worse than that when viewed over time, say during the last 10 years. It is simply not acceptable in view of the situation the industry is facing, namely market failure, business and marketing issue, and not only an oversupply, production issue. Sadly, we know very little about the consumers in the market. I am sure that GWRDC is aware of this problem, but the funding allocation is quite political and it is hard to change the current ‘situation’. Huanmei: Nicola, I know you run a blog introducing tropical wine news and are involved in the social media for the Wine2030 in the University of Adelaide. From your research and practice perspective, what do you consider to be the key issues?

Nicola: I love my job and feel lucky to be involved in the wine industry. In Australia, the chains of Woolworths, Coles and IGA Metcash are significant retail outlets for branded wines and private label wines. Overseas, the strength of major wine retailers is also a factor affecting Australian wine exporters. Thus, the distribution channels are becoming increasingly narrow as fewer large companies dominate the wine market. In addition, the discount culture in some markets can hinder profitability, both overseas and domestically. Associated with this is the reputation of Australian wines overseas as being good value but cheap. Huanmei: Allan, I know that you recently conducted a successful workshop on innovation and growth with the senior management team at Coopers, the biggest Australian-owned brewery, in October 2011. You should be the right person to talk with about innovation and growth, but what can you tell us about the Australian wine industry? From

your research perspective, what are the challenges for Australian wine producers? Allan: I am happy that the people at Coopers are passionate about innovation and their record on innovation is impressive too. Regarding the Australian wine industry, it currently faces severe price pressures internationally and locally there are changes in industry structure and shifts in bargaining power. This may sound rather dire; often it is the case that innovation comes from adversity. In my opinion, the key challenge for Australian Wine producers is to innovate on multiple fronts to achieve advantages in both differentiation and cost. Huanmei: Have any efforts been made by government and industry alike to differentiate Australian wines? Allan: Yes, the government’s response has been to increase the market presence

of Australian wines in key international markets and reinvigorate excitement in the Australian brand in the domestic market. To achieve this, A+ Australian Wine is a key driving initiative that displays the quality and variety of the Australian wines. The wine industry is also beginning to realize the importance of differentiation and lowering cost. An example is the Scarce Earth initiative from McLaren Vale in South Australia. The Scarce Earth wines profile unique flavours and personalities from single block, small parcels of land. Huanmei: In the aspect of lowering cost, have any efforts been made? Allan: Well, on the alternate strategy to lower costs, there are innovations like the Lean + Green Lightweight Wine Bottles. Designed and manufactured by O-I, reportedly, the new manufacturing technology for this bottle results in a 750 ml red wine bottle that is between 18 and 28% lighter. Lighter means more efficient shipping and also wins on the sustainability front by reducing the energy and water usage and decreasing carbon emissions. Significantly though, the new bottle maintains the premium look and feel of the Australian wine product. Huanmei: Peter, water is becoming more limited in some regions particularly in the hot regions. Are there any methods to deal with this challenge? Peter: Even though we can change the varieties very quickly, people do not want to do that because their vineyards are already there so we need to develop management strategies to reduce the impact of increasing temperature and to find techniques to make the vines more water use efficient. One way to do deal with that challenge is to grow vines on rootstocks, which are more drought tolerant than wine grapes growing on

their own roots. Another way is to protect bunches so that they will not get so hot and we need to change the trellis type to protect the bunches more. In the future, we may have to consider shading the vines artificially. Huanmei: which regions in Australia are going to face the biggest challenge from increasing temperature? Peter: The regions that are going to face the big challenge will be Riverland, Murray Darling region and Riverina. Approximate 60% of Australian wine grapes are grown in these regions and these are our hottest regions. These mostly rely on the water from the Murray Darling system. So, probably they have the biggest challenge in the future. However, I think all the regions in Australia need to expand the number of grape varieties that we are using at the present time. That is the reason why we have this program on these new varieties to get grape growers and winemakers in Australia to try more grape varieties. Huanmei: Kym, wine, has become a more-important part of international trade and the share of global production that is exported has risen greatly over the past decade or so. During that time China and other East Asian countries have emerged as great marketing opportunities for the world and especially the Australian wine industry. What is your view of the market prospects in these countries? Kym: I expect China and other East Asian emerging markets to keep growing steadily for fine wines. For example, five of the world’s top ten importers of bottled still wine, in terms of price, are East Asian countries. Australia already has a strong foothold there, second only to France. The China market may continue to grow rapidly also for commercial premium and non-premium wines,

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notwithstanding the expanding domestic production capability and rising quality of Chinese wines. Huanmei: Given that the Chinese market is becoming very important for the Australian wine industry’s future, how has Australian wine performed in that market during the past several years and how well do you expect it to perform in the near future? Kym: France has dominated the Chinese market, and I expect that to continue to be the case for some time yet for imported fine and especially superfine wines. France is also investing in domestic production there. Australia still has a lot of work to do if it is to become well known as a fine wine producer. A recent consumer survey found that one third of China’s upper-middle-class drinkers of imported wine do not know Australia produces wine! Huanmei: What do you see as the main obstacles to the marketing of Australian wine in China? Kym: One of the main obstacles is the small size of Australia’s budget for generic promotion. In 2011-12, that budget for all markets was just 8.9 million Australian dollars. That amounts to 0.7 cents per litre produced, and compares poorly with

Bordeaux’s 23.3 million Australian dollars or nearly five times as much (3.3 cents) per litre produced. Secondly, Supermarkets in China, just as in Australia, will continue to squeeze winery margins and to develop their own brands, which will compete ever more aggressively with brands. If Australia continues to warm and water becomes more expensive, high costs of growing grapes for popular premium wine will mean Australian wineries will be able to supply bulk wines for supermarket brands only by squeezing local warmregion growers or by using cheap wine grape juice from lower-cost countries. Huanmei: Peter, is there other important research going on in Australian Wine Research Institute (AWRI) to prepare the Australian wine for the global competition, especially in the Chinese market? Peter: At present Australian winemakers are making wines mainly for Australian consumers, American consumers and for British consumers. However, some of my colleagues here at the Australian Wine Research Institute are doing some research to find out what Chinese consumers like. For example, do Chinese and Australian wine consumers appreciate the same wine flavours? Is the preference for wine style different from the Australian consumer? Once have this information, we should make wine for the Chinese consumer, not just take our existing wine styles to China and say “you should like this”. The research is ongoing and there is still a lot more to be learned. Huanmei: In your opinion, what wine types do the Chinese consumers like? Peter: I think the Chinese consumers prefer red wine rather than white wine because of the colour and the taste of the red wine should be soft with perhaps a little sweetness. My impression is the Chinese consumer wants wine to taste like

white wine but to look like red. However, my impressions are based on my personal experience and not on any proper research. Huanmei: Nicola, are there any emerging phenomena for the Australian wine industry? Nicola: The growth of private label wines is a relatively new phenomenon for the Australian wine industry. As I mentioned in my blog, Tigchandler. com, this offers both challenges and opportunities and affects both the domestic and overseas markets. In my opinion, Australian wines can benefit from this development. Some already do provide wine to go into private label wines, both within Australia and for overseas retailers. Another new phenomenon is people are changing how they buy wines. There are options to use the internet, including social media such as Facebook and Twitter, and direct methods or a combination of the two. Huanmei: Johan, some big wine producers dominate Australian wine industry. Do you think this will be an obstacle to the development of Australian wine? Johan: I agree with the fact that a few big producers dominate. However, most industries, not only the wine industry, are dominated by big ‘players’. In the Australian wine industry, the top 20 wineries occupy 70-80 percent of the market by volume. In my opinion, the phenomenon is a response to the market requirements, i.e. concentration of supply as a counter-strategy to retail consolidation. Therefore, I do not see it necessarily as bad. For example, Australia needs big players to compete against the might of other countries in the exports markets, and even in its domestic market. However, the real problem is the intense competition in the low-priced wine

market segment. There are far more big companies competing for lowerpriced wine market share than for the higher-priced end of the wine market. Economies of scale dictate this. It is therefore all the more important that we develop a deepened understanding of consumers needs and want at both ends of the market and the so-called ‘middle territory’, namely the super-premium segments, etc. Huanmei: Do you agree with the statement that there is limited knowledge of consumer insights, drivers and preferences? Johan: I totally agree with this statement as I work full-time in this field. We know so little about what in essence is actually a consumer product. At the end of the day, wine is a consumer product, not an industrial product, regardless of what artisanal winemakers may think. It always concerns me that we have so little knowledge about what consumers want and do not want. Take Chardonnay as an example, Chardonnay wine is the biggest Australian white wine variety in production terms. However, in recent years, the sales of Chardonnay have gone declined sharply. Currently I am involved in a project called "The Chardonnay Challenge" to find out what exactly the problem is. Only now that we have a real problem (and the situation may well not be 100% retrievable) we are trying to find out what went wrong with chardonnay. The same situation is happening to Shiraz wine, which is our biggest red wine variety. Why wait until that situation becomes very serious too? Huanmei: What is your opinion on the quality and availability of wine industry related training and educational courses? Johan: Well, The University of Adelaide is the only university in the world that teaches significantly across the whole

wine value chain as degree programmes and research in viticulture, oenology, winemaking and wine business are all provided under one roof, so to speak. We are the world leader in this area and the university that has been doing this the longest dating back to 1977 at Roseworthy College. Despite this, the collaboration between university and industry is not strong enough, especially in wine business. Up to now, we do not have a formal internship program in the business side. But we do have had good collaboration with some wineries such as d’Arenberg, Dutschke, Whistler, Kies, Two Hands, Eldredge, Deviation Road, Paullet, etc. Huanmei: Nicola, what is your opinion on the relationships between opportunities and challenges facing the Australian wine industry? Nicola: I think the Australian wine industry is essentially a success story. It has grown rapidly over the last two decades to become a major player on export markets. The way that the Australian wine industry has done so well in the past is to be innovative and

adaptive. The challenges facing the industry can be turned into opportunities. The industry is strong and the product is becoming world-renowned. However, the approach to dealing with challenges must be positive, proactive and responsive. Huanmei: Johan, do you have any suggestions to wine producers on how to market their wine? Johan: The first one is wine producers should pre-empt and react to consumers’ preference trends, and not wait to react to what has already happened. The wine producers should know of wine fashion swing(s) in advance and plan accordingly. That means be proactive, not reactive. The second is to do what you do well. If you grow Chardonnay, not Sauvignon Blanc, find out what happens to Chardonnay, which market is fit for purpose and which market do you have to develop. Before you launch your market strategy do base research first since research-informed strategies are based on facts and they are smart strategies and therefore far less likely to fail.