Real income growth and rising living standards over the last two decades has contributed to a decline in per capita consumption of beer in favour of wine and spirits.
The greater a household’s economic resources, the greater the proportion of their expenditure is spent on alcohol, with the different taxation treatments contributing to wine becoming less expensive relative to beer, and leading consumers away from traditional brews.
Per capita consumption of beer is highest among the population in the 18 to 30 year old age group, with demand being greatly influenced by marketing activities. Advertising expenditure by the major players can serve not only to increase their respective market shares, but to increase the total size of the market by promoting overall beer expenditure. Changing consumer preferences — for example, recent trends toward lower per capita consumption of beer, has occurred in favour of consumption of premium quality brands.
The wine industry growth is also being driven by exports, which account for more than half of all revenue. Although the export volume growth remains strong, a fall in average prices received, due to an oversupply of wine, had slowed revenue growth. In the 12 months to November 2007, however, export prices had improved by 2%. While export volumes still grew, it was at a lower rate than usual.
IBISWorld expects that in 2008-09, the Australian Wine Manufacturing industry will record revenue totalling $6114.9 million, an increase of 3.0% from the previous year.
Until 2006-07 the Australian market, like the international market, was characterised by a number of years surplus stocks, which had the effect of depressing prices. The sharp decrease seen in wine production in 2006-07 has resulted in these stocks being drawn down. The write down of bulk wine inventories by Fosters, announced in June 2008 as being worth $70 million, is an indication that some companies still hold considerable surplus stocks.
Australia consumes less wine on a per capita basis than many other wine producing nations, drinking 21.3 litres of wine per year. Therefore, international markets are important. The high proportion of industry revenue generated from exports means that the international market has a significant effect on industry revenue. Thus oversupply of wine globally has undermined the performance of the industry.
The period has also been characterised by increasing volumes of wine sales, with stagnant or falling prices resulting in marginal real decline of industry revenue. The industry has benefited from strong growth in export volumes and moderate growth in domestic volume sales.
Stagnant prices, however, have resulted in relatively low growth in real terms. Exports have underpinned increases in volumes, and, despite the situation of oversupply in the world market, wineries with an export focus have fared best. The global oversupply of wine has led to heavy discounting since 2003 and a rise in the volume of low margin clean skin wines on the market. Compounding this has been consolidation in downstream liquor retailing, with Coles and Woolworth’s increasing their dominance of domestic wine retailing and using their market power to promote market-wide discounting.
Looking ahead
IBISWorld forecasts that in the five year period to 2013-14, the wine manufacturing industry revenue will grow at an average annual rate of 3.7%, to $7349.5 million. The domestic market is expected to be stagnant while exports will continue to grow, at a slower rate than has previously characterised Australian wine exports.
The oversupply of wine that has depressed profits since 2004-05 is likely to diminish over the outlook period, as wine grape production remains lower than historical levels and wine inventories are sold down. As such, industry profits and value added are likely to return to growth over the outlook period. Consolidation in the wine industry is likely to offset price pressure among downstream liquor retailers.
IBISWorld also forecasts that over the five year outlook period, beer consumption by volume will rise, while per capita consumption will fall slightly. However, price increases and growth in premium beer sales will drive revenue growth. The beer and malt manufacturing industry’s main challenges will be increased competition from premium beer imports, and substitutes such as wine and spirits. Over the five years to 2012-13, revenue is forecast to increase at an annual average rate of 1.4%, to $4,644 million in 2012-13.
In 2008-09, industry revenue is forecast to grow by 1.3%, to $4,388.9 million. Growth will be driven by the higher consumption of premium beer, and strong demand from the core downstream industries of liquor retailing, pubs, taverns and bars. Bottled beer, and especially higher-priced premium beer, is expected to increase its share of revenue, at the further expense of draft beer.
Lena Zak is the editor of FOOD Magazine.