The five bottlenecks in Australia’s wine industry

IBISWorld has released its Wine Manufacturing in Australia 2012-13 report, and lists five key inhibitors to growth and success in the industry.

The report provides a snapshot of the industry, revealing that annual growth from 2008-13 has dropped by 3.2 percent, which annual growth from 2013-18 is due to rise by 1.1 percent. Revenue for 2012-13 sits at $5.3b, with a profit of $273.9m.

It also list the five major bottlenecks in the industry, preventing winemakers both large and boutique, from experiencing significant growth here and abroad. There are:

  1. Volatile economies in key export markets
  2. The high Australian dollar
  3. Rising competition from new low-cost wine producers
  4. Increasing dominance of the supermarket giants
  5. Oversupply of wine and wine grapes

The most challenging issue faced by the industry in recent years is oversupply.

In November 2009, the Winemakers’ Federation of Australia, Wine Grape Growers’ Australia, the Australian Wine and Brandy Corporation and the Grape and Wine Research and Development Corporation released a joint statement highlighting the structural surplus of wine and wine grapes in Australia, calling on producers to take steps to reduce production.

According to the research, at least 20 percent of bearing vines in Australia are surplus to requirements and at least 17 percent of vineyard capacity is uneconomic. The study found that Australia is producing 20 million to 40 million cases a year more than it is selling.

Major wine producers have responded to this oversupply by writing billions of dollars off their wine assets and selling vineyards. “During 2009-10, Treasury Wine Estates axed 37 wine brands and sold 31 vineyards, while Constellation Wines sold 10 wineries and 23 vineyards. Although this has had a disastrous effect on profitability, it should improve profit in the longer term as production capacity matches demand,” IBISWorld reports.

Export sales have declined by an annualised 9.7 percent over the five years through 2012-13, the report reads.

“During the past five years, wine exports have declined sharply as key export UK and US markets have suffered recession and the rising Australian dollar has eroded export competitiveness,” it states. Exports opportunities in Australia have also had to contend with growing competition from other low-cost wine producers.

The report says that cheap Australian wines dominated the UK market 10 years ago. But over the past decade several new producers have entered the market from countries including New Zealand, Argentina, Chile and South Africa.

Competition has also increased from producers in France, Italy and Spain, which the report states are “regaining their iconic status as winemakers.”

In order to combat this, Australian producers are responding by trying to improve Australia’s reputation as a wine-producing country and increase sales of higher value wines. Producers are also targeting Asian markets, particularly China, with Australia being the second-largest importer of wine to China, following France.

“A major concern for wine producers is the increasing dominance of Coles and Woolworths in liquor retailing. Woolworths and Wesfarmers (Coles) have aggressively increased their presence in the liquor retailing market in recent years, expanding the number of Dan Murphy’s, Woolworths Liquor, BWS, Liquorland and First Choice outlets in Australia,” Wine Manufacturing in Australia 2012-13 reads.

The supermarkets’ hold on alcohol retailing in Australia represents more than 60 percent, and this is expected to increase with Coles and Woolworths having plans to open another 270 stores between them over the next two years.

Woolworths and Wesfarmers therefore have significantly more bargaining power over wine producers and their marketwide discounting has contributed to limited wholesale price growth over the past five years.

IBISWorld’s report also states that “The supermarket chains have also exploited their market power to reduce shelf space for branded products and push their own private-label and control-label wines.”

Looking forward
Wine Manufacturing in Australia 2012-13 states that leading up to 2017-18, winemakers are expected to move towards producing premium wines with Asian export markets playing an increasingly important role in the industry’s longevity and profitability.

“Growth will remain moderate in the immediate future, as the strong dollar and sluggish global economy take a toll on exports. Weak price growth will constrain domestic revenue growth and profitability,” it reads.

It’s also expected that winemakers will work on producing single vineyard wines, while also focusing more on cellar door sales and sales opportunities online.

Here’s cheers to hoping IBISWorld’s next analysis of our wine industry will paint a rosier picture for producers.


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