A drop in the ocean: Australia's wine exports and the economic downturn

Sunday, 13 September 2009

As the tone of the global downturn shifts toward guarded optimism, Dion Kagan looks at the effects of economic uncertainty on the Australian wine industry.

Passionate vignerons are wonderful to talk to. They are knowledgeable about the tastes and trends of contemporary palettes, and clear and articulate about the agricultural methods and mechanics of viticulture. Add to that well informed and forthcoming about the current state of the Australian wine export industry. However, there remains a certain reticence on the part of some local winemakers - large-scale producers in particular - to discuss the effects of the global financial downturn.

The narrative of the wine industry could potentially be read rather bleakly. A declining share in key US and UK export markets, the eroded value of the Australian dollar, growers battling with ongoing drought as well as swelling irrigation costs, water restrictions, and the ongoing oversupply of fruit. There are stories of smaller producers leaving grapes on the vine and just walking away. Is this an accurate reflection of our local industry?

According to Mark McKenzie, executive director of Wine Grape Growers Australia, the local market has lost about $650 million worth of export value over the last eighteen months alone. Winemaker and critic Jeremy Oliver declared recently that 'the industry is in crisis - anything less than that is avoiding reality.'

When I mentioned these formidable conditions to one of the country's most celebrated producers, I was quickly shunted to the voicemail of the sales and marketing manager. At a prestige South Australian producer, I was transferred from the cellar door to a winemaker, then to a brand communication manager who finally offered to answer my inquiries via email. I sent her some questions, but she didn't respond either.

Against this trend, Aaron Drummond, global brand manager at Yering Station, spoke openly about the company's response to the economic downturn.

'Our two biggest export markets are the US and the UK, and both of them are struggling. Generally our business is mainly on-premises in the UK. And about sixty percent of our business went to restaurants. Given the climate in London, where a lot of restaurants have gone out of business, we've had to alter our approach and switch to channels that previously we'd never dealt with.'

Victoria's first vineyard, Yering is a medium-sized premium boutique winery. Like most other producers they have faced one of their biggest challenges in the turbulence of the US and UK markets. However, Yering recently adapted their sales and distribution strategy after finding that the most suitable market for their wines is with specialist and independent sellers.

'We're finding that generally a lot of the specialist retailers and independent wine merchants - what they call the "high street set" - are still doing ok. The shift in the UK is that a lot people are not eating out at restaurants as much, especially two and three-tiered restaurants. They're more inclined to grab a good bottle and go home and cook something and drink it with friends.'

Supermarkets like Tesco and Sainsburys dominate the UK market, where the average spend on an Aussie bottle is around three or four pounds. But the cheap and cheerful supermarket sales that enabled Australian wine to become the UK's top seller - surpassing Italy and France in 2004 - have now led to the fall in exports. Eighty-five percent of the British export market was tied up in these few large supermarkets that have now used their influence to push down prices, especially as competition increases from Chile, Argentina and South Africa.

Thankfully, supermarket shelves are not the only conduit to European tables. Yering is enjoying strong sales with Majestic, the UK's biggest specialty wine warehouse, which sells mixed cases direct to the public. At Majestic, the demographic is older and higher spend. The minimum purchase is a dozen bottles. For a winery like Yering, where the average UK bottle sell price is closer to nine pounds, the specialist retail market is the smarter option.

'We can't really afford to be playing with the supermarkets,' Drummond explains.

Luke Campbell is a wine consultant at Armadale Cellars, an independent wine merchant in Melbourne's inner south-east. His role is varied and includes not only buying and selling wine to the general public, but training and education.

'The Australian industry in general, over the last two to three years, has struggled for its European positioning. We're always in a strong tussle between Italy, Spain, France, and even the Americas now. Europe is the most valued export market, and it's quite tight. So with our excessive grape production and with not a lot of the grape juice being taken up, a lot of that good fruit is being put into the lower price bracket.'

However, these difficulties in the export market, combined with the glut of local fruit, hasn't been bad for domestic sales - they continue to grow by about four percent per year. Australian consumers are still drinking, and they have reasons to be cheers-ful.

'With the current climate, as far as the excess of good quality fruit in the domestic market, we see the consumer getting much better value out of domestic wines, particularly in the price category between twelve and twenty-two dollars. Good fruit is being poured into this price bracket.'

One of Campbell's roles at Armadale Cellars is the purchase of imported wines, making up between twenty-five and thirty percent of their core business, though he says these varietals are harder to sell at the moment. Local consumers are spending their money locally, rather than selecting imports.

'Sangiovese from Italy, albariño from Spain, grenache from the Southern Rhine in France; these types of varieties that aren't noble, and aren't in day-to-day society yet, are a little bit difficult to sell. These varieties, which are just starting to really hit Australian wine drinkers' palates, they're suffering a little bit.'

Campbell says that in times of economic contraction, drinkers are less inclined to experiment with unknown quantities. They're more likely to stick with familiar and fashionable grapes, but move a shelf down in terms of price.

'They still drink what they like. But they drink less, and they're drinking smarter. Instead of buying one fifty dollar bottle of imported shiraz, they're buying two twenty-five dollar bottles of domestic shiraz.'

Drummond agrees that the domestic market for wine is still strong. In both the local retail and restaurant markets, Yering have seen no impact on sales. Indeed, they're up from last year. But he doesn't think the downturn has affected local consumers' taste for exotic varietals.

'Personally, I think if anything, there are some good deals out there on European wines. People are experimenting more than ever.'

Rollo Crittenden, of Crittenden Estate in Dromana, agrees: 'People are more concerned that they are going to get value for money. They might be choosing to drink by the glass rather than by the bottle, [but] they're still looking for interesting wines, and to evolve their palattes.'

Crittenden Estate is a family-owned-and-run boutique winery in Dromana, whose range includes a number of classic French varietals - chardonnay, sauvignon blanc, shiraz and pinot gris, as well as Spanish varieties such as tempranillo. Eighty to eighty-five percent of their sales are to restaurants, and the rest are made through independent and boutique wine sellers.

'Although a lot of people do turn to larger chains in tough times, I think quite often these boutique bottle shops can offer a different dimension in terms of information and communication.'

In their search for both value and distinction in wine selection, Crittenden says, consumers are turning to "third parties" for advice.

'We're finding that having reviews of our wine is important. If we have wines written up they do sell quite well. And the wines that are being written up are the interesting ones.'

Are wine drinkers favouring local produce because we prefer to support our industry during difficult times? Drummond doesn't think so: 'I don't know if people become more parochial. I know there was more support for the Yarra Valley after the bushfires, [but] I think that your average punter thinks that Australian wineries are owned by rich people.'

So how is it then that local markets have remained so strong?

One theory is that going out for a meal and selecting a good bottle of wine is an affordable luxury, whilst a new car or a flat screen TV is something that can be held off. We're still eating out, catching up with friends, and enjoying our locally produced wines. Perhaps the recession really is on its way out of the cellar door.

Dion Kagan