20/04/2015 - 04:59

Wine business retains romance

20/04/2015 - 04:59


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Those who rode-out the 15-plus years of tough times in the wine sector will be better prepared to meet the challenges to come.

The Western Australian wine industry offers the rest of the state's business sector a useful guide to living through a bust and emerging intact at the other end.

The nation's vineyards multiplied at a rapid rate in the 1990s, driven by the twin forces of overseas market demand for Australian wine and tax-driven investment in new wine assets.

After a decade of euphoria, the sector hit a brick wall as prices plunged due to global oversupply.

Sound familiar?

Due to a number of factors, WA's wine sector has spent nearly 15 years clawing itself back into a healthy state.

Many in the resources sector and those servicing it will hope it doesn't take as long for iron ore or petroleum products to recover.

Some of the reasons wine struggled were related to the sector's peculiarities. Many investors, be they cottage or corporate, have a romantic attachment to the industry that outweighs more pragmatic decision making and ensures that loss-making wine lingers much longer than other products.

Many tax-driven investors were distant from their assets and, truth be told, the main gain for them had been won up front, leaving it years before they necessarily had to consider their next step.

In the intervening period, wine in WA has been hampered by resources-related factors. The strong Australian dollar hurt exports and encouraged import competition. At the same time, high wages paid by mining companies damaged the cost base of what is an unusually labour-intensive enterprise by Australian primary production standards.

As a result of this long, tough decade and a half, recovery was delayed.

Nevertheless, it has occurred. In the background, the industry has restructured. Some of the biggest names have disappeared, some of the corporates have been privatised, and many have cut back their ambitions. New operational models have been created. Foreign owners are now a significant part of the picture.

This extended restraint on growth has weeded out the marginal operators who may well have hung on during a shorter crisis.

In the meantime, conditions have not returned to how they were 20 years ago.

China, the driver of our resources boom, has emerged as a real market for our wine. Its growing middle class is developing a taste for more than just the basics in life and they want the things they consume to be safe and trustworthy, something WA offers in abundance.

The upside with growing penetration for WA wines in new and traditional markets is the sector's strong alignment with tourism. Wine, perhaps more than any other product, is the embodiment of the physical attributes of the place where it is made. By its nature, wine tends to only be made in pleasant places.

Furthermore, the wine sector's competitiveness invites strong branding to differentiate each maker with geographic uniqueness one common selling point.

As a result, drinkers from afar are often drawn to visit the location if the vineyards.

It is all part of the romance, and the voyage of discovery that wine offers, and has been going on in this state almost as far back as the establishment of the Swan River colony in 1829.

Wine does more than invite interest in WA and lure tourists here. It drives interest in related products such as food and other beverages, and prompts investment in hospitality and tourism.

It helps shape a service culture that our state has severely lacked.

Despite this recent success after such a long time in the wilderness, challenges still remain for wine.

Tourism is an important feeder for the sector and it has been decimated by under-investment during the resources boom.

Furthermore, red tape abounds in this area due to a somewhat anachronistic view of liquor licensing that remains from a more conservative era.

Due to its scale, WA's wine industry is hampered by the dominance of major retailers. The rise of small bars has provided a welcome alternative, but state and local government authorities are increasingly frustrating new entrants to this sector.

The ability to responsibly sell alcohol ought not be restricted by the economic desires of incumbent players. Diversity in retailing makes WA a better place, provides stimulus for investment and jobs and, importantly, gives WA wine makers a way of show casing their wares.

Add to this, the taxing of wine on an ad valorem basis (value) is wrong. For medical and social reasons, alcohol is the issue and its volumetric presence ought to be the basis of taxation to limit consumption. Taxing by price simply discourages investment in the craft of winemaking and puts better products further out of the reach of consumers than they need to be. It is revenue raising and a wealth tax, that's for certain.


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