Wine producers play tough

It may not be obvious when perusing your liquor store’s shelves or scanning the ‘by-the-glass’ menu at your favourite restaurant, but Australia’s wine industry is under significant pressure, and WA is no exception.

For the past 10 years the industry has been dealing with oversupply, a market that is bulging so heavily with grapes that some growers have stopped picking.

Governments are also offering incentives to growers to rip out vines to encourage balance between supply and demand.

Excess supply is not the only challenge for growers, producers and wine companies, but it is often considered the most significant.

The dominance of the retail market by Coles and Woolworths rubs salt into the oversupply wound. Their downward pressure on prices, not just on groceries and milk, but on wine too, might be good news for consumers, it is not good news for those in the business.

With estimates the two majors account for up to 80 per cent of wine sales, the price wars are on and small producers are struggling to compete.

WA has 360 wine producers across its nine regions, and most are small boutique producers, according to the Wine Industry Association WA.

With the grocery giants pushing the prices of wine down to less than $5 a bottle in some cases, one has to wonder – who suffers the cost?

Wine producer The Growers, best known for its Peppermint Grove and Niche labels, is set among the Yallingup sub-region of Margaret River. The company’s general manager, Phil May, speaks emotively of the price-point pressure.

“Right now the wine industry is not an easy game to be in, it is very difficult to fully recover the cost of goods,” he says.

The Growers started in 2002, when wine-making had become prospective for investors but at the beginning of a decade when negative returns darkened the often romanticised industry.

He had been in the industry for 20 years at that point and built his business on a model whereby The Growers does not own any vines and the company buys grapes off growers in the region – it is in the production side of the process, though Mr May prefers to call himself a farmer.

He says the model allowed the company to take advantage of soft grape prices and avoid the cost of managing vines, but has also caused issues; at times he has had to compromise on price to make a deal, a point that is difficult to recover from.

“It has been necessary for us to simply take the approach of buying market share through pricing our wines at competitive prices and we just hope that if we can hang in there long enough, we can come out of this cycle and be in a position where we do have reasonable distribution and brand awareness,” he says.

Despite the challenges though, Mr May is optimistic, confident even, that the worst of the market conditions is behind the industry.

“The glass is always half full to me. I see and genuinely believe the worst of this industry’s downturn is behind us. It is onwards and upwards from here,” he says.

Fogarty Wine Group proprietor Peter Fogarty modelled his business, which has the Deep Woods and Millbrook labels and acquired Smithbrook from Lion Nathan in 2009, in order to be able to cope with the pressures in the supply chain.

He says having different labels within the company – the state’s fourth largest producer, according to the WA Business News ‘Book of Lists’ (see page 20) – has meant Fogarty can deal with the majors, supply restaurants and wholesalers with its higher quality wine and maintain its direct customers through the cellar door without compromising its product.

“Restaurants don’t want to carry on their wine list products that are cheap and cheerful in a bottleshop. More and more the on-premises market is looking for products that have a point of difference to what is available for sale in liquor stores,” Mr Fogarty says.

“We set ourselves up to be able to supply anyone who wants to be supplied out of the WA market.”

For Fogarty Wine Group, dealing with the Coles and Woolworths-owned retailers such as Ist Choice, Liquor Land, Vintage Cellars, BWS and Dan Murphy’s has become a necessity, as for many producers operating on volume.

“The reality is when 70 or 80 per cent of the market is controlled by those two companies, if you can’t sell all of your wine into the remaining 20 per cent, you don’t have much choice,” he says.

“The last few years and the next few years will be a real turning point for the industry in the way you go about selling your wine.”

Larry Cherubino’s The Yard Wine Company was named 2011 winery of the year by arguably the industry’s most respected critic, James Halliday.

Mr Cherubino is adamant things need to change in the industry.

He says when the number of producers boomed in the early 2000s, there was the incorrect perception that volume was the key to making money from wine.

“You can do really well in this industry, but you have got to do it at low yields and bigger margins,” Mr Cherubino says.

He believes that this old European-based model is the road to business sustainability; Mr Cherubino refuses to go below his cost of production, which he says helps to maintain his brand equity.

“There are easier things to do, but if you don’t stick to your guns you are going to end up with a brand and business where the assets are devalued,” he says.

Export versus import

For any keen sauvignon blanc drinkers, the influx of New Zealand wine to Australia – or the ‘savalanche’ as the industry calls it – is rather obvious.

Sixty per cent of Australia’s wine imports came from New Zealand last year, according to the Australian Bureau of Statistics – 44.4 million litres worth $258 million at an average bottle price of $5.80.

According to the industry, the biggest impact this has had for the WA industry is on sauvignon blanc, for which WA was well known before the ‘savalanche’ hit.

“The market that has been hurt the most for WA is sem sav blanc, that was a big seller out of Australia. Its share of the market on the east coast has been hurt by the import of sav blanc from New Zealand,” Mr Fogarty says.

“Quite a few people I know on the east coast say they have started to see it turn a bit in there is more interest back in WA sem sav and chardonnay.

“What happened was they marketed it very cleverly when they had smaller volumes, Marlborough sav blanc was considered to be fantastic. I think a lot of people are asking questions about the quality of the sav blanc we are seeing in Australia now.”

According to Mr Fogarty, the best way to compete with perception is to produce the best fruit possible, and let the wine speak for itself.

On the flip side, exporting has long been a focus for some WA producers, with the Margaret River name carrying the Western Australian brand across the world.

While it accounts for less than one per cent of Australia’s wine exports (6.38 million litres), exporting was worth $34.5 million to the WA industry last year and accounted for 1.6 per cent of Australia’s exports by value.

While the most lucrative export markets for WA have traditionally been the UK and the US, there is a shift taking place, leading exporters to focus closer to home, on the Asia-Pacific markets.

Six of the top 20 wineries on the ‘Book of Lists’ export more than 30 per cent of their production overseas, including Howard Park (30 per cent), Plantagenet (50 per cent), Leeuwin Estate (40 per cent) and Sandalford (30 per cent).

With supply chain-pricing issues, increasing production costs and supply-chain woes, some producers are beginning to see the Asian market as a possible panacea.

According to the Grape and Wine Research and Development Corporation, Australian wine accounts for 20 per cent of bottled wine imports into China, second only to France, a figure that is growing at a compound annual growth rate of 67 per cent during the past five years.

Mr Fogarty says he has been focused on developing exports to Asia for some time.

“We don’t sell much into Europe, we have never really tried to sell into the US, and we took the view the dollar was going to be all too hard to manage,” he says.

Instead they have gone into Japan, China, Hong Kong, Indonesia, Singapore and Malaysia with all labels under the company name. Mr May recognised the opportunities in the Asian market in 2000, before he started The Growers, and went about establishing relationships with importers and wholesalers in China.

The Growers now exports 12 labels to China, as well as to the Cook Islands, Japan and Vietnam.

“As China continues to develop and grow in its absorption of wanting products from the West, there is a rapidly changing culture in terms of wine consumption,” he says.