Decision time Down Under
With sales grinding to a halt, the market
leader stands at a crossroads in the UK,
as Graham Holter reports
Australia has been grown-up enough to accept that, in its quest for quality wines at higher prices, it may lose some ground in the UK, its principal market. Its prophe cy has come to pass, but it remains the off-trade's most important wine supplier if only because its closest rival, France, has suffered bigger declines.
Only a cynic would argue that the Australian adventure is over - that UK wine drinkers have fallen out of love with a product which, in many cases, was the reason they embarked on an affair with wine in the first place. But there seems to be a growing acceptance that Australia's boom years are probably behind it and the future will be built around measured, sustainable growth.
However, growth of any kind cannot be taken for granted, and a glance at the latest Nielsen figures shows
the Australian bandwagon juddered to a halt in the year to August, with volumes down just over 2% in an off-trade wine market which was up 1%. The value of sales was static
in a wine sector up 5%.
Mathematicians might take this as evidence that Australia was achieving its stated aim of realising higher retail prices, but in fact it hasn't been keeping pace. Inflation is roughly 4% in the UK (more like 10% for food), which would, in theory, take the 2007 average price paid for a bottle of Australian wine from £4.27 then to £4.44 now. Add on the
chancellor's duty increase of 15p and you arrive at £4.59 - and even this figure ignores currency fluctuations and rising production and distribution costs. In fact, the average price of Australian wine is up just 12p to £4.39, and brands such as Wolf Blass and Rosemount are actually cheaper than they were a year ago.
While few, if any, of the main Australian brands have serious concerns just yet about falling sales, most can attribute their increased value to the duty increase - and some,
such as Jacob's Creek, Lindemans and Calloway Crossing, have registered volume declines, according to the Nielsen stats.
But the biggest loser of all is
own-label. Sales value declined by 7% over the period while volumes dropped by 10%. Again, this is something which had pretty much been prophesi ed by the Australians themselves when they warned that a shortage of cheap wine would affect their ability to fulfil retailers' own-label requirements. Not that many people in Australia were too worried by this: tired of splashing around in the shallow end of the UK wine trade, producers were ready to move into more serious, premium territory. It wasn't their fault that their poor 2007 vintage coincided with the UK's economic downturn and a growing fascination with three-for-£10 deals.
According to the Australian Wine & Brandy Corporation: "Bulk and bottled wine shipments both declined in the past year. Bulk wine was the main contributor to the overall volume decline but the decline in bulk shipments is stabilising on a month-by-month basis. The decline in bottled wine shipments continued."
The UK and US , which remain Australia's most important export markets, registered "significant declines" which were partially offset by "strong growth" in Denmark, China, the Netherlands, Hong Kong and Singapore. There are those who believe Australia ought to be doing more business with its Asian neighbours and maybe the focus for exporters is beginning to shift.
Australian producers regularly voice their despair at the low margins available to them in the UK,
and will rejoice at any suggestion that the market is beginning to show an interest in upscale wines with better profit potential for producer and retailer alike. But even in premium territory it's not plain sailing for Australia. Jamie Harrison, of Noel Young Wines, says: "Australia is in much the same boat as Europe, simply because of the currency. The Australian dollar is 20% stronger against the pound than it was 1 2 or
1 8 months ago and everything that was £7.99 is now £9.99."
The Cambridgeshire retailer was named Australian merchant of the year in the recent International Wine Challenge, with an Aussie range bigger even than its French selection. Having its own business interests in Australia has helped it gain access to premium wines, frequently from cool -climate areas and made from varieties
such as Pinot Noir, Riesling and Gewürztraminer, which multiple rivals don't tend to home in on.
Australia will wholly abandon the volume end of the market but adds that consumers are increasingly knowledgeable about what the country can offer further up the quality scale.
"I think it's becoming more regional," he says. "Ten years ago people thought Australian wine was all of one type. It's a very big country and regional identity has started to creep in now. People are aware of South Australia and Western Australia and cooler -climate areas
such as Tasmania. We do well with aromatic varieties which is where British cuisine is going at the moment.
"Hats off to
the likes of Jacob's Creek for getting people interested in Australian wine and at good price points. There are always going to be people who just want a good drink with sweet fruit for a fiver. But it's increasingly difficult for them to produce that - because of the cost of shipping, if nothing else. I don't see the bulk end dwindling away to nothing but they will probably have to readjust."
Foster's UK commercial director Neil Barker does not believe there is a crisis facing Australia.
"W e have had to deal with unprecedented vintage and economic conditions that have provided the perfect storm for Australian wine growers: a dramatic exchange rate shift versus sterling; a long-term, extreme drought in key growing areas; the need to buy water to irrigate at significant cost; and
pressure on dry goods costs," he says.
"Australia remains a premium -priced category, 27p ahead of average unit prices in the off-trade, according to the latest Nielsen data. For sure, promotions play a major role in the whole category
and, as the leading country, Australia will always have to play a disproportionate role in promotional plans. The fact is, Australia turns more stock than any other category."
Innovation and support
He adds: "Where Australian brands are innovated, supported and built carefully, they continue to thrive. Our core brand portfolio is growing at 10% in value over the
- well ahead of volume growth
more than 22% in value in the latest Nielsen read. Average unit prices across this portfolio are growing, 74p ahead of category averages, driven by consistent brand support above and below the line, and careful, breakthrough innovation."
Barker cites the Wolf Blass Green Label PET bottle, low -alcohol Lindemans Early Harvest and "more refreshing" styles such as Rosemount Diamond Label Pinot Grigio and Rosemount O as evidence of such innovation.
"Australia, like all other categories, needs to continue to innovate to meet changing consumer demands," he says. "Chardonnay will always be important to Australia, but the country is equipped to evolve into new wine styles and varietals."
At Constellation Europe, the message is similarly bullish, as befits the owner of the sector's best selling brand, Hardys. According to consumer marketing director Clare Griffiths, Constellation's market share for Australia in multiple grocers has grown by 10% year on year by volume and 10.9% by value. "This shows Constellation's premiumisation strategy is working," she maintains.
"Overall prices are moving in the right direction. Although the £3-£4 price bracket holds
more than half the Australian market share, the biggest growth is between £5
and £8 with increases of 24-25%
year on year.
"Australia is responding extremely well to the challenge of becoming more premium and sales are rising faster by value than volume. This indicates that the Australian Wine Bureau's tactic of focusing on regionality and premiumisation is paying off."
Constellation's arsenal of brands and sub-brands means it can fight it out at the budget end of the market where necessary, but it can't be accused of targeting all its resources on discounting. Recent NPD has included Banrock Station Ecomate (a Tetra Pak variant) and trial-size half -bottles of Nottage Hill.
"Constellation is actively investing in the wine category to drive more value and ensure wine is seen as more than a commodity," says Griffiths. "This year, Constellation Europe is investing a massive £12 million
in its flagship brand, Hardys. This represents the biggest
UK spend behind a wine brand and is set to add real value to the Australian category and bring new consumers to wine."
Australian Vintage, formerly McGuigan Simeon, believes its output is nicely balanced between branded and
own-label. UK general manager Paul Schaafsma is in no mood to sacrifice sales in the budget segment of the market but accepts that margins there are harder to come by. "It's pretty tough at that end," he admits.
His company has spread the risk by increasing
its proportion of branded wines
from 40% to 55% and Schaafsma predicts that more suppliers will be forced to consider UK bottling to trim costs.
"The supermarkets are really trying to react to the current economic circumstances and with Aldi and Lidl doing well you're seeing more three-for-£10s and half-price deals, which is a challenge for brand owners," he adds.
"We've invested above the line in the 'vineyard in the city' and a national ad campaign on the radio, and competitions to win wine trips to Australia. We're providing the things that retailers
such as Tesco and Sainsbury's need above the line but also giving them the deals they need to be able to compete.
"We don't believe Australia should just capitulate and grit its teeth. After all the work that has been done over the past 20 years, if we just throw our hands up and raise prices, and let Chile and the like through the door, we would be crazy because it would take so long to take that back."
Australia faces an interesting immediate future. With the 2008 vintage coming in at 1.83 million tonnes - more than double what some had been predicting - it could still be possible for producers and their retail partners to retreat into the comfort zone of £3.99 and £4.99.
There's no doubt
the juice is there: the question is whether the changed financial climate really makes that end of the market quite as comfortable as it was.
There are even fears of oversupply, and Stephen Strachan, chief executive of the Winemakers' Federation of Australia, has articulated what many in the industry are feeling.
"With increasing pressure around water shortages, a strong Australian dollar, and a tough international market, we can no longer compete on price alone," he says.
"Australian wineries produced some extremely high -quality wines this vintage - with some regions experiencing their best season in years - and this is where our focus must lie."
Top 10 Australian wines (sales value)
1 Hardys +3%
2 Jacob's Creek +4%
3 Wolf Blass +15%
5 Banrock Station +1%
6 Rosemount +6%
7 Calloway Crossing -4%
8 Oxford Landing +12%
9 McGuigan +7%
10 Andrew Peace +46%
Australian wine performance
Value sales: £1.1 billion +0%
Volume sales: 862 million litres +1%
Average price: £4.39 +12p
Source: Nielsen off-trade data for year to Aug 9 2008 (compared to year to Aug 11 2007)