Wine makers are facing several challenges, on several fronts, but the opportunity is there to make some tough rationalisations now to be set for the recovery. By JASON BAKER of IBISWorld.
By Jason Baker
Sales in the wine making industry in Australia have plateaued in the past five years, with annual revenue growth falling from an estimated 10% in 2001-02 to a forecast 1.2% in 2006-07.
This is despite the fact that wine consumption has almost tripled over the same period.
Moderate growth came from domestic volume thanks to rising incomes and a shift in consumer tastes from beer to wine in both domestic and export markets. But exports have underpinned the strong revenue growth, and in general wineries with an export focus have fared best.
Stemming growth has been a global oversupply of wine.
The oversupply has led to heavy discounting since 2003, and a rise in the volume of low-margin cleanskin wines on the market. Compounding this has been consolidation in downstream liquor retailing, with Coles and Woolworths increasing their dominance of domestic wine retailing and using their market power to promote market-wide discounting.
By volume, Australia is the fourth-largest wine exporter in the world. The country ranks third by value, behind France and Italy. Australia’s share of global wine trade is shown below, which shows strong growth in export share over the current period.
Despite the slowing growth in the previous five years, the short-term outlook is for some hastening of growth in the industry.
The domestic market is expected to be stagnant, while exports will continue to grow, but slower than what has previously occurred.
The oversupply of wine that has depressed profits since 2004-05 is likely to diminish by 2008-09, as wine grape production slows and wine inventories are sold down. Consolidation in the wine industry is likely to offset price pressure from further consolidation among downstream liquor retailers.
Most of the export growth is likely to be driven by the larger wine manufacturers, Foster’s and Hardy Wine Company. However, there are some medium-size companies, such as Casella Wines, that are likely to continue achieving strong growth. Supply chain management will become more important for export success.
Larger operators, especially Foster’s Group Limited, since its takeover of Southcorp, will accrue greater scale economies and reduce costs. This will also better position it to focus on the global premium wine markets where prices and margins are higher.
Smaller producers will experience a decline in profit margins, particularly producers of lower quality and lower priced wines. To combat declining margins, successful small wine manufacturers are expected to reduce costs, obtain access to a greater range of grapes and improve distribution capabilities by forming alliances with other small operators, combining winemaking facilities and distribution networks.
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So to stay successful in the wine making industry, it will be important for producers to look into export opportunities.
Smaller players must focus on reducing costs, or entering niche markets, such as premium wine, or lesser grown grape varieties. Wine producers that fail to notice the diverging trends in this industry may just be calling sour grapes in five years’ time.Revenue growth
IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au