Oz Wine Industry Faces Increasingly Competitive Environment

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– Global wine industry becoming increasingly competitive
– Overcapacity in Australia pressuring prices
– CBA suggests key for Oz producers will be ability to meet market needs

By Chris Shaw

Over the last 20 years or so wine consumption in Australia has grown strongly, while beer consumption has been relatively flat. As evidence of this, Commonwealth Bank notes wine's share of Australian bar tabs has increased to 37% in 2009/10 from 17% in 1974/75.

In CBA's view, the increase in wine consumption at the expense of beer reflects increasing cultural diversity, a shift in drinking culture, the perceived health benefits of wine and a rise in household incomes.

While wine consumption growth in Australia has been strong, CBA agricultural commodities analyst Luke Mathews points out Australian wine production over the past couple of decades has been exceptional, to the point production has been more than required locally.

Between 1994 and 2004 Australian wine production increased 2.5 times to 1.92 million tonnes, driving export growth of 11% annually over the past decade. Mathews notes exports now account for 63% of total disposals of Australian wine.

Wine grape production in Australia is concentrated in the south-eastern states, with South Australia accounting for nearly half of Australia's total wine area. New South Wales accounts for 27%, followed by Victoria at 17%.

Shiraz is the most commonly produced wine grape in Australia, accounting for about 30% of total wine grape area. Chardonnay is the second most common, followed by Cabernet Sauvignon. Australian total vineyards area in 2009/10 was estimated at 156,632 hectares, of which 97% were fruit bearing. The split is 60% red varieties and 40% whites.

While growth in Australian wine export volumes may be a good thing, the issue according to Mathews is the global wine market is now saturated and export competition has becomes more intense. This, Mathews suggests, is proof not all agricultural commodities are enjoying strong consumption growth, as world wine consumption fell by 1.4% per annum between 1980-2000. 

This reflects falling consumption in traditional old-world countries such as France and Italy, which is not being fully offset by increased consumption in new-world countries such as Russia and China and in the likes of the US and UK.

Since 2000 global wine consumption has only expanded at a rate in-line with population growth, as per capita consumption has remained flat. Mathews sees little scope for a strong lift in global per capita wine consumption in the foreseeable future.

As global production has risen and domestic consumption has declined the global surplus has seen wine prices fall. Mathews notes this is putting global demand for Australian wine under pressure.

This suggests much of Australia's wine grape vine area is excess to requirements, Mathews noting in 2009 local wine industry bodies indicated 20% or 30,000 hectares of Australian vine area is above requirements. 

Australia is estimated to be producing 20-40 million more cases of wine than is being sold. This excess is putting pressure on wine grape prices, Mathews noting over the past 10 years warm climate red grape prices have declined by an average 67% in inflation adjusted terms. 

With ABARE (Australian Bureau of Agricultural and Resource Economics) expecting Australian wine output to lift 11% from 2010/11 to 2012/13, Mathews expects this increased production will only exacerbate structural oversupply and so keep grape prices under pressure. 

According to ABARE numbers, Australian wine grape prices have slumped between 37% and 67% in real terms since 2000, the falls varying depending on grape variety.

Mathews suggests the response of Australian wine grape producers to this overcapacity has been sluggish, though the pace is picking up. As evidence, Mathews notes in the 2009/10 season more than 8,000 hectares of vines were removed from production.

Also impacting on prices is the scale of liquor retailing controlled by the major supermarkets in Australia, with Woolworths ((WOW)) and Wesfarmers ((WES)) now controlling about 58% of the liquor retailing market.

This has delivered increased purchasing power and has also seen an increase in own-brand wines by the duopoly. Own-brand wines are estimated to currently account for about 8% of domestic wine sales, with this share expected to increase further in coming years.

With respect to the Australian wine trade, Mathews notes Australian wine imports have swollen by 20% annually between 2001 and 2010. Imported wine accounts for about 12% of domestic wine consumption. New Zealand has enjoyed most of the increase, growing its share to around 70% of all Australian wine imports.

On the other side, Mathews notes Australian wine exports account for about 42% of industry revenues and in 2010 were worth about $2.17 billion. Much of the wine sold overseas goes to the UK and US markets, followed by Canada, China and New Zealand.

Mathews suggests the near-term outlook for Australian wine exporters is likely to be challenging, as while export volumes lifted 10% between 2007/08 and 2009/10, the value of these exports fell by 19%. One issue is Australian exports are viewed as standard, bulk, commodities wines rather than premium products. 

As well, Mathews points out consumer tastes now favour lighter wines rather than Australia's more traditional full-bodied shiraz and chardonnay varieties. This leads Mathews to suggest the outlook for the Australian wine industry will depend on the ability to produce and market products that are in demand both domestically and globally.

Given the increasing competitive global wine market and the current strength in the Australian dollar, Mathews suggests achieving this is likely to prove a challenge for the industry.

 

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