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           Sydney Time

  

            

   Copyright © Ric Einstein 2009

 

 

 

 

Trouble at the Top End

 

Recently an email announcing a simple road show to showcase Australian wine in the US caught my attention, not because the show excited me, but the comments in the invitation were insightful and hit a raw nerve.

 

The email was from John Gorman of Southern Starz who specialises in importing southern hemisphere wines from small producers into the US, with Australian wines being the largest chunk of his portfolio. John has been at it for many years; he understands the Australian wine segment and has a thorough understanding of what is happing across the complete US market, and that knowledge means he knows what he is talking about.  

 

Here is what (in part) it said.

  • “It is our contention that the southern hemisphere wine category is traded in far too linear a manner and that this aspect of its flawed marketing design has created boredom and consumer disconnect within it.

  • The top end of Australia has completely come unglued and the bottom end is saturated and fetching $3 less per bottle than it was 5 years ago. Retailers are frustrated with the set and are seeking solutions to take the consumer back to the $10 mark and beyond. We have the solutions in abundance and on display.

  • New Zealand Sauvignon Blanc is now traded as a commodity and it seems that price is all that matters - at a time when their currency is the strongest it's been in years and grape prices are at record highs. See why value priced Pinot Noir could be the answer to re-imagining the category and see that it actually exists.

  • In much the same way as other credible wine categories have been established, and now exist, we believe the southern hemisphere needs to advance its cause - by promoting the smorgasbord of stylistic diversity and opportunity within its different regions.”

 

So how true are these claims in relation to the Australian segment and/or are they just one importers perspective?  My gut feel says they are true. One of the best indicators of the health of the Australian premium segment is the US wine bulletin boards. By their very nature wine forums attract premium wine drinkers; you don’t see many tasting notes on Chateau Chunder Chardonnay, Bordeaux BilgeWater Cabernet, or Platypus Plonk Shiraz, so the status of tasting notes on any particular category is an excellent barometer of the health of that segment.

 

With the release of the 1998 vintage, and the surrounding hype that was fuelled with a petrol-like accelerant from Robert Parker, the Australian category became a “fashion inferno” generating enough heat to warm the cockles of the heart of the Australian wine industry. Since that time, as the years have passed, there are less and less tasting notes about premium Australian wine on the US bulletin boards.

 

Probably the most active US forum for Oz wine is Wine Spectator, but even this forum does not have a huge amount of Oz wine coverage anymore. Out of the last one hundred and fifty tasting note topics, only twelve of them have been about Australian wines, but generally most of them are either those labels especially aimed at the US market or those premiums that represent excellent value. That figure of 8% seems OK but when you factor in factor in another one hundred and fifty posts in the general section, which had virtually no general discussion on OZ wines, the percentage drops to four percent which no longer seems very high.

 

There are also a limited number of hardcore Australian wine lovers who post on the forum on Robert Parker’s site hosted by Mark Squires. Now remember, at one time this site probably had the biggest Oz wine participation, but in the last five hundred topics posted only eight were about Australian wine. Six were individual tasting notes (and one of those was from a resident Australian,) one was an obscure question about wine dating back decades, and one was about receiving a mixed case of Oz wine. In a general topic about what you will be drinking over the weekend, out of the hundreds of wines mentioned, only six of them were Australian.

 

As the bulletin boards are a true reflection of the top end of the market, it is easy to see that premium Australian wine is certainly no longer at the top of the consumers mind. The reality is that when the hype was at its peak with the release of the 98 vintage, premium Australian wine became a “trendoid fashion statement” and like all fashions, over time the fashion changes and the product is then no longer hip; and that is exactly what has happen to premium Oz wines. (The low cost Oz wines are a different story.)

 

Sceptics may think this reliance on input from the wine forums is anecdotal evidence at best and at worst pure guess work, so let’s see what the official numbers have to say. According to the Aust Wine and Brandy Corp, there was a forty one percent reduction in the shipments of Aussie wine to the US last year in the category that AW&B measure as the A$7.50/litre category, (this translates to the over US$20 retail category) – a truly frightening statistic. So whilst overall exports may be up, (both quantity and dollar value,) the rise is totally attributable to the growth at the low end, and the top end is dropping faster than flies hit with Mortein spray. This is a truly worrying tend for our premium producers.   

 

According to John Gorman, “The wholesaler's warehouses and importer's warehouses are piling up with high-end Aussie booze. Many retailers’ shelves are stocked with older vintages of high-scoring wines that are sitting there and not selling through. This has resulted in the trade not taking their allocations of top end, traditionally high-scoring Aussie releases.”

 

Simple logic dictates that if the consumer is not interested in buying a particular category of product, the supply chain will become choked, and when that happens, the producers will have trouble moving their output. So the bottom line is that until consumers regain interest in the category, the category will be in trouble and that’s exactly what is happening to the premium Australian segment. So what else caused this to happen?

 

If we go back in time and examine the success of Australian wine in the UK market and see how it was built and then compare it to the US market, the reasons become evident.

 

The Australian category in the UK was built up over a long period. The base was built on the fantastic success of brands like Jacobs Creek and Lindemans. These brands formed the foundation stone for the category, and slowly over time, other players came into the market and took advantage of the solid reputation that had been gained by these brands. This was the time before Australian premium wine prices went crazy and our premium wines were seen as excellent value. So whilst the solid foundation base was being established, the premium drinkers were starting to buy into the Australian category because of the excellent value it offered. Over time, due to the increasing affluence of the population, some of the foundation drinkers moved up into the premium segment. The key point here was all of this took time.

 

In the US, the Australian category was no where near as popular but it was growing at a reasonable rate, and Rosemount was the star player. (Jacobs Creek was not as successful there.) Rosemount was doing so well that Southcorp wanted to buy the company so that its success could be replicated with their own brands. (We know what a disaster this turned out to be, but that is another story and not relevant to this article.)

 

At this point, the US foundation base was being built on Rosemount, in much the same way as the UK was originally built on brands like Jacobs Creek and Lindemans; so why did it all go so horribly wrong?

 

Four factors need to be examined to understand what happened in the US market to complete the picture. Firstly, with the release of the 1998 vintage, the Parker factor cut in and suddenly the premium Australian wine segment was the flavour of the month; it was truly fashionable to drink our juice, and people were going ape over the stuff; importers couldn’t get enough of it. This was great news for the industry as almost anything that was made in Oz was being snapped up by importers and on-sold to consumers with ease; they were truly golden days. The growth of premium Australian wine exports to the US was phenomenal.

 

The problem with fashion items is that what was “the in thing” today is yesterday’s news tomorrow, and that’s exactly what happened. Over time the fashionable premium Australian lost its gloss and became yesterday’s news; however all was not lost and in the process, some new converts remained steadfastly loyal to the category whilst others continued to still buy from it from time to time. The premium category is still selling more than it was say five years ago, but not as much as it was in its heyday and this is hurting producers as more and more of them have geared up for this market and are finding it harder and harder to hold traction, let alone gain further momentum.

 

At the same time as the premium fashion skyrocket went off, one of the greatest royal marketing/business stuffs up of all times took place with the Southcorp-ification of Rosemount; or was it the Rosecorpification of Southmount? Whichever one was to blame, the result was the same; the foundation stone of the Australian segment was ripped asunder. The damage to the foundation stone was the second factor.

 

The end result of the third factor was entirely predictable. A few people, and I was one of them at the time, were very vocal about the long term implication of the short term greed by a number of US importers who were gouging their clients. Here is what happened. In many cases, the wineries were trying to build a long-term brand in the US market and felt that the product should be pitched at a certain price point. A good importer will work hand-in-glove with the winery to build the brand as it is in both parties’ interests to do so; or so the naive producers thought. The problem arose when some importers decided that to heck with the long-term promotion and dedication to building the brand; they decided to capitalise on the high scores and “fashion-generated” demand; this resulted in some wines suddenly pitched way out of their “normal” pricing point vis a vis the competition. The free enterprise economy rules and making a buck is fine but when the fashion skyrocket went off and importers decided to jack up their prices exponentially, it had long term consequences for the producer.

 

In the short term, the importer made a motzer; the public were severely gouged, the winery wound up with wines at price points that were unsustainable in the long term and which caused all sorts of marketing problems. The problem is deeper than just the wineries that were directly affected by the gouging; it impacted on the whole category as the segment, which was initially well regarded for its value, now looked to be very ordinary value.

 

Whilst on the subject of importers and wholesalers, the final factor that needs to be examined to fully understand today’s picture is the distribution process in general.

 

Twenty years ago, the USA had roughly 10,000 wholesalers but due to mergers and consolidation, today they have about 1,000; this despite the fact there has been a gigantic increase in the number of brands and labels being distributed. The big distributors have fewer sales people per brand than ever before, and the average wine rep, has in many cases, become virtually an order taker. Brands from the big houses don’t get much focus and attention unless they make “the top 20 monthly priority list;” that's 20 out of 500 or 20 out of 1000 depending on the size of the portfolio. The big volume brands monopolise the wholesaler focus. The middle tier of Australian segment that needs building is not of interest to these large wholesalers, and won't be until it becomes big business (i.e. until someone else builds it) for them.

 

At the retailer level many of today’s retailers are not as sophisticated/wine knowledgeable as 20 years ago. Sure, there are some exceptions (fine wine retailers) but many retailers are little more than self service box movers that follow the press’s lead, and succumb to the crafty money-making deals thrown at them by large wholesalers, who are cutting each others throats to get a controlling piece of the retailers business. The deals are becoming sweeter and sweeter, and it's simply not about the wine any more, it’s about moving boxes.

 

According to John Gorman “In a surprising number of cases, the retailer virtually gives full purchasing control to the sales rep for the wholesaler. The sales rep decides what goes in the store; and yes, the rep is accountable for the stock moving, but it has two major implications. It’s a license to print money for the wholesaler, and the selection/product range is restricted for the consumer.”

 

As already outlined above, the average export price for Australia wines has dropped and this has a flow-on effect for the retailers. Their “register ring up” for the Australian category today is more than $2 lower now than it was 5 years ago when Rosemount was hot. That can be OK as long as you are moving a lot more boxes, but to make matters worse, the saturation of the premium category means that more premium boxes are not being moved and until the situation changes, that will remain the case (bad pun intended.)

 

From my research, I understand that some smart, small importers (like Southern Starz) are showing retailers how the top section, which they have put in place based on third party validations and reviews, is collapsing and that 95 point wines in this category are not moving, and the ‘nickel’ finally drops. It's also a revelation for these retailers once they work out that is was a mistake to have let the wholesaler stack their shelves with all those “critter” and lower cost wines that have essentially killed not only the retailer's premium business, but his customer's enthusiasm for the Australian premium category.

 

The USA is a tough market. The ironic thing is that once the importer opens the retailers’ eyes, and the retailers see the problems and decide to try and fix it, they still have to get around the gate-keeping wholesalers. The major retail buyers are guarded by the wholesalers, who don’t want to let outside influences, like importers, near 'their' customers. The challenge for the importers is not to rock the wholesaler's boat too much or they'll legally kick the importer in the crutch; in the US importers cannot proceed to market without going through distributors.

 

The distributors are thick as thieves, and as the number of distributors reduce, so do the importers options. The consolidation of distributors also ensures their survival but it also ensures the continued demise of this category and others.

 

John Gorman goes to summarise the situation extremely well. “The category has no direction and the pyramid has to be built from the bottom up - not the top down. The Aussie wine pyramid (in the US) has a huge base, no solidity to the middle, and a top that's got too many diamonds but no depth of substance (thanks to far too many concept label creations). There is no visible path for the consumer to get from the base to the top. Yes - we think the problem is huge.”

 

John is spot on with his comments but his comments in regard to base of the pyramid need a little further explanation. The base is now huge, but it is primarily because of one brand; Yellow Tail. As readers will know, the success of the brand has been unprecedented but it is also a recent phenomenon. The wine can be found for less than $6 in many stores and at this level, there is little brand/category loyalty; the motivating factor is the price tag. Only a miniscule percentage of drinkers at this price point will ever ascend the pricing pyramid, and in most cases and it will take years for this percolation to take place. To make matters for difficult, instead of these drinkers percolating up because they like, for example Barossa Shiraz, they are more likely to progress to another “critter” label that comes from South East Australia, which is more of a cross percolation, rather than an upward movement.  

 

Finally, in this news report, the 2005 Deloitte Wine Industry Benchmarking Survey recently revealed overall Australian wine export prices have plummeted thirty three per cent since 2002. It is a huge problem; and a very worrying one for our premium producers.

 

Copyright © Ric Einstein 2006

 

 

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