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           Sydney Time

  

            

   Copyright © Ric Einstein 2009

 

 

 

 

Where’s The Paddle  (20 Aug)

 

This article has been in my mind for months, but production of the Tour Diaries meant it had to remain an idea until now.

 

Not to put too fine a point on it, the Oz wine industry is “up the creek” and in serious need of a paddle. Unfortunately they are in short supply at the moment.

 

Ask any winemaker and the majority of them will tell you how tough it is out there to sell wine; that’s both domestically and in the critical US export market, but there are other signs and indicators everywhere. Unsolicited samples have arrived from producers who didn’t want to know me in the past. Suddenly they have a “need” to focus on the domestic market because the US is no longer snapping up all they can produce. Recently I received an email from a Canberra retailer offering me wines from the Grateful Palate Portfolio. In part, the email said, “We never thought we would see the day when we were offered wines from the Grateful Palate. The Grateful Palate is associated with Marquis Philips and the wines are now made by Chris Ringland. Years back we actually sent a cheque for a parcel of their wines and it was returned with the explanation the wines were only available in the USA.” Not any more they aren’t! They can’t flog enough of their juice in the US, so now they are trying to unload it locally. My how times change!

 

Confirmation of my suspicions, by coincidence, came the day before this article was written in the form of a press release from the Australian Wine and Brandy Corporation. Last financial year, the volume of wine exported fell from 806 million litres to 704 million litres. Not all of that was low end, bulk wine, the good stuff declined as well. In terms of value, exports dropped from $3 billion to $2.65 billion. That’s a drop of approximately 13% in both value and quantity.

 

The US, our most valuable per litre market, took a huge hammering with a twenty five percent drop in value. The only segment to do well in the US market is the US$12-20 retail category. Above that and below that, it was very grim. Our second most important market, the UK was down by nine percent by value. On the positive side, and it’s precious little, exports to Denmark (hi Duncan and Julie), Honkers, Holland, Canada and Singapore are all improving.

 

The reasons for this decline are worth examining, because once the reasons for the decline are understood, the magnitude of turning it around becomes apparent.

 

It is extremely easy for people to blame the strength of the Aussie dollar for the problem. However in reality that is just one of many factors, and whilst it’s the easiest to blame, that should not be the case. For years the Oz dollar was way undervalued and it could only go in one direction. Those that staked their business model on a low Oz dollar were always destined to feel pain. Yes, it did go higher than expected, but that is still just one factor of many behind the decline in exports.

 

The biggest cause of the decline is because of the positioning of Australian wine in the market place, and the lack of strategic marketing leadership in a timely fashion. As an industry, Australia did not have either the marketing vision or planning in place to correctly position the industry. Basically the strategic thinking and planning was ineffective. Strategic planning is about the long term future and direction, not what is going to happen in the next twelve months. That’s tactical planning.

 

As a nation, for many years we marketed our wine as “sunshine in a bottle” and it worked brilliantly. We were known for our fruit driven wines and their excellent value. The writing was on the wall for anyone with a strategic outlook of the world to see that this positioning could not last. Unfortunately the people tasked with looking after our strategic outlook, assuming there are such people, left it far too late to be ahead of the game.

 

To make matters even worse, the marketing “brain surgeons” at some of our biggest producers exacerbated the problem by an incredibly stupid plan to try and capture the low end of the market, and entered into a race for the bottom. This move was always going to fail. It never stood a chance in hell of being successful. The very successful sunshine in a bottle concept was always going to run its course too.

 

I do not make these scathing criticisms lightly. The results were always entirely predictable for a myriad of reasons. Firstly, Australia could never remain the low cost producer and anyone who thought we could, should not have been in a management position.  Our cost of production is too high, our dollar was too low, and emerging economies would always have less expensive cost structures. Economically, it’s that bloody simple. You didn’t need to be a rocket scientist to work this one out. Secondly, the emerging new world wine producers (and eventually China) are starting to replicate the sunshine in a bottle concept that was unique to Australia for so long. And even some of the old world producers are trying to emulate our winning formula.

 

In a smart move, the one very good move that Australia made was to try and lessen it reliance on the UK market, something it did very successfully. Unfortunately you can have too much of a good thing and many of the smaller producers put far too many eggs in this one, relatively new basket. The crash and burn of the US wine market for Australia was also entirely predictable. As well as the value of the dollar and the sunshine in a bottle concept, which has already been discussed, there were some unique factors.

 

Many wineries built their US business on the back of Parker scores. Talk about doomed to fail. Those producers were endeavouring to capture a fashion market, which by definition is fickle and subject to change every season, and to make matters worse, their basis of their success (or failure) was grounded in an annual “heroin” hit in the form of Parker points. Predictably, as time wore on, these scores have meant less and less. Why would a points conscious wine buyer purchase a $50 Shiraz with 92 points when you can get a 94 point Shiraz for $30? When it comes to points, there is zero consumer loyalty to the brand or category.

 

According to Mike Opdahl of Joshua Tree Imports, a well respected importer of Australian wines, "One thing for the little guys to put in perspective---we are now handling some Argentinean brands. There are several small producers down there that are doing solid volumes to the states (5-10k cases) through 5-6 different US importers. The difference vs Australia? They are up here all the time. One guy spent six weeks straight working the SW market (Texas, New Mexico, Las Vegas, Colorado) with his importer. Most Aussies come over here for a week, a meeting with Jay Miller, and they think that is all that is required.

 

Simple fact is that in addition to getting outpriced, the Aussies are getting outworked."

 

Lets face it, much of the US wine market is unsophisticated and the appreciation of wine is an emerging trend amongst the middle class. This new market (as opposed to the traditional old world market that is supported by experienced wine lovers) lacks direct and focus. That is one of the main reasons its a "fashion market"  that can be so heavily influenced by a very small number of critics. The Argentina and Spanish stuff  may be the hot fashion at the moment, but in time that will change too.  To further quote Mike Opdahl, "Australia, as well as Chile, Argentina, and Spain make up a very small percent of the overall volume of wine that is consumed in the U.S., so from a business standpoint, an importer is already competing with quite a few very large fish in a rather small pond.

 

I've met with various Aussie trade groups and basically told them this: if they want to put the wines of specific regions, such as Orange, Victoria, Padthaway, or Hunter Valley on the map in the minds of the average U.S. consumer it is going to take a great deal of work, and a great deal of money. None of them have been willing, or are able to commit these type of resources. Brand Australia overall has done a terrible job organizing and promoting itself."

 

Another well respected importer, John Gorman of Southernstaz had this to say, "Australia is one seriously screwed up wine category right now and desperately in need of a major make over. This category has been so dehumanized by corporations and designer brands that for most consumers it appears to have lost its soul. The saddest for us is noting that 85.5% of all Aussie wine shipped to this country last year was labelled as product of SE Australia - a region that cannot be found on any map. The consumer's perspective of the predictable style of wine that awaits them with Australia, has robbed this category of it's true opportunity and denied people exposure the smorgasbord of wine styles that make it such a special place."

All of the above was predictable long ago, but there were a few factors that were surprises and not as easily foreseen. The producers who looked at the predictable factors and positioned themselves accordingly, are in much better shape to manage and survive the surprise factors.

 

The low alcohol debate will cost Australia some business in all markets. In many ways it is a knee jerk reaction by the “do good and wowser lobby,” but that is not the point. Due to the lazy press that parrot repeat any rubbish that comes across their desk, rather than doing some professional journalistic work and thinking about the real stories, the movement has gained some traction, especially in the UK nanny state. Unfortunately, like a dose of the pox, this is likely to slowly spread, but there is no antibiotic or vaccine against it. And one could get into trouble for suggesting we shoot all the politicians, no matter how good the idea. 

 

Finally, we have the economy. Turning to the domestic Australian economy, if you listen to the politicians all is rosy and we have nothing to worry about. On average, that’s correct but the reality is very different. If I have one hand in a raging fire and the other in liquid nitrogen, on average my body temperature is ok and that is the position of the Australian economy. Draw a line from Bunbury in WA to Coolangatta in Queensland and north of that line the economy is booming thanks to resource exports. South of that line, and that’s where the majority of the population reside, and things are downright grim. NSW, Victoria and South Australia are in a general retail recession. A few sectors like mobile phones, electrical equipment etc may be exempt, but general retail is in a ditch. And that includes the wine retailers.

 

The US economy is also suffering thanks to a low dollar and credit crunch. Not even the wealthy are still buying normally, and those on moderate incomes have had to tighten their belt. And petrol prices in all wine consuming markets don’t help either. By coincidence, when I read today’s Sydney Morning Herald, there was an article in the business section about the US downturn. Headed Jet-setters renounce the lobster, the story states that even those at the top end who hire Gulf Stream Jets to move around the US are feeling the crunch. Instead of ordering lobster bisque, Cristal, and caviar, they are stopping at the local deli on the way to the airport and brown bagging it. I kid you not! The article goes on to state, a survey of people with an average income $US204,800, - shows luxury consumer spending in the second quarter of 2008 was down 20 per cent on last year. That is the bracket of people that are buying the super premium wines. 

 

It’s bloody tough out there and many small producers won’t survive these harsh economic times. Even large producers like Fosters and Constellation are not above feeling the pressure on their wine businesses.

 

Many of the smart producers out there are in a solid position to weather this economic storm. Those that have a niche market should be ok. Producers who have built a solid, mailing list base of clients should also survive. Wineries that believe that loyalty is a two-way street will find out just how much that pays dividends now. Those that have spread their risk across multiple export markets and are not reliant solely on the US should also survive. The others…. Well they will have to take their chances.


 

Feel free to submit your comments!

From Larry Dines: Thursday 21 August

I think you understated how bad the US, UK and Irish economies have tanked. I have a mate in the US and he is making no sales there whatsoever - zip - he is replying on European sales to pay bills and wages.

The UK is dire - friends of mine have been laid off and some are being made to take 10% pay reductions.

Ireland is also bad. If you think the decline in the value of Australian Banking stocks is bad then look at some Irish bank stocks where the share price has gone from EU25 to below EU8.

All discretionary business spends have been canned in these 3 economies. And ordinary people are doing the same.

It's a good time to live and work in Oz.

I think the Chinese will pick up the slack. They are encouraged to drink red wine (as opposed to Cognac) by the mainland government. I notice more and more Chinese people at wine tastings and they are very serious about becoming educated.

 

From Mike Pollard: Sunday 24 August

There is certainly enough blame to go around. It was obvious here in the US (even before the credit crunch) that Aussie wines were not doing as well as they had done. One aspect that does need looking at is the proliferation of labels that arrive from Oz. There never seems to be an end to this. The growth in the Grateful Palate's own labels (R wines) is a good example, but it seems that every time I go into a wine shop there is another wine from Australia that I have never seen before, and I doubt that most Aussie wine drinkers have ever seen the labels either because they have been made for the US market. There is no way that this can build brand recognition, or loyalty, or add to the consumers knowledge of Aussie wines, it just gives them more choice. And the problem in the US is that there are way too many choices - from all over the world.

Wine Australia's Regional Heroes was supposed to be a effort to build recognition of the different regions of Aussie wines but I seriously doubt that very few have seen this. And its quite correct that we never see many producers over here showing their wines. In contrast an importer of Spanish wines took a bunch of producers around various retailers to show off their wines. That opened up a whole new sphere of well valued wine for me. There is no reason why Aussie producers can't do the same. Its about time that they started to take their game seriously because with Jay Miller at the helm of Aussie reviews for the Wine Advocate and some of the scores I've seen the Wine Spectator giving Aussie wine recently, the days of great hoards of US wine drinkers chasing down the latest and greatest from Oz are quickly drawing to a close.

 

Copyright © Ric Einstein 2008

 

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