Grape expectations: Australian wine production set to rebound

The signs are positive for the future of Australian wine production.
The signs are positive for the future of Australian wine production.

Australia has long produced some of the most renowned wines in the world. However, over the past decade Australia's wine production industry has faced a host of difficulties, which have led to some substantial revenue declines and a major restructuring of the industry's operating environment.

In the five years through 2014-15, industry revenue is expected to decline by 2.0 per cent.

The greatest challenge facing the industry over the past decade has been the structural oversupply of Australian wine and wine grapes. The grape glut has led to massive overproduction, uneconomic vineyard capacity and, in some cases, large-scale destruction of vineyards. These factors have combined to lower wine prices and squeeze industry profit margins.

In the past, producers have offset these oversupply problems by increasing wine exports. Unfortunately, the high Australian dollar over much of the past five years has significantly constrained demand from the industry's major export markets.

Wine imports up, domestic products down

This has been exacerbated by increased competition from cheaper import markets, with the value of wine imports more than doubling over the past decade. The strong Australian dollar has made imported wines comparatively cheaper, which has reduced consumer demand for domestic products.

Adding to the industry's woes has been the emergence of the major supermarket chains, Coles and Woolworths, as major players in the downstream liquor retailing industry. Domestic wine producers have lost bargaining power to these massive retailers, which has further reduced prices and constrained industry margins.

Coles and Woolworths have also exploited their market power by reducing shelf space for branded wines and pushing their own private-label and control-label products. Numerous wine producers, particularly smaller independent producers, have been unable to compete with these lower priced products, and many have been forced out of the industry.

Positive outlook for local wine production

Despite the tough conditions over the past decade, things are looking up for wine production in Australia. Over the next five years, domestic wine production is expected to improve. Operators are addressing the oversupply problem by reducing production and closing underperforming wineries, which should gradually bring the industry back to balance. Furthermore, the depreciation of the Australian dollar is reviving industry exports and making cheaper imported products less competitive in the domestic market.
Over the next five years, consumer shifts towards premium wine products and increased online liquor sales are expected to benefit local wine producers. Online wine retailers have found success by stocking premium, niche and independent wine labels that may not be available at mass-market, bricks-and-mortar liquor retailers.

Cellarmasters (acquired by Woolworths in 2011) has generated rapid growth by focusing on the online fine wine market. Independent online wine retailers, such as Vinomofo, are also growing strongly and establishing supply contracts with a range of domestic wine producers. In March 2014, Vinomofo was voted Online Business of the Year at the Australian Startup Awards, indicating the growth potential and expanding markets for online wine retailers.

The emergence of new online wine retailers, and the shift in consumer tastes towards more premium wine labels, is shaking up the downstream market for wine producers. These trends, coupled with the wine production industry's expected return to balance, are expected to provide a host of opportunities at both the wine production and retail levels over the next five years.

Source: IBISWorld