WINE
INDUSTRY
REPORT
Expert Report on the
Profitability & Dynamics of the Australian
Wine Industry

PREPARED FOR WINEMAKERS FEDERATION OF AUSTRALIA BY CENTAURUS PARTNERS – AUGUST 2013

This proposal is solely for the use of WFA. No part of it may be circulated, quoted or reproduced for distribution outside the addressees without prior written approval from Centaurus Partners.

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Expert Report on the Profitability and Dynamics of the Australian Wine Industry

Centaurus Partners

INTRODUCTION AND REPORT CONTENTS
The Australian (and global) wine industry is highly fragmented with many different business models, and significant variations in performance. Players within the industry make decisions based on their individual position, strategy and view of economic fundamentals. The intention of this review is to provide facts and perspectives to help WFA determine where it should focus its industry efforts and how it can support individual participants in their decision-making processes.

The Report has four sections:
  ummary Findings of the Expert Review
S
  ecommendations for the WFA Board to Consider
R
  xecutive Summary of the Fact Base Supporting the Findings and Recommendations
E
 Appendices • Recommended Next Steps for WFA • Overview of Approach, Analysis, and Sources •  dditional Analyses and Exhibits—Available on the WFA Website www.wfa.org.au/review
A
Segment Definitions. To enable clear evaluation of the Australian wine industry quality segments for grapes and wine were developed and agreed with the WFA Board. There are five segments—A, B, C, D, E/F. The definitions are:
Grape Price

Domestic Retail Price

Export FOB Price

A

> A$2,000/tonne,

> A$30/bottle,

> A$10/litre

B

A$1,501 – 1,999/tonne,

A$15 - 30/bottle,

A$7.50 – 9.99/litre

C

A$601 – 1,500/tonne,

A$10 - 15/bottle,

A$5.00 – 7.49/litre

D

A$301 - 600/tonne,

A$7 - 10/bottle,

A$2.50 – 4.99/litre

E/F

< A$300/tonne,

< A$7/bottle,

Data Sources and Limitations. Due to its fragmentation, predominately private ownership and modest investment in data gathering the Australian wine industry lacks publicly available quality information. This review has used an extensive combination of data sources to address this issue, including: confidential interviews and surveys of WFA board members and industry stakeholders, and detailed company financial and market data provided on a strictly confidential basis. Limitations of the data sources and the related analyses are noted through the report and in Section 2 in the Appendices.

< A$2.50/litre

Bulk wine is allocated to its quality segment. Under $1 per litre FOB to E/F, over $1 per litre FOB to D

Expert Report on the Profitability and Dynamics of the Australian Wine Industry

Centaurus Partners

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SUMMARY FINDINGS OF THE EXPERT REVIEW
The Australian wine industry enjoyed considerable success from 1991 to
2007.
It more than tripled in size from less than 400 million litres to 1.2 billion litres and achieved total revenues of $5 billion in 2007. The value of exports grew from
$212 million to $3,004 million. The industry and many of its participants built an enviable global reputation for producing quality wine and created strong export markets particularly in the UK, US and Canada.
Analysis of available information suggests, on average, the industry enjoyed good profitability. From 2007 a number of factors resulted in tough times for the industry—the impacts of which and possible solutions are discussed in this Report.

Despite the recent difficulties facing the industry there are number of positives.
There has been a significant increase in domestic consumption of quality wines. From 2007 to 2012 the domestic consumption of Australian wine sold above $15/ bottle increased by $268 million (64%) in value terms and
11.6 million litres (42%) by volume. Unfortunately for the overall industry this only accounts for 16% of all wine produced in Australia by value and 3% by volume.

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Another bright light has been China. From 2007 to
2012 exports to China rose 144% (26 million litres) by volume and 333% ($186 million) by value. Continued growth is predicted and will help the industry but it has limits:   hina is still just 6% of total export volume and
C
13% of value
  rom 2007 to 2012 the value of wine exports fell
F
by $1,336 million (excluding China). The increase in exports to China mitigated 14% of this fall
  ver half the increase in the value of exports to
O
China came from A and B quality wines of which there is limited supply.
A good number of company success stories continue to emerge. In particular:
  roducers of high-quality fruit and/or wine
P
  owest cost producers of fruit and wine at each
L
quality level—especially C, D, and E/F
  layers able to establish a niche—brand, market,
P
and/or method of distribution.
Unfortunately, a number of players in the industry will find it difficult to transition to one or more of these models. The recent fall in the A$ will benefit Australian producers through higher A$ export prices (FOB) for existing volumes, and/or increased volumes.

Expert Report on the Profitability and Dynamics of the Australian Wine Industry

The wine industry remains important and highly valuable to Australia and Australians. Its benefits extend well beyond the direct economics to elements of our global reputation, tourism, and the economics and vibrancy of our wine regions. As such it is critical that the industry works together (and with government) to rebuild its global/export franchise and address domestic profitability.

It is important to recognise and understand the issues facing the industry to ensure the correct next steps are taken by: the industry, groups of stakeholders working together, and individual players.
Industry profitability has fundamentally lowered over the last 5 years and will remain under pressure for the foreseeable future.
The key drivers of this change are:
  he collapse of export returns due to the
T
appreciation of the Australian dollar (A$), falling demand, and issues in key markets
  he ability of retailers to extract margins from
T
growers and winemakers
  versupply of grapes and winemaking capacity
O

Centaurus Partners

(relative to domestic and export demand—at profitable prices) and the ‘negative feedback loops’ this has created.
In this environment the business models under the most profit pressure are:
  igher cost growers of C, D, and E/F grade grapes
H
  inemakers with significant portion of their
W
portfolio in wines with retail prices around and below $10/bottle (and $30 per bottle) >$10/litre n B ($15–30) $7.50-9.99

n

C ($10–15) $5-7.49

n D ($7–10) $2.50-4.99*

Value

Exports

Volume (Ml,%)

Volume (Ml,%)Value

Value

3 1% $94m

4 5% $98m

24 3% $360m

37 $596m
8%

22 $185
26%

22 3% $155m

58
$626m
13%

60 $286m
8%

28
$172m
35%

75
$556m

17%
20
$81m
24%

378
52%

$853m

n E/F ($10

64

94

30

46.9

365

360

(5)

(1.1)

8.5

10.4

73.8

97.9

24.1

32.6

B

$15–30

$7.50–$9.99

358

596

238

66.5

271

155

(116)

(42.8)

12.6

17.3

166.3

184.9

18.6

11.2

C

$10–15

$5.00–$7.49

667

626

(41)

(6.1)

854

286

(568)

(66.5)

30.4

21.0

82

171.7

89.7

109.5

D

$7–10

$2.50–$4.99

329

556

227

69.0

1,323

854

(470)

(35.5)

33.0

32.4

40

81

41

102.6

E/F

$10

1.7

2.5

0.8

47.1

21.8

23.9

2.1

9.6

1.9

2.3

1.9

3.5

1.7

89.8

B

$15–30

$7.50–9.99

26

36.8

10.8

41.5

31.4

22.3

(9.1)

(29.0)

4.7

5.0

15.1

21.8

6.6

43.9

C

$10–15

$5.00–7.49

73.1

58.2

(14.9)

(20.4)

143.6

59.6

(84.0)

(58.5)

17.6

10.0

12.3

28

15.7

128.3

D

$7–10

$2.50–4.99

49.8

75.1

25.3

50.8

434.0

377.5

(56.5)

(13.0)

39.4

38.6

7.3

19.8

12.5

170.1

E/F