Essay: Australian Wine Industry - Production, Consumption, And Challenges.

You we will examine the economics of competition and how market and product characteristics, such as industry concentration, entry barriers and product differentiation can affect price and output decisions and the profits of individual firms and entire industries.

“Industry analysis frameworks, such as Michael Porter’s1 Five Forces and Adam Brandenburger and Barry Nalebuff’s Value Net, provide a structure that enables us to systematically work through these wide-ranging and often complex issues.”

Production of Wine in Australia

The Australian Wine industry is comprised of around 2,620 registered wineries (Wine Australia, 2016) and several resellers. The wine industry is an important industry from the point of view of export and employment generation for Australia. The industry provides direct employment to 16,122 people and mostly in semi urban and rural areas. (Poddar, 2015) Wine is produced in all states of the country and sold in the domestic and international market (Wine Australia, 2017). Hence, the demand for the wine industry is not just the domestic consumer but the international wine consumers as well.

Wine is produced in all states of Australia with South Australia is the largest wine producing state in Australia.

On the production side, the wine industry is dominated by large wine brewing companies like Accolade Wines, like multinational companies like Pernot Ricard as well as by large supermarket chains like Coles. (Wine Australia, 2016) 

The vast expanse of the country and its various climatic zones makes it possible to produce all kinds of wine in Australia with wine being produced in the hotter climatic zones as well as the cooler climatic zones. (Anderson, 2015)

The wine produced is exported globally and is a source of foreign trade.  One of the biggest markets for Australian wine is the UK. (Winemakers' Federation of Australia, 2014) An emerging market for the Australian Wine is the Asian market, most notably China. The consumption of wine in the Asian market is increasing in leaps and bound. Additionally, consumer spending in these markets is expected to pick given an increase in the per capita income of these countries. (Wine Australia, 2017)

The domestic consumption of alcoholic beverages, in general is declining in Australia. (Hoyer, 2017) However, the millennial generation is driving the growth of wine consumption in the rest of the world, especially the consumption of premium wine.

Figure 1 Some Products of the Wine Industry in Australia (IBIS World, 2017)

The wine industry in Australia has plenty of small and big wine producing groups. There are over 2500 wine produces with over 4000 wineries in Australia that brew wine. (Poddar, 2015) (Wine Australia, 2016). A distinction between these wineries could be made in terms of whether they sell wine on premises (i.e. selling wine on the location of its productions) or sell wine off premises (i.e. sell wine as production at other distribution locations such as supermarkets, restaurants, mom-and-pop shops etc. Major wine producing and retail companies like Coles account for over 77% of wine sold off premises  (Poddar, 2015)

Wine Industry Players

Figure 2 Supply Side of Wine Industry in Australia. Source (Winemakers' Federation of Australia, 2014)

Figure 3 Demand Side of Wine Industry in Australia. Source (Winemakers' Federation of Australia, 2014)

Over 30,000 types of wine or Stock Keeping Units are produced by wineries in Australia. The revenues of the wine industry are highly unevenly distributed with the top four producers commanding over 40% of the revenue (Poddar, 2015)  

The Australian Wine industry is fragmented in several ways. There are a large number of producers and their market share ranges from miniscule to very large. There is a fragmentation in products with a very high number of SKUs. (Poddar, 2015). According to Poddar, (2015) , big retailers in the industry tend to have an advantage simply because of their vertically integrated supply chains, right from supply of grapes to distribution systems to marketing channels. This makes it difficult for small and medium producers. Additionally, there is a constant threat of new retailers entering the market, making the territory more difficult.

 (Poddar, 2015)

• Barriers of Entry to the Australian Market

 In the recent times, the Australian Government has increased the import tariffs for imported wine in the country. Hence, there is a slight threat in terms of entry barriers.

• Health and other regulations The European Union requires wine producers to maintain strict health codes and rejects wine that is not produced using approved processes. This is a barrier. The Australian wine market is highly fragmented and many wineries are not able to recover even their basic variable costs. In such a situation, such regulations can price several wine producers out of the market. (Foster & Spencer, 2002). Similar barriers also exist towards packaging, labeling and handling of wine and may inhibit exports.
• Tariff Barriers: Several countries such as  Scandinavian countries have state owned wine products and discourage imports in order to maintain monopoly as well as to discourage wine consumption.(Foster & Spencer, 2002) These act as barriers.
• Non Tariff Barriers: There are several brands that already national and international brands that produce and sell wine in Australia.
• Competition from big retailers largely remains one of the biggest threats of entry, especially to small firms. In addition, big retailers already have established brands as well as the ability to influence consumer choice by highlighting their own wine or a wine of their partnership.(Bagwell, 2015) International players like Pernod Ricard already have globally established brands and thus, may be favoured by consumer to a brand of wine that they may not have heard of. This vastly increases the need for advertising and promotion for a new player.

• Foreign Wine as a Substitute: The wine industry is a highly globalized industry and all markets  and Australian wine experiences competition from other wine all over the world, in the domestic as well as international market. In China, Australian wine owns 21% of the share of wine market while French Wine nearly own double i.e. 41% share of the market. (Volkofsky, 2017 )

(Anderson, 2015)In the recent times there has been a fashion swing in the Australian domestic market as consumer are leaning towards imported wine from countries such as New Zealand. Wine imports in the country increased by 6.4 % from 2014 to 2015 while wine exports out of Australia increased only marginally (less that 0.5 %) during the same period. (Winetitles Media, 2017)

• Other Spirits as Substitutes: Wine, also , faces competition from other alcoholic beverages such as beer, vodka etc. (Hoyer, 2017)
• Agro – Tourism as a complement to Wine Production:  Agro- Tourism can be a wonderful complemt to the wine industry, especially the small wine producers. Vineyards can be opened for tourist activity providing consumers with a unique experience by involving them in the farming and wine production activities. This may help small producers stay afloat. (Wine Intelligence; Intellima, 2013)

As discussed above, the upstream market of the wine industry is very competitive and thus, the prices of the input (mostly grapes) are determined by supply and demand. Procurement of  Winegrapes amount for the largest input costs in the process of production of wine. Winegrapes, or grapes meant to make wine are easily available in Australia as grow in different regions of the country. In fact, the supply of wine grapes has persistently remained higher than the demand. In 2008, two-thirds of all winegrapes were sold in the $400 to $650 per tonne range, but by this declined to an average of $441 for a tone by 2014. (Anderson, 2015) 

Global Market of Australian Wine

The prices for winegrapes averaged at $540 for red wine grapes and $340 for white wine grapes. There has been a significant drop in the price of wine grapes. Production in hot regions remains considerably high and remains high. (Anderson, 2015)

Additionally, big retailers can contract grape farmers and negotiate prices. However, given that the demand for wine grapes, is generally, lower than the supply, downstream buyers will have an advantage. (Anderson, 2015)

The, general, tendency of wine producers would be to keep process low and this will keep pushing the prices of grapes downwards. In spite of the low prices of wine grapes, supply of wine grapes has not decreased. (Poddar, 2015) . Hence, it is easy to conclude that the prices of wine grapes may not increase in the visible future.

Big retailers have a lager bargaining power. This has prompted several super market chain like Coles  and Woolsworth to produce and sell their own wine. (Bagwell, 2015)

Australian wine receives competition from wine all over the world, in the domestic and international market. Poddar (2015) described the Australian wine market as an Oligopsony i.e there are a large number of sellers and fewer buyers. Oligopsony, buyers have a large bargaining power. According to  Poddar, (2015), the store brought category of wine sales are increasing as consumers simply seek less expensive wine. This gives an edge to big retailers as they can , with their vertically integrated supply chain make possible distribution of wine at low prices across the country.

An increase in the inventory build due to low domestic demand, the balance will shift in favour of buyers (both retail customers as well as bulk importers and resellers) and increase their bargaining power since wine producers would be looking to off load some inventory.

Conclusion

The above mentioned analysis describes the Australian wine industry from the Porter’s Model. However, there are some other factors that affect the wine industry of Australia such as exchange rates and taxes. (Wine Australia, 2016)

A problem for Australian wine is the taxation of wine in the country. Australia ranks very high among OECD countries in terms of taxation on wine. (Anderson, 2015)

Other factors that greatly affect the wine market are the exchange rates for Australian dollar Depreciation in the Australian Dollar would imply lower prices of Australian Wine in the international market. (Wine Australia, 2016)

Consumption of Wine is another factor that affects the industry. The consumption of wine is static in the Europe and is showing a downward trend in South America while the consumption is increasing in China (Wine Australia, 2016)

The production of wine grapes in Australia continues to exceed demand. (Anderson, 2015) This implies that the Australian wine producers need to establish bigger markets or through advertising and research  lead the consumers to consume more wine.

Anderson, K. (2015). Growth and Cycles in Australia's Wine Industry: A Statistical Compedium 1843-2013. Adelaide: University of Adelaide.

Bagwell, S. (2015, October 30). Wine makers cry foul as Coles and Woolworths become major wine producers in their own right. Retrieved September 19, 2017, from ABC News: www.abc.net.au/radionational/programs/breakfast/wine-makers...coles.../6898132

Foster, M., & Spencer, D. (2002). World Wine Market: Barriers to Increasing Trade. Canberra: Australian Bureau of Agricultural and Resource Economics.

Hoyer, H. (2017, August 08). Millenials Think Before They Drink: Fewer Rounds, Less Carbs , More Variety. Retrieved September 19, 2017, from Neilsen Consumer and Media View: www.nielsen.com/au/en/insights/newa.html

IBIS World. (2017, July). Wine Production in Australia. Retrieved September 18, 2017, from IBIS World: https://www.ibisworld.com.au/industry-trends/market-research-reports/manufacturing/beverage-tobacco-product/wine-production.html

Poddar, A. (2015). Inquiry into The Australian Grape and Wine Industry. Adelaide: Accolade Wines.

Volkofsky, A. (2017 , September 5). Australian wine reputation grows as export value climbs by 10 per cent. Retrieved September 18, 2017, from ABC News: https://www.abc.net.au/news/rural/2017-07-19/wine-exports-increase-australia-reputation-grows/8724818

Wine Australia. (2017, January 27). Australia's Finest Wines Achieve Record Value in 2016. Retrieved September 23, 2017, from Australia Wine and Grape Authority: https://wineaustraliacom/new/media-releases/december-2016-export-report

Wine Australia. (2016). State of Australian Wine. Melbourne: Wine Australia.

Wine Intelligence; Intellima. (2013). Australian wine tourism: a unique connection with consumers. Wine Intelligence.

Winemakers' Federation of Australia. (2014). Australian Wine. Coles; Winemakers' Federation of Australia.

Winetitles Media. (2017). Wine Industry Statistics. Retrieved September 19, 2017, from Winetitles Media: https://winetitles.com.au/statistics/default.asp