Nature points the way
Published:  27 August, 2008

In 1996, when the Winemakers' Federation of Australia published Strategy 2025, it outlined how a target of AU$4.5 billion in annual wine sales would be achieved by 2025. The "Old" wine-consuming world watched in amazement as Australia thundered into the UK, then US and other markets, beating its own target figure some 20 years ahead of schedule in 2005.

During that period the overwhelming sense in Australia was of great confidence, with producers and growers clambering over each other in the rush to create new labels and wines. Rises in exports of 17 -18 per cent year on year were sustained for over a decade, driving a buoyant, creative and thriving industry.

But sometimes an army's lightning advance can happen so fast that both strategy and supply lines need radical rethinking. Brand Australia, faced with rapidly maturing key markets, had to regroup to consider its next move. Few realised this was the beginning of a roller coaster ride.

Downward price pressures resulting from a discount culture around the big brand leaders, underpinned by domestic and global over supply of grapes, plus increasing competition from both Old and New World producers, had already conspired to produce cracks in the normally optimistic psyche of the Australian industry. Then, as Australia's phenomenal growth began to slow, a combination of drought and frost brought about some severely reduced harvests, with further drastic reduction in volume predicted for 2008 and even 2009. To the dismay of the Australians, times had become tougher still.

== Shift of emphasis ==

Far from sitting on its hands - and after 18 months of far-reaching research in a joint initiative between the WFA and the Australian Wine and Brandy Corporation - the industry responded to these changed circumstances with a revised marketing-driven road map entitled Wine Australia: Directions to 2025, published in May 2007. This, Brand Australia's stakeholders were assured, would help drive an increase in "the value of the Australian wine trade over the next five years by an accumulative AU$4 billion".

Where Directions 2025 differs from Strategy 2025 - including the latter's 30 key strategies covering every aspect of the industry from production to export - is that the new document is focused primarily on the producers themselves. It bills itself as a "comprehensive and timely plan for the Australian wine sector to transform itself from a volume-driven approach to one that delivers a more sustainable and profitable business environment for more growers and producers".

In the document's introduction, Kevin McLintock, chairman of the Directions taskforce, pushes the central message home: "The Australian wine sector needs to re-evaluate its current approach towards export markets ... In particular this can only be achieved by raising awareness and expectation of an Australian wine story founded on an international reputation for regionally distinct and fine wine production."

There is no doubt Directions 2025 presents a clear vision for the future . But the question is whether events have overtaken that vision. Despite the relative speed with which WFA and AWBC turned around such a comprehensively researched and finely tuned document, external environmental conditions have shaken Australia .

== Water - the vital element ==

In a key line that reveals how the effects of the ongoing drought - the worst in Australia for 1,000 years according to a recent report in The Times - may have been under estimated, the report says: "Australian wine can achieve these goals [in Directions 2025] in a way that improves and highlights the sector's environmental pedigree, especially its comparatively responsible use of, and economic return from, water with respect to other primary and processing industries."

The situation is complex but, put simply, ongoing water shortages, coupled with harvest shortfalls after frost and fire, have raised such a level of concern that Directions 2025 is already being re-thought to cope with a potential crisis - rather than re adjustment - in the industry. "We are having to rethink certain aspects of Directions at the moment in the light of ongoing events," admits Paul Henry, general manager, export development, at AWBC.

With grape surplus rapidly turned to shortfall - especially in the bulk-producing Murray-Darling Basin, where 60 per cent of Australia's grapes are grown - the situation seems likely to be further aggravated if WFA and AWBC's own published concerns about global climate change prove correct. A shortfall prediction in 2008 has been confirmed by the AWBC, suggesting a crush of 1.22 million tonnes, down from an already reduced 1.42 million tonnes in 2007 (see table), with further shortfalls expected in 2009.

The fear is that the bottom could well fall out of Directions 2025, because it focuses on a "challenge" - namely that of maintaining and growing its existing market share in the bigger volume, lower value market territory, while also "extending the brand into new territory", the premium and associated regionally focused higher end of the market. "The opportunity out of the predicted harvest is for the Australian wine sector to shift its focus from volume to value," Sam Tolley, chief executive of AWBC recently said. "It is incumbent on us, as an industry, to use this period as a strategic stepping-stone . The currency of our success must be measured by value and not volume alone."

== A question of balance ==

Few doubt Australia's potential to grow its already impressive portfolio of premium wines. But maintenance of the lower-end volume market is needed to fund the push for the high ground. And both the revenue and muscle provided by the volume trade could be in increasing jeopardy as Chile, South Africa, Argentina, southern France, Spanish regions, Sicily and the Italian south, plus other producing regions, all line up to capture sales should Australia fail to meet its markets.

The concern over shortfall is also highlighted by continuing discussion - admittedly against strong opposition in many quarters - about creating a Greater Australia geographical indicator (GI) that would allow for continent-wide blended wines, meaning surplus cooler climate fruit and, for example, fruit from Western Australia (in surplus in 2007) could be used to address shortages countrywide.

The argument runs that the current 15 per cent maximum permitted inter-regional blending limit allowed for regionally labelled wines has already been stretched to capacity, showing the necessity of such action. Elsewhere, so concerned is Yellow Tail's managing director John Casella about potential shortfalls that he has openly admitted his company would consider importing raw material for the brand and may even move part of its operation to southern America or southern France, "if we can't see that Australian production will return in the foreseeable future".

Despite current difficulties, the architects and supporters of Directions 2025 argue that recent events simply highlight the urgency of achieving the industry-wide aims of the document. "We have been a victim of our own success, creating a consumer market during the years of surplus and possibly as recently as four to five years ago we also had little respect as an industry for water as a building block," says Victor de Bortoli, export director of the medium-sized De Bortoli winery.

"We already realised we needed to increase in areas of premium production and we have been doing so with 400ha of new vineyards in Yarra," he continues, "but we need to underpin this with entry-level wine. However, entry level does not mean bottom rung and Riverlands is still producing great quality fruit at many levels, though not bargain-basement wine."

De Bortoli agrees that Australia strayed from its founding success of over delivering across price points ( thus achieving an enviable median entry-point price level in premier export markets such as the UK), but argues recent events will conspire to accelerate the process of "moving towards a European philosophy where the notable emphasis is on site-specific, premium areas for wine".

== Pushed in one direction ==

Adrian Atkinson, wine development director at Pernod Ricard, owner of the Jacob's Creek brand, also agrees with the central tenets of Directions 2025, believing that current challenges mean the industry must work together to deliver a turnabout. "There are similar pressures on Jacob's Creek to the category as a whole and we believe that the four elements of marketing [in Directions 2025] are as relevant to us as to the industry," he says. These are built around the recognition of four key levels of wine : Brand Champions (such as JC), Generation Next (funky, innovative, though not necessarily regional ), Regional Heroes (clear regional identity ) and Landmark Australia (top end, icon wines).

Atkinson does, however, introduce an element of caution : "It is very difficult to move away from what Australia is built on - and what the consumer expects - so if we are talking about repositioning upwards we must take care not to put all our emphasis on this move to the detriment of our base. It has not been possible to build in a discounting environment, so now the whole industry is responsible for adding value at the lower end and must refocus on the brand champions as much as the higher end."

Jacob's Creek continues to develop its higher-end wines, including new aromatic whites, but has had to pull back on a prospective release date for these new labels, due to uncertainty over consistency of future supply. This is precisely the type of knock-on effect that could constrain some of the ambitions of Directions 2025.

Atkinson rightly highlights the cost pressures on the industry. Water costs have risen by up to 50 per cent in Riverina, now accounting for such a significant proportion of cost of a kilo of grapes (or any agricultural produce for that matter) that it is fast becoming more profitable to sell a water quota than farm the land. Add in enforced low yields, with the fixed costs of running a vineyard remaining the same and the difficulties for very low-cost production are amply highlighted.

Despite the huge shortfalls in the bulk-producing areas , the situation is not so serious in Riverlands and many cooler climate areas, plus the aforementioned WA. The flip side to this literal drought of low-cost volume fruit is an abundance of high-quality, cooler-climate grapes, which, as Henry puts it: "have ensured Australia is inoculating the market with better wine than ever". I t seems increasingly clear that Australia has little choice but to embrace the thrust of Directions 2025 - whatever the consequences to its volume market.

== Maturing early ==

At a recent seminar, winemaker and industry commentator Brian Croser remained resolutely upbeat about the future for Australia. "Australia's viability as a reliable source of price-competitive branded commodity wine will be sorely tested over the next decade," he said, "and it is already evident that climate cycle drought, politically-enacted water constraints and global warming will make expansion of the hot irrigation-dependent vineyards of Australia's inland river systems virtually impossible.

"Unless there is another planting spree, which is unlikely given the water constraints, Australia is set for at least a decade of inventory constraints which will diminish its influence in the global branded commodity wine market, but it will also change the dynamics of the marketplace for Australian wine and, as image, price and quality lift, demand will also lift."

Croser argues that where Australia's commodity wines have previously benefited from cross-regional blending, they should now be allowed to benefit from cross-country blending. However, he stresses that the real future lies in a continued drive towards quality via ongoing assessment of the best clones of the best varieties planted in the best soils giving the greatest expression of regionality coupled with variety - in essence, the leading aim of Directions 2025.

It's a vision put clearly by Jeremy Oliver, an independent Australian wine commentator and journalist who was consulted by the taskforce behind Directions. "Australia's real challenge is not only to promote its higher-end and regional wines - and to convert suitable existing vineyards from producing modest regional wines to high-end icons - but to simultaneously cede the lower-priced strata of wine to other competitors whose circumstances are more suited to making very cheap wine," he says.

"Therefore, prices should be set by the same criteria that apply to Old World wines, when factors like quality, image, demand, prestige and reputation set prices in overseas markets, which are then replicated in the country of origin," Oliver continues. "That is the way mature wine-producing countries with large export markets operate, and it is inevitable that Australia, which is fast becoming a mature wine-producing country with a large export market, will inevitably move."

The impending shortfalls of 2008, it seems, coming on the back of previous and possibly ongoing shortfall, are simply the catalyst that is speeding up these changes. Directions 2025 set out to convince and co-ordinate an industry in the face of necessary change. It now seems that events themselves may well push through that change far quicker than anyone ever envisaged. Not least the Australians themselves.


=== Australia: wine grape harvests 2000-06 ===

Vine bearing Winegrape crush Winegrape crush

areas (ha) (tonnes) Red White

2000 1,106,23 564,287 580,951

2001 130,602 802,909 621,040

2002 143,373 909,584 696,262

2003 142,795 825,000 573,528

2004 150,561 1,140,727 776,511

2005 153,205 1,076,474 849,016

2006 158,167 1,055,646 845,914

2007? Na 678,000 741,000

Source: AWBC

?WFA estimates, June 2007


=== Directions 2025 ===

Brand Champions: Wines that appeal to a broad market base through accessibility, ease of enjoyment and a strong premium brand message about product and country.

Generation Next: Wines driven by innovation (marketing; product; packaging) that appeal to consumers who drink wine for social occasion and/or peer group affinity, rather than for wine attribute.

Regional Heroes: Wines from somewhere rather than wines from anywhere - adding and sustaining interest for consumers by fostering a clear association between region and variety and/or style.

Landmark Australia: High-profile, aspirational wines built on inherent quality and world-class reputation.

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