Australian wine exports dropping

MURRUMBATEMAN, Australia: From a picturesque hill overlooking the hazy, distant foothills of Australia's eastern ranges, Bruce March can see with crushing clarity a crisis facing the Australian wine export industry.

March, the chief winemaker at Doonkuna Winery, in the prized cool-climate vine country north of Canberra, had been looking forward to a bumper 2009 harvest, tripling production capacity last year in anticipation of rocketing demand in China for his wine.

But the global financial crisis has quenched that interest, bringing with it a soul-searching for Australian vine growers as good rains and a late summer are expected to bring one of the best harvests in years.

"We set up to produce all this wine. We spent a lot of money, and then bang, the financial crisis hit us," March said while standing near his largely new winemaking plant. "Our Chinese importer is hoping for a better next year. Right now we're tightening belts and we're into survival mode."

The latest export figures are depressing reading for the Australian wine industry, which for decades led the challenge to wine's traditional French, German and Italian strongholds.

In 2008, Australia shipped 11 percent less wine by volume and 18 percent less by value, the first setback for 15 years, according to the Australian Wine and Brandy Corp., or AWBC, a government marketing agency. The average liter value of wine sold dropped 7.6 percent to 3.53 Australian dollars, or $2.38.

In major British markets, total value slumped 18 percent, while exports to the United States fell off a cliff, slumping 26 percent. Rare bright spots included China, which imported 32 percent more Australian wine by value, from a low base, Hong Kong (up 17 percent) and Japan (up 4.1 percent).

A few hills distant from Doonkuna, Tim Kirk now sees a reckoning facing the industry after what even optimistic marketers admit has been an extremely disappointing year.

"We have had massive success with an approach of good wine, good price, cheap and cheerful, sunshine in a bottle. But in some respects that's been the seeds of our undoing," Kirk said.

Kirk's Clonakilla winery sits at the boutique end of the Australian wine market and his reds, in particular an award-winning shiraz-viognier, have won international acclaim.

But Kirk, a second-generation winemaker, says Australia has been complacent, believing that ground-breaking, cutting-edge production methods developed by the country have seen New World wine supplant the old.

Quality is there, he says, but the problem, magnified by the recession gloom, is a tradition of marketing overseas based on low prices.

"Rather than compete on good wine, great price, we need to focus on regionality, on great wine at maybe a good price," said Kirk, whose father began Clonakilla in 1971.

Since then, Western Australia's Margaret River has become one of the world's great cabernet regions, while in South Australia, Clare Valley turns out world-class Riesling. The continental climate of Canberra produces rivals to Rhone reds, Kirk says.

"The quality is a given. We need to develop the excitement," he said. "We have ancient soils, every bit capable of standing shoulder-to-shoulder with the great wines of Europe. Australia needs to grow up."

Industry heavyweights recognize the problem, which has gained urgency with the export decline and with Germany, the United States, Japan and Britain in recession.

A turbulent run for the Australian dollar, which neared parity with the U.S. dollar last year before a drastic depreciation, underscores Australia's need for a strategy other than competing with low-cost rivals in Chile, Argentina and South Africa.

"We got caught in a tailspin of tactical responses to apparent opportunities" in the market, "which were usually promotion-driven," said Paul Henry, general manager of market development for the AWBC.

Australia exported 62 percent of its wine in 2008 as the country looked to repeat the 2007 export high of 3 billion dollars. The average for France is about 40 percent.

The industry is, by some estimates, 20 percent too large, with many newcomers expecting export bonanzas.

That has harmed the image of Australia's overall wine brand, Henry says, making it synonymous with low price in crucial markets like Britain and some parts of North America.

"The real inconvenient truth for Australia is that we are not the best-placed in the world to compete on volume or price alone," he said.

"There's a stark realization to come to, which is that our immediate future is going to look very different to our recent past, in which our ability to produce large volumes of compellingly branded, easy-drinking wine at a price was dominant and exclusive."

Greg Corra, who ships the top end of Australian wine to 32 countries from a small farm outside Canberra, says many large Australian winemakers have themselves to blame as they look for ways to halt an export crash.

Yes, there is a financial crisis. But the ones who are suffering the most are the larger producers who have allowed the quality of their products to decline in a bid to meet demand in the good times," Corra said.

The Australian wine industry is dominated by Foster's, the world's second largest wine company, with brands including Beringer, Rosemount and Penfolds. The world's largest wine producer is Constellation Brands, a U.S. company that owns the Hardy's label.

Pernod Ricard of France owns the top-selling Jacob's Creek, while some other major Australian exporters are family-owned, including Casella Wines, whose popular Yellow Tail label has enjoyed phenomenal U.S. success.

About 15 percent of all wine products leaving Australia are Casella's and 9 percent of Australia's total grape crush in 2007 went through the company's huge plant near Griffith, which claims the world's fastest bottling line.

Corra agrees that the future for the Australian industry now lies in higher-quality offerings that still sell despite the recession.

"I only just entered the U.K. market as the recession hit and demand there is amazingly strong. I've just sold 3,000 cases and another 10,000 cases will likely follow," he said.

But that is small comfort to March, who admits taking advice to try to sell into China at the lowest price possible and moving up in quality later.

"They told us, don't worry, the Chinese don't know what they're drinking. I reckon a few growers round here will be pulling out vines by the end of the year," March said.