For Australian Winemakers, More Turns Out to Be Less

SYDNEY, Australia — Just a few years ago, Australia was being hailed as the great international success story of the wine business, challenging the dominance of France, Italy and Spain. From 1999 to 2007, foreign sales grew more than threefold, making Australia the world’s fourth-largest exporter.

Bottling the Yellow Tail brand at Casella Wines. An early emphasis on low-cost, high-volume wines may have damaged the sector.
But even as its star appeared to be rising, the Australian wine industry was sliding, selling a greater volume of wine at increasingly lower prices. Last year, the average price per liter of Australian wine sold overseas was about 25 percent lower than it was a decade ago, a level many say is unsustainable.

The industry is also facing increased competition from lower-cost rivals and changing consumer tastes. Last year, exports fell 9 percent by volume, the first such drop in a decade. Many vintners are hanging by a thread.

“The industry is in crisis — anything less than that is avoiding reality,” said Jeremy Oliver, an Australian winemaker and critic. “It is interesting that nobody really saw this coming.”

The reversal of fortune is prompting tough questions about what went wrong, and stimulating efforts by the industry to reinvent itself. Some vintners say Australian wine needs an image makeover; others are shifting their sights to the relatively undeveloped Asian market.

Australians have been making wine almost since the first convict settlers arrived in 1788. With a few exceptions, local winemakers toiled in relative obscurity until the late 1980s, when some entrepreneurs and government officials spotted an opportunity in the growing demand for wine in Britain and the United States. Encouraged by tax incentives, investors planted vines and opened wineries at breakneck speed.

Australia took the British market by storm, surpassing Italy and France as the country’s top seller in 2004. What many suppliers did not foresee was the extent to which their sales in Britain would be dominated by a few large supermarkets, which would use their influence to push down prices, especially as competition increased from newcomers like Chile, Argentina and South Africa.

About 85 percent of Australian wine sales in Britain are made through supermarkets. Though the volume of Australian wine sold to Britain has more than doubled over the last decade, the price per liter has fallen to 2.95 Australian dollars, or $2.36, in the year that ended March 31, from 4.36 Australian dollars in 1999.

“Australia can’t even bottle air and make money selling at that price,” Mr. Oliver said. “It’s not sustainable for Australia to be trying to produce the world’s cheapest wine; we’re totally unsuited to it.”

Producers in several of Australia’s major wine regions have seen irrigation costs soar in recent years because of a prolonged drought. Australia’s higher labor costs and its distance from major markets have also made it harder for the country to compete globally.

In the United States, where Australian wine imports have fallen 4 percent by volume and 25 percent by value from their peak in 2007, the industry’s troubles are more complicated.

From the late 1990s, top-end Australian wines rode a wave of enthusiasm led by the influential critic Robert Parker, who extolled shiraz from South Australia. His high marks made those wines fly off shelves, with little extra marketing, said Chuck Hayward, owner of the Jug Shop in San Francisco, which specializes in Australian vintages.

But that wave soon turned into what Mr. Hayward described as “a perfect storm of laziness” in which no one — neither wine media nor importers nor the top United States sommeliers — felt the need to learn much about Australia besides South Australian shiraz. And wineries were making so much money peddling South Australian shiraz that they, too, failed to educate consumers about other regions or varieties.

Thus, at the upper end of the market, Australia became identified by “one grape and one region,” Mr. Hayward said — a strategy doomed to fail when that variety inevitably fell from fashion.