Wine exports wither on vine but there's light at end of funnel(2)
The unexpected, and unwelcome, bounty of wine produced this year means that the pain of oversupply will continue for at least another year.
This surplus wine gets dumped below cost and becomes a scourge in the retail channel, or exported in bulk where it damages Australia's attempts to build a premium brand.
The numbers are simple.
Goldman's analysts estimate that true sustainable demand for Australian wine is about 100 million cases about half of which represents domestic consumption.
Actual production is closer to 140 million cases of wine each year.
This is on top of the high dollar leaching any profit out of exports while bargain imports are eating up hundreds of millions of dollars in local sales.
Goldman's says the high dollar means our biggest export markets in Britain, Europe and the US are ''barely break-even at present'' for the likes of Penfolds parent, Treasury Wine.
Even China's penchant for Penfolds can do only so much.
Any upside for Australia's largest listed wine stock is down to expectations that the Aussie dollar will deflate from current levels.
Goldman's says it is plain that ''with export earnings closer to zero, there is significant leverage to the upside if the Australian dollar were to depreciate back below parity with the US dollar''.
Analysts at another investment bank, Citi, are more sceptical, saying: ''The listed wine company model has yet to be proven through the cycle. The litany of disasters that have characterised the Australian wine industry over the past 5-10 years provides plenty of evidence.''
The only upside it sees is the fact that the wine industry is at the nadir of the three cycles dictate terms to listed wine stocks such as Treasury Wine: currency, wine supply, and the economic environment.
''The recovery stage of the economic and wine supply cycles bode well for improving industry conditions, however the long-dated nature of each implies an extended recovery,'' says Citi.
While a solution to oversupply is in sight, the message from industry veterans is that Australia needs to work its way up the value chain to help negate the currency issue which has dictated success in our traditional export markets of Britain and US.
As Penfolds and other premium winemakers have shown, the currency issue gets taken out of the equation the higher up you go.
And no one is counting on a return to the glory days when a much cheaper Aussie dollar allowed the industry to go gangbusters.
''If you're writing your strategy right now you'd be insane if you weren't writing your strategy at $1.07,'' says McLintock.
And the strategy should not just be about China.
McLintock sees big opportunities in building the premium end of what remains of Australia's hard-won wine markets in Britain and US.
McGuigan says that regaining ground from the foreign invasion, including what he sees as the Kiwi blight of Semillon Sauvignon Blanc, will also help put the industry back on a sustainable footing. ''The way out of it is to be creative and get people excited about Australian wine again,'' he says.
To this end, McGuigan's company, Australian Vintage, is combating the Kiwi juice with the recent launch of a wine labelled the Semillon Blanc.
He recently told the Herald that the wine is already doing exceptionally well in Britain. ''This wine has single-handedly lifted McGuigan's semillon sales in Britain by 52 per cent,'' he says.
But no one is denying that the big opportunity is China.
Although veterans have no illusions about how hard it will be to harness this potential.
''I think there is a huge opportunity for Australian wineries in China but it comes at a high risk,'' says Anderson.
She describes the Chinese market as being ''on the cusp'' and says it is important for Australian wines to build the right image and position - a sentiment echoed by others in the industry.
The dynamics are very different to western nations and it is changing rapidly as a growing cultural sophistication, and adoption of western tastes, spreads from the traditional high ground of Beijing and Shanghai to regional hubs such as Wuhan and Chongqing.
Time, connections, and money, are needed to harvest this potential market of a billion imbibers.
Despite a history of viticulture stretching back thousands of years, China's relation to wine is very different to that of your average Aussie, yank or Brit.
''China is just such a complicated market at the moment,'' says wine industry consultant John Weeks.
''The whole culture of drinking is very different to how we think of it.''
The current Chinese experience of wine is of it playing more of a ceremonial role in wedding toasts, gift giving, or socially in restaurants rather than in the home.
Weeks says the vast majority of wine sales take place around festivals, Chinese New Year and the mid-autumn Moon Festival.
McLintock says this is why 55 per cent of sales are ''on premise'' in restaurants and the like, compared to just 15 per cent in Australia.
But the market is changing rapidly and Australia needs to get its branding and marketing in order to chase the growing westernised tastes of China's new middle class who threaten to become the sort of wine consumer more recognisable to a western consumer.
''The emerging middle-class - predominantly consumers in their 20s and 30s - present a significant opportunity for Australian wine sales,'' says Anderson.
''This is where we need to work together as a wine community to target these opportunities and successfully position Australia as a producer of aspirational, high-quality, excellent value wines.''
This market opportunity may be more recognisable to Australian pioneers who placed Australian wine at the top of British shopping lists but the education and marketing efforts needed in China will be as daunting as the competition.
Weeks says the favoured place of French wines will have an umbrella effect on its regional cousins Spain and Italy.
And then there is China's home-grown competition. The country expects to produce more wine than Australia this year and double this within four years. Local giants Changyu Pioneer Wine, China Great Wall Wine and Dynasty Wine dominate the market.
Weeks says Changyu's marketing spend already is in the hundreds of millions of dollars - potentially drowning out the competition which cannot match this spend let alone the local knowledge of a company that traces its roots back to the 1890s.
No wonder some veterans such as McLintock are reluctant to rely on China as the panacea for the industry's ailments.
''China will be one component of the Australian wine industry, whether it becomes the saviour is yet to be seen,'' he says.
