Another vine mess for winemakers

FOR many Australians who broke out the bubbly to ring in the new year, champagne was the tipple of choice.

Of all the wine consumed in Australia, 15 per cent is imported -- and the famous French beverage, along with New Zealand sauvignon blanc and reds from France, make up much of the quota.

With the buying power of the Australian dollar far stronger than it has been historically, consumers are the winners. The ugly flip side is currency torture for the domestic wine industry.

Squeezed by stronger competition from the UK and North American markets, depressed consumer markets abroad, a persistent grape glut and the debilitating effect of the strong dollar, the industry is in a crisis that is forcing a major restructure.

The nation's 2800 wineries are having their efficiency tested. There have been cutbacks among the major players, smaller margins for well-known family firms and some of the tiny wineries that make up a third of the $7 billion industry have been pushed to ruin.

It is not all bleak. Consultancy group IbisWorld is forecasting sales growth of 2.8 per cent a year for those wineries that can adapt and keep exporting. There are high hopes that China's growing middle classes will increasingly acquire a taste for quality wine.

Yet, since the financial crisis, the industry's revenue has shrunk an average 0.6 per cent a year -- including an expected 2.1 per cent drop in 2011-12 -- in a world market flooded with cheap wine, as we barely reduce our own glut.

Last year's harvest of 1.6 billion tonnes is likely to be nearly matched for 2012, despite 10,000ha of vines being pulled out in recent years -- nature doesn't allow grapegrowers to "turn off the tap" with precision.

Exports are valued at $2.63 billion, making up 38 per cent of our wine industry revenue, but this has fallen by over 10 per cent in the past three years.

TWO of the three largest wine companies have undergone structural changes, with 80 per cent of Accolade Wines bought last January for $280 million by Champ Private Equity, giving it the Australian-based control it lacked under US-owner Constellation brands.

Since 2007, as its revenue and earnings growth declined, Accolade -- which owns Hardy's, Banrock Station and Omni -- has halved its workforce to 800.

Treasury Wine Estates was spun out of Foster's in May, ending a tortured marriage in which the wine-making business soaked up $7 billion from the brewer -- half of which was later written off during the financial crisis.

Treasury chief executive David Dearie has foreshadowed cost cutting measures of $30 million -- about equal to its foreign exchange losses on earnings before interest and tax of $171 million in the year to June 2011.

The company, which is the world's largest stand-alone wine business -- with 40 Australian and New Zealand labels, 15 US labels and three European labels -- has been subject to widespread takeover speculation. Before the demerger, Foster's had rejected a US$2.3 billion offer for the business.

Mr Dearie is splitting it into five divisions.

Treasury is ramping up its premium brands in North America, where it makes half its revenue, and expanding its luxury Penfolds and Wynnes Coonawarra wines in China and Asian markets broadly.

The theory is that sales of the quality wine labels will withstand exchange-induced price rises.

Accolade commercial manager Russell Barratt says the biggest domestic challenge is the reluctance of consumers to spend.

With labels aimed at the mainstream market, Accolade is keenly aware of the threat posed by large supermarket chains -- Coles, Woolworths and Aldi -- who are selling cheap wines under their own labels or as cleanskins.

So far their market share is estimated at 3 per cent to 6 per cent, but it is growing.

Brown Brothers, along with 11 medium-sized family firms including Yalumba, De Bortoli, McWilliams, Tahbilk, have formed industry group Australia's First Families of Wine to market to higher-end consumers in the UK and Europe.

In contrast to the lower-end of the sector, the value of bottled wine exports above $10 a litre increased 11 per cent in the year to September, while the $20 to $49.99-a-litre segment grew 60 per cent.

"Australia has had to re-position itself because of the exchange rate," says Australia's First Families of Wine chairman Ross Brown. "Our company had exported around 40 per cent (of its wine) but that's back to around 20 per cent."

Mr Brown is fearful for small producers who came into the industry in the past 15 to 20 years. "Everyone in the industry is pulling vines out," he says.

With 56 per cent of wine grapes under irrigation, more are set to be pulled along the Murray-Darling river system.

Wine Australia statistics show the big-volume exporters are bottling and labelling in the UK in an attempt to stay competitive with low-cost Spanish, South American and South African competitors.

Bulk wine makes up 51 per cent of exports, costing the domestic economy about $340 million that would otherwise be spent on jobs and packaging at home.

Accolade's Mr Barratt says bottling in the UK is essential if the domestic industry is to remain globally competitive. UK prices for our wine have dropped from $4.74 a litre in 2003 to $3.51 today.