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Wine in Australia: Still the Taste of the World?

While Australian wine is considered among some of the best in the world, in the last several years, the industry has faced significant negative impacts from the pandemic, freight disruptions and international tariffs on Australian exports. Despite this, annual revenue growth projections for the 2022-2027 period are positive

The great novelist Ernest Hemingway once wrote that “wine is the most civilised thing in the world” and it’s no wonder that almost every nation on Earth makes wine, and drinks it. Australian wine is considered among some of the best in the world. Savvy’s interpretation of the latest data finds the size of the industry certainly underpins that fact, taking in AU$6.9 billion in revenue as of September 2021.

However, during the COVID-19 pandemic and other internationally led factors, growth and profits from the Australian wine industry dipped. This can be explained by tariffs imposed by our largest export destination, China, as well as consumption habits and government restrictions. So, is Australian wine still the taste of the world? Do we drink as much wine as we export? Where are all the wineries in Australia? Which sector of the industry profits most? What will happen to Australian wine in the future?

SIZE OF THE INDUSTRY

According to IBISWorld, the Australian wine industry is worth $6.9 billion, taking in $409.8 million in profits as of the final quarter of 2021. This represents a 5.9% profit margin for producers and wineries. In terms of how wine impacts the broader Australian economy, the wine industry generated $1.1b in wages, spread out across 14,754 employees and 1,954 businesses. The overall annual profit growth of the market has been negative however at -8.2% between 2017-2022.

Annualised growth in terms of revenue over 2017-2022 showed a dip of 0.6%, while projections show annual growth over 2022-2027 to increase by 2.5%.

There is no far-and-away dominant winery or wine producer in Australia – minor players comprise almost two-thirds share of market revenue (65.7%) with the top wineries in Australia being Treasury Wine Estates (13.5%), Casella Family Brands (7.7%) and Pernod Ricard Australia (7%.)

ALCOHOL CONSUMPTION IN AUSTRALIA

The method of alcohol consumption in Australia was turned upside down during the COVID-19 pandemic due to the extended However, the volume of consumption stagnated. According to the Foundation for Alcohol Research and Education, the same proportion of people drank more or less than previously (17%). Thirty eight per cent of people self-reported that their consumption stayed the same. This hews with the IBIS report, showing per-capita alcohol consumption staying the same over 2017-2022.

The ABS reports that pure alcohol consumption in wine per capita narrowed the gap between beer as of 2017-18, with 3.67 litre of alcohol in wine consumed versus 3.71 litres in beer. The widest gap was last seen in 1973-74, with 2.05 litres of wine consumed per capita versus a whopping 9.18 litres of beer.

WINERIES AND WINE REGIONS IN AUSTRALIA

Australia has over 60 designated wine regions, with most of them clustered in South Australia, famous for its rich and fertile south-east: Barossa Valley, McLaren Vale, Clare Valley, Coonawarra, Eden Valley and Adelaide Hills. Victoria has the next highest proportion, followed by New South Wales, Western Australia, Queensland, and Tasmania.

SUPPLY CHAIN OF WINE

The key sellers of wine production are grape growers, fruit and vegetable processors, flour and grain manufacturing, paperboard makers, and glass and glass product manufacturing. These comprise the ingredients and packaging for wines. Other considerations for wine-making include nursery production, livestock and agricultural supplies to ensure healthy grape growth, and chemical product wholesaling.

Wine reaches us through large liquor wholesalers, while the second tier is comprised of direct-to-consumer retail sales such as casinos, hotels, retailers and hospitality venues.

RED VS WHITE WINE

Red wine production leads the way in the Australian wine industry comprising 59.5% of all products, followed by white wine on 32.2%. Cider accounts for 4% of production and other wines and alcoholic beverages on 4.3%.

WHO IN AUSTRALIA DRINKS WINE?

According to IBISWorld, people with higher disposable income usually drink wine as it’s considered a premium, non-essential

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product. Wine demand has also increased, particularly white wine among young female drinkers. Wine consumption is also moderated by health concerns. Wine is often used as a digestive or sleeping aid by some people, and beer and hard liquors are often seen as unhealthy.

Though we produce a lot of wine ourselves, we imported $928.2 million worth of wine from around the world. The highest proportion of wine was direct from the United Kingdom (22.9%) while other countries (excluding the US, Hong Kong, and Canada) were the highest share of imports at 35.9%. These countries include New Zealand, France, Italy, Spain and select South American nations.

WHO IN THE WORLD DRINKS WINE?

According to Wine Australia, in the year ended December 2021, Australian exporters shipped wine to 112 markets, compared with 114 the year before. IBISWorld reported that exports amounted to $2.3 billion. Export markets account for 32.5% of the market share of Australian wine by revenue in 2021-22. By comparison, Wine Australia states that Australia exports 59% of all wine produced. The top three markets by value were the United Kingdom ($453 million, down 1%), the United States ($403 million, down 7%) and Hong Kong SAR ($192 million, up 45%).

The top three markets by volume were also the United Kingdom, buying 243 million litres; the United States 125 million litres; and Canada 47 million litres.

Nations participating in the Trans-Pacific Partnership (signed in 2018) will also increase opportunities as tariffs are gradually reduced over time.

THE KEY SELLERS OF WINE PRODUCTION ARE GRAPE GROWERS, FRUIT AND VEGETABLE PROCESSORS, FLOUR AND GRAIN MANUFACTURING, PAPERBOARD MAKERS, AND GLASS AND GLASS PRODUCT MANUFACTURING. THESE COMPRISE THE INGREDIENTS AND PACKAGING FOR WINES. OTHER CONSIDERATIONS FOR WINE MAKING INCLUDE NURSERY PRODUCTION, LIVESTOCK AND AGRICULTURAL SUPPLIES, TO ENSURE HEALTHY GRAPE GROWTH AND CHEMICAL PRODUCT WHOLESALING.

CHINA WINE EMBARGO – WHAT HAPPENED TO AUSTRALIAN WINE EXPORTS?

Since 2016, China has been the largest export market for Australian wines. However, due to political manoeuvring and disagreements, China began a campaign of scaling back Australian trade on key goods such as coal, barley, meat and of course, wine.

In December 2020, the Chinese Government imposed anti-dumping sanctions on Australian wine amounting to tariffs in excess of 100%, in some cases, double that number.

This left wine producers scrambling to find new buyers for approximately $1.26 billion worth of wine.

According to a statement by Wine Australia, “exports to mainland China declined by 97 per cent in value to $29 million and by 93 per cent in volume to 6.4 million litres, a loss of nearly $1 billion in value and 90 million litres in volume, when compared to the 2020 calendar year where shipments were free from tariffs for most of the year.”

Though a total of 63 million litres were shipped in December 2021, the largest month for exports since the big slump in October 2020, it was still the lowest volume shipped within a 12-month period since the year ended September 2004.

Further complications arose during 2020-21 due to the global supply chain crisis, where sea shipping costs rose over 150% over previous years.

WHO PROFITS MOST FROM WINE SALES IN AUSTRALIA?

The major market segmentation for wine is major retailers such as Coles or Woolworths (28.1%), domestic wholesalers (22.5%) and other markets (16.9%).

Market concentration in Australian wine is low, with the four major Australian wine producers taking up a 34.3% share of industry revenue in 2021-22.

The four major producers are Treasury Wine Estates Ltd with a market share of 13.5%. They produce some of Australia’s most premium brands including Penfolds, Wolf Blass, Lindeman’s and Rosemount Estate.

Casella Wines Pty Ltd shares 7.7% of the market and makes wines such as Yellow Tail and Casella 1919. Yellow Tail has performed well in the United States due to its unique and aggressive ‘Blue Ocean’ strategy of marketing.

Pernod Ricard Pacific Holdings has a 7% market share and is the subsidiary of French luxury spirits and wine group Pernod Ricard SA. They own the respected brands of Jacob’s Creek, I am George and St Hugo.

The fourth of the Big 4 of Australian wine is Amphora Australia with a 6.1% share.

Underneath the Big 4 are medium-sized wine companies including Australian Vintage Limited (4% share) and De Bortoli Wines. Smaller producers include Zilzie Wines, Kingston Estate Wines and Tyrrell’s Wines.

According to Bill Tsouvalas, finance expert and founder of Savvy, “While the fundamentals of the wine business remain good, the industry has really been impacted by first the China trade tariffs and now the ongoing pandemic. This has been reflected in the decline in business equipment lending we’ve seen in that sector, compared say to the craft beer market, where producers are increasing in number and expanding production capacity.

This may have as much to do with the comparative maturity of the industry – Australian wine producers have been established much longer and probably now have excess production capacity.”

THE FUTURE OF AUSTRALIAN WINE PRODUCTION WHERE EXPERIENCE IS EVERYTHING

Wine production is considered part of the Traditional Service Economy – combining labour and goods to create products for consumption. Wine production is exposed to threats by disruptive innovation – the cost of entering the market may be lowered by new innovations and the rate of innovation. However, smaller players are unlikely to unseat the Big 4 wine producers as the wine industry is a highly concentrated market. Wine has only seen moderate revenue volatility over the past five years, mostly due to unforeseen geopolitical circumstances. The wine production industry also receives moderate industry assistance to increase Australian competitiveness and a wine equalisation tax introduced in 2000 to support smaller wineries in Australia.

Industry data shows that revenue will increase year on year until 2027, with 2023 showing an increase of $279 million. With a global and local taste for wine, Australian wine production has its best years ahead.

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