Australia's wine glut worries appear well and truly over but that does not mean the country is out of the woods. Now facing its third small harvest in three years, wine is actually going to be in short supply. Some believe this offers the chance to focus on the higher reaches of the market and less on the entry-level volume business. Chris Losh has misgivings.

If I were an Australian wine producer, I'd be worried. A few weeks ago, I was researching an article about Chilean wines in the on-trade, and within the space of a couple of days, three separate people - completely unprompted by me - gave me an almost word for word similar quote.

"We can sell Chile," they said. "It's Australia that nobody wants."

Admittedly, I was speaking to small or medium-sized merchants/restaurants, rather than to big pub operators, but the total lack of enthusiasm for the country was astonishing. All the more so, when you consider that for the last few years Wines of Australia in London has supposedly been focusing its efforts on wooing the same upper reaches of the on-trade who now seem so hostile to it.

Now obviously the on-trade is a relatively small and niche market. And Australia's 2.8m cases in this sector over the last year, while down on 2006, is still a pretty good showing. But the signs are worrying nonetheless.

Australia should be worried in the first instance because where the trade goes the consumer often follows in five years' time. The 'Anything But Chardonnay and Big Fruit' trend began as an on-trade phenomenon, which fed into the mainstream. And it is not just the influence the on-trade has on the wider market that should be of concern but also the far-reaching influence the UK market as a whole has on global wine markets. The UK is often something of a bell-weather for other markets, and if there is a diminishing of enthusiasm for Oz here then similar sentiments might be brewing in Scandinavia and northern Europe.

Of course, you could look at Australia's continuing growth in the off-trade, and say that the idea of an 'Anything But Australia' movement is arrant nonsense. The country's 21m cases last year was an 8% improvement on 2006. And, perhaps surprisingly, value was up by about the same rate. In the off-trade alone, we're talking about a GBP1bn (US$2.01bn) business, with 22% of the market and the second-highest average per-bottle price.

So why, then, the feelings of unease that have led no less influential an operator than Dan Jago, head of drinks for supermarket behemoth Tesco, to describe Australian wine as "standing on a precipice"?

To begin with, there's a definite feeling that the explorers of the wine world have 'done' Australia and are switching their attention elsewhere, leaving much of the purchasing to be done by uncritical bargain-seekers. Or as one seasoned trade observer put it, "People like Australia, but it's not exciting any more, and tastes have moved on. They want wines with a bit more subtlety and, rightly or wrongly, Australia isn't perceived as supplying it."

Secondly - and rather more quantifiably - there's the problem of short vintages, which threatens to blow the country's recent wine strategy out of the water.

The 2006 harvest was 1.6m tonnes, while 2007 was down to 1.34m tonnes, and the latest estimates for 2008, with frosts last year, another dry winter and spring and further-reduced water rights, have next year's crop down to just 900,000 tonnes. If correct, it means there could soon be half as much Aussie wine on the shelves as we're used to.

Now, there are those even within Australia who think this might be no bad thing; that given the choice between irrigating Godello or Chardonnay, farmers will always choose the noble variety, and that the country's wines will be both better and (through simple economics of supply) more expensive as a result.

But while there's certainly something to be said for a reduction in the number of deep-cut discount wines, the whirlwind transformation from glut to shortage threatens to send the industry into a tailspin.

It simply isn't viable, as some observers have suggested, for Australia to solve its impending shortages by just skipping the entry-level category, and moving all its wines up a notch.

In the first place, the entry-level space would be instantly filled by competitors from not just the New World, but Europe as well, with Australia haemorrhaging market share. Secondly, there simply isn't enough wine sold at the higher price levels to make a strategy based on selling GBP6-7 wines viable, however much Australians, journalists et al. might wish that weren't the case.

Over 90% of all wine in Britain is sold under GBP5, and Australia can't simply shift its business-model overnight from mass-market to, effectively, niche supplier. Put bluntly, consumers are not going to shift entrenched buying behaviour just because there's a water shortage in the Riverland.

There will, doubtless, be a certain amount of schadenfreude in the rest of the world at the sight of the country that used its vast volumes to muscle others off the shelves preparing to receive a taste of its own medicine, but the retailers, I'm sure, are petrified.

"Australia losing market share is not something we're keen on happening," Dan Jago admits. "We would be concerned if it lost momentum, and would do all we can to help it get it back."

That, though, is easier said than done. Once market share is gone it's a long hard slog to recapture it. Just ask the Germans…