Insight - Fresh calls to cull Australian wine industry
Poor results for Australia's two biggest domestic wine firms have this week brought fresh calls for a widespread cull of Australian vineyards.
"The golden age has well and truly gone," declared Dane Hudson, CEO of Australian Vintage, the country's second largest vineyard owner and producer of the McGuigan brand.
Australia's wine industry is a third bigger than it needs to be and is facing a "stark new reality", he said, as the company reported net losses of A$123.6m (US$102.7m) for the 12 months to the end of June.
A day earlier, Hudson's counterpart at rival Foster's, Ian Johnston, said that the "wine category is bearing the full brunt" of the economic downturn. "Wine returns are not where we want them to be," he said.
Both companies have been restructuring their wine operations this year, with the result that thousands of hectares of Australian vines are currently up for sale. The problem is that buyers, like consumers for low-end Australian wine, are hard to find.
Australian Vintage this week refloated the prospect of surgery on Australian wine; the notion that, in order for the sector to stay afloat, dead wood must be hacked away.
Hudson said: "It is clear the industry's present operating model is unsustainable as there are still too many grapes being grown and too much winery capacity. Lower demand, lower prices, the global financial crisis and a high dollar are exacerbating the issues."
"Our view is that grape supply and wine production capacity is at least 30% higher than it needs to be."
To the dissenters, Hudson had a simple retort: "If the industry doesn't want to change, the new reality will transform it anyway. On the supply side all major wine companies are reducing grape supply by exiting grower contracts and selling vineyards."
This is not a new theory, but it is one that appears to be seeping into the mindset of the industry's top brass.
There is a "strong case for downsizing the industry", Lawrie Stanford, manager of information and analysis at the Australian Wine and Brandy Corporation, told just-drinks back in December 2008.
He said that national vineyard area could be 16% smaller and still cover market demand. When set against a backdrop of increasingly severe water shortages, Stanford said the case for a smaller industry becomes even stronger.
Over the sea, New Zealand's wine industry is facing its own grape glut, although the problem does not appear to be terminal. Privately, some industry leaders speak of wishing to avoid "doing an Australia" by pushing production too far, although none would be so tactless as to put the situation in those terms in public.
China is the promised land for some in Australian wine, but it has so far failed to make up for falling exports to the US and UK. Australian wine exports slipped 11% by volume in 2008, and by 18% in value. It was the first value exports fall for 15 years.
Hudson believes Australian Vintage is ahead of the curve.
"Australian Vintage moved earlier than others in the industry," he said, hardly disguising a dig at Foster's and perhaps even US-based rival Constellation, which is also a big player 'down under'.
"In 2006 we began restructuring and more recently undertook a strategic review," said Hudson. "AVG has transformed its asset and cost base by exiting grape purchase agreements, selling and exiting vineyards, and reducing production by closing and selling wineries. We now have a simpler, lower cost flexible business."
The firm's winery costs have fallen by A$6m in the last two years and are expected to fall by another $3m in the next 12 months.
A strong Australian dollar has made Foster's Group half-year wine figures look worse than they are....
Organisers of the London International Wine Fair have said that they remain confident for 2010, despite withdrawals of several high-profile wine companies, including Constellation Brands and E&J Gallo...
Foster's Group may still look to sell its wine business, but the group has received no offers for either that or its more successful beer arm, CEO Ian Johnston has said....
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