A difficult and changing business environment is squeezing the profitability of Australia's wine industry, according to the 2003 Annual Financial Benchmarking Survey released by Deloitte and the Winemakers' Federation of Australia.

Stephen Harvey, leader of the Deloitte Wine Industry Group said: "Fierce competition, the excess supply of bulk red wine and greater consolidation within the retail sector are some of the factors that have forced wineries to reconsider their short, medium and long term strategies.

"Unfortunately, wineries of all sizes have recorded losses for the 2003 financial year.  More than half of the small wineries that participated in this study generated a loss before tax.

"We expect these losses will contribute to increased levels of consolidation within the industry, particularly for wineries with revenues between $1m and $5m."

Stephen Strachan, chief executive of the Winemakers' Federation of Australia, said the survey results are indicative of the tough domestic trading conditions.

"Our current estimate of the 2004 vintage, at over 1.8 million tonnes, suggests that pressure on the industry's supply position is likely to continue," he said.

"Effectively managing your business and establishing a point of difference for your brands are critical to surviving a fiercely competitive domestic market."

Harvey said: "Wineries need to re-think their growth strategies in order to survive the difficult period ahead and to remain competitive and profitable."
The report says that recent amendments to Wine Equalisation Tax (WET) will help to ease the financial and administrative pressure for some wineries - depending on their size and on the retention of existing state rebates."

But it added that there were some significant losses recorded by wineries of all sizes in the 2003 study. Wineries with revenues below A$20m showed declining earnings before tax, compared to the previous two years.

Of wineries generating A$0-$1m, 40% generated a loss for the 2003 financial year.

Wineries generating A$1m-$5m saw tougher trading conditions and intense competition, the report said, contributing to an average loss of 7.9% before tax for these participants.

A$5m-$10m wineries also performed poorly with a significant fall in average gross margin. Many wineries have been forced to reduce prices to remain competitive. They recorded stock write-downs of 3.8% of revenue.

A$10m-$20m wineries experienced difficult times also. This includes reported losses on bulk wine sales of 4.8% of revenue, the report said. The gross margin in this category is the lowest of all categories at less than 30%.

But $20m+ wineries improved from last year, showing an increase in profitability and returning to levels reported in the 2001 study. 

"This category has performed particularly well given that they compete most closely with the five major Australian wineries<" the report said.