To coincide with the London International Wine Fair this month, just-drinks' latest management briefing is for all you wine companies out there, particularly those with Australian leanings. Richard Woodard offers an in-depth look at Australia's wine industry in this four-part briefing for May 2011. Part one considers the export landscape.

Just a few years ago, it seemed that the Australian wine juggernaut was unstoppable. Then, 15 years of consecutive export sales growth came to a juddering halt, to be followed by three consecutive years of decline, including a 9% fall in export sales by value during 2010. Can the country’s producers stop the rot in 2011?

The signs are mixed. In the year to the end of March 2011, official Wine Australia figures show a continued decline in volumes, with exports down by 3% to 755m litres; however, value declined at a slower rate to AUD2.02bn (US$2.16bn), resulting in a 1% increase in the average value per litre to AUD4.19 (in FOB terms).

The major trend identifiable in the recent past has been the large-scale increase in bulk wine exports, which has had a major impact on export value. The bulk share of exports has more than doubled in three years, moving from 22% in 2008 to 47% in 2011.

What are we to make of this trend?

“The major factors that have contributed to the increased share of bulk wine exports in the mix include adjustments to the excess supply position, shipping branded wine in bulk for packaging offshore, the increased presence of buyers-own brands and the strong Australian dollar,” says Yvonne May, director of Wine Australia in the UK, Ireland and Europe.

“Products from Australia are being packaged offshore for a combination of reasons, including economic, environmental and scale rationale, together with meeting the requirements of some customers.”

Nearly half of these bulk exports were destined for the UK, reflecting the intense price competition present in what is still Australia’s top export market, as well as the pressures engendered by the strong Australian dollar, which gained 11% against the pound between January and September 2010.

This trend, May points out, has been intensified by the growing importance of buyers-own brands in the UK, a segment that now accounts for 13% of Australian wine sales. “This wine is shipped in bulk and bottled in-market,” she says. “With taxes continuing to rise, this way of doing business for some Australian producers will likely continue.”

Given Australia’s professed aim of improving the country’s image around the wine-drinking world and of driving premium wine sales, might this increase in bulk sales be viewed as a retrograde step that will only serve to cheapen its reputation?

Matthew Roberts, Lion Nathan wine regional manager for the UK and EU, believes the shift to bulk is a “must do” for producers trying to hit GBP4 to GBP5 price points. “Having said that,” he adds, “the shift to bulk does not mean that quality is always compromised. So, I think the connection between the two issues is not valid. Moving stock to a facility in the UK is no different to moving stock between production sites, which is a normal occurrence for most producers of any scale.”

Troy Christensen, CEO-designate at Accolade Wines, the former Constellation Australia/Europe business, agrees. “Bulk exports are a means of staying competitive and the fact that wine is exported in bulk is not necessarily a guide to its quality,” he argues. “It’s simply a question of logistics.

“We have enormous bottling/packaging capacity at Guildford [in Surrey, England]. It is simply more efficient to export in bulk and package into glass in the UK, rather than shipping glass around the world. Perceptions about the quality of wine should be determined by its performance in the mouth – not how it is transported.”

However, for Mark Wilson of premium producer De Bortoli, shipping in bulk is “not a comfortable trend and not a sustainable way forward for the industry”. He argues that the trend is largely responsible for increases in average prices for bottled Australian wine in the UK, as lower price points increasingly migrate to bulk.

Others are more bullish. A spokesperson for Orlando Wines, the Australian arm of Pernod Ricard’s Premium Wine Brands business, points to the unit's value-driven strategy behind Jacob’s Creek, including the launch of regional Reserve wines at higher prices, as evidence of rising retail prices.

May, meanwhile, points to Australia’s out-performance of the overall UK market in the latest Nielsen figures, MAT to 19 March 2011, which show Australia up 3% by volume and 6% by value, against an overall category performance of down by 2% and up by 3%, respectively.

For May and Wine Australia, a stronger presence in the on-trade and independent off-trade – traditionally weaker areas for Australia than the multiples – will help to “build value into this market for everyone in the supply chain”.

Roberts adds that Lion Nathan is seeing the first “green shoots” of recovery in the UK and EU, with “definitely more interest in Australian wine above GBP9 per bottle”. But, he adds less optimistically: “The main reason for the average price per bottle moving up is duty and VAT increases.”

The intense competition in the UK is increasingly making Australian producers look elsewhere for sales growth. Conditions in number two market the US, however, are similarly tough thanks to an 8% hike in the strength of the Australian dollar against the US dollar in January to September last year, taking it beyond parity.

For Accolade's Christensen, other options need to be explored, including growing domestic sales in Australia, achieving further efficiencies in the supply chain and exploiting Australia’s logistical advantages in Asian markets. He is also eyeing “significant opportunities” in eastern Europe, the Netherlands and Nordic markets.

China, where Australia's volumes were up by 30% to 55m litres in the year to March 2011, bringing it to the level of number three export market Canada, is another beacon for the future. So far, maintaining relatively high levels of value here has not been a problem, but producers remain slightly cautious about the market’s long-term prospects.

“China is a market with enormous potential,” says Christensen. “However, it is a developing market and it will be some time before it is clear where the market dynamics will settle.”

Restoring value to Australia’s wine exports is a long-term process, strongly influenced by continuing oversupply, competitive pressures in markets like the UK and the strength of the Australian dollar. Although there are early signs of improvement, it will be some time yet before the industry sees anything approaching the buoyancy enjoyed by its exports in the 1990s and early 2000s.