by Brian Croser
The Australian wine industry has squandered three decades being confused about the differences between premium and non-premium wine and where the opportunities really lie. Brian Croser reports.
Imagine the world without America and China. I don’t mean their geographic absence, rather imagine after the Australian wine industry’s 1990s growth spurt, that the export boom to the USA from 2002 to 2009 didn’t happen and similarly the China export boom from 2014 to 2020 didn’t occur.
What would the Australian wine industry look like today?
The answer is exactly as it does today.
Both booms came and went but the underlying trends of wine sales and production remain constant through the last 22 years. Australia currently produces about 1.7 million tonnes of grapes per annum based on the last 10-year average; 1.25 million tonnes (73 percent) come from the hot inland irrigation regions and the balance, 450,000 tonnes (27 percent) from the other, cooler regions.
That’s almost exactly as it was in 2001.
The tables are turned for the value of grapes; the inland regions provide only 43 percent of total grape value and the cooler regions 57 percent.
Easy to produce, harder to sell.
Sales of Australian wine in the combined export and domestic market are divided between premium and non-premium.
Premium wine is defined by a price of more than US$10/bottle (A$15/bottle) in the domestic market and exported at more than A$5/litre FOB, roughly equivalent price points in their respective markets. Non-premium is sold and shipped at less than these values.
For the past 22 years, the volume of premium wine sales in the domestic market has grown by six percent per annum. Unfortunately, we don’t have domestic market values for those 22 years, but we can assume value has grown in line with volume for premium wine (six percent per annum) for the period.
After 2001, premium wine has shown no volume growth in the underlying export markets after the USA and China booms came and went. Despite no growth of premium export volume, premium wine export value has grown by two percent per annum, still less than inflation. For non-premium wine, healthy volume growth of 3.3 percent per annum in export markets over the 22 years, has been accompanied by a loss of value of one percent per annum.
Ignoring the blip of the China boom, the export volume growth for non-premium wine all occurred in the first decade of the century. In the last 10 years non-premium wine has lost 13 percent of its volume of export sales.
The domestic market has been drifting backwards for non-premium wine at a rate of –0.7 percent per annum.
The star performer over the past 22 years has been premium wine in the domestic market.
Ten years ago, in 2013, the US export boom had well and truly ended, and the China boom had not started. The China boom had finished by 2020. For the 10-year period 2013 to 2023, uninfluenced by the China boom, combined domestic and export premium wine have grown by 1.8 percent per annum in volume and 4.3 percent in value.
Combined domestic and export sales of non-premium has contracted by –2.2 percent per annum in volume and –1.8 percent in value over the 10 years. That exactly mirrors the global picture for all wine from all countries for all markets.
Global 10-year growth of premium wine value is 3.1 percent per annum and for non-premium wine there is a loss of value of -2.2 percent per annum.
That’s the past, what of the future?
We can assume the global trends are continuing.
The future for non-premium wine in an oversupplied, diminishing export market is for increased marketing competition and lower prices. Australia with its remoteness and high cost base is not well positioned to compete in a market where the lowest cost producer will eventually win.
In the domestic market, Australian non-premium wine will continue to out-compete other country suppliers, because of customer loyalty and proximity of market. Australian non-premium wine producers will retain high market share of a diminishing domestic market.
That’s as long as the quality keeps increasing.
The two big growth opportunities for Australia are premium wine in the domestic and in export markets. Both premium markets are expanding in sales volume and value, quicker in value than in volume. Australia is way underperforming in the premium export market, having no underlying volume growth over the past 10 years, despite a healthy value increase of 3.3 percent per annum, more than keeping up with inflation.
The global premium market is expanding in volume by 1.7 percent per annum and Australian premium exports should be at least matching that performance.
Back in the domestic market, imports are now 20 percent of volume and 31 percent of value of all wine sold. Imports are more than 100 million litres per annum costing $1 billion, pretty much all premium wine at a very high average price in excess of $10/litre and growing at 3 percent per annum.
Australia needs a healthy wine import market, spiking consumer interest and knowledge and willingness to trade up. However, Australian wine lists in restaurants tend to be import centric, especially at the higher price points.
Even in its own domestic market Australian premium wine does not have the same aura nor creates the same consumer excitement and willingness to spend, as do the wines from the great terroirs of Europe. Australia has the regions, terroirs, winemakers and wines to replace a healthy slice of current imports.
Even replacing a quarter of current imports would absorb another 40,000 tonnes of premium Australian grapes and generate $250 million retail income for Australian wine producers. It would require a strong promotion of Australia’s unique terroirs and wines to knowledgeable Australian consumers to reverse the growth of the imported fine wine market share.
If Australia was able to boost premium export volume sales to the global average of 1.7 percent per annum and maintain a 3.3 percent per annum value increase, that would profitably absorb another 10,000 tonnes of premium Australian grapes over the next five years.
Currently Australia is producing on average 1.7 million tonnes of grapes and is selling wine made from 1.31 million tonnes. There is a 390,000-tonne structural grape surplus nearly equally divided between premium regions (210,000 tonnes) and non-premium (180,000 tonnes), calculated by comparing the sales volumes of premium and non-premium wines against the respective production of grapes of each type.
The premium grape surplus displaces non-premium grapes in the production of non-premium wine, so most of the grape surplus is generated from the inland vineyards. Because non-premium white grape supply is in better balance with sales, most of the surplus is inland red grapes.
Using the current 10-year volume CAGRs for Australian premium and non-premium wines in combined domestic and export markets, 1.8 percent per annum growth for premium and a contraction of -2.2 percent for non-premium, the structural surplus only gets worse. In five years, premium wine will have absorbed another 22,000 tonnes of grapes but non-premium will have generated another 60,000 tonnes of surplus inland fruit.
These are brutal statistical facts.
Despite 2023 being the smallest harvest since 2007, precipitating a slight reduction in inventory, the national wine inventory is 300 million litres above the 10-year average against combined domestic and export market sales that have diminished by 14 percent over that time.
At inland wine extraction rates, that’s at least 400,000 tonnes of grapes equivalent in surplus inventory.
Then there’s China. Or there used to be China.
At its peak in 2018/2019, the Chinese market was importing about 52 million litres of premium Australian wine, the equivalent of 80,000 tonnes of cooler region grapes and 124 million litres of non-premium wine, the equivalent of 165,000 tonnes of inland grapes.
The non-premium market for Australian wine in China began plummeting even before the imposition of the draconian import duties.
If and when the China market reopens for Australian wine, it is likely to be a very subdued return with a strong preference for premium wine. International competitors have occupied our slot and they will be difficult to dislodge, especially in the contracting Chinese market. In the medium term, with care, we may win back the market equivalent of 50,000 tonnes of mainly premium grapes.
A bad outcome would be the accrued non-premium inventory surplus being ‘dumped’ into China, cruelling the pitch for an orderly return of Australia’s premium wines to that market.
The crystal ball into the future of Australian wine is looking fairly cracked.
If Australia was Europe the future would be adjusted by the state subsidisation of the distillation of the excess 300 million litres of non-premium inventory and a payment to grape producers in the inland to uproot at least 15 to 20,000 hectares of vines to eliminate the structural surplus of 390,000 tonnes of grapes.
The EU has just announced they will provide A$111 million to Bordeaux vignerons to uproot 9,300 hectares of vines.
Australia is not Europe.
In Australia market forces will be left to prevail.
The 390,000-tonne structural surplus will dissipate through lower cropping regimes in premium and non-premium regions, fruit left on the vine and the inevitability of vines being removed, mainly in the inland.
That process is already underway and let’s hope it is selective, removing the worst varieties and vineyards thereby increasing the quality of Australia’s residual grape harvest.
As the global market for non-premium wine deteriorates further on trend, Australia needs continuous reassessment to inform growers of their prospects and allow rational choices to be made.
Australia may not have a grape harvest of more than 1.5 million tonnes for many years.
It will require a strong focus on grape and wine quality improvement and an even stronger effort to promote Australia’s unique regions, terroirs, wines and winemakers to restore the Australian wine community to profitable growth.
The premium wine opportunity for more than 2,000 fine winemakers is palpable. We have squandered three decades being confused about the differences between premium and non-premium wine and where the opportunities really lie.
As I have said before, the tea leaves are screaming at us.