Australian Wine Industry Essay
Australian Wine Industry
It is anticipated that there will be a dramatic increase in population with a shift to Asian and Pacific Rim growth. This means a number of opportunities exist for wine industry with the increasing affluence of Asian consumers and the maturation of income and time rich 1950s Baby Boomers generation. In addition, this trend is enforced by a global economy with increasing free trade, international business collaboration, strategic alliances and a global currency. Geographically Australia is well placed to capitalise on the Asian boom and wine meets the Asian demand for Western style products.
As for the domestic market, despite the fact that there has been minimal focus on developing new wine consumers during the last ten years, domestic sales have continued to expand in value rather than volume. Population growth in prime wine consuming age groups, the emerging generation who has grown up with wine consumption, the changing demographic profile of the Australian population, growth in the dining out market, increasing popularity of the Mediterranean diet, tourism growth and the quest for more individualised beverage experiences are significant opportunities exist for increasing domestic wine consumption.
1. 1. 2 Economic conditions Although a decline in the value of the Australian dollar inhibits profitability and the ability of Australian winemakers to hit key price points, it helps to stimulate the other countries to import Australian wine because of lower price Increase in demand for wine may be attributed to the following economic factors: changing living standard, changes in the relative price of wine to other goods and services, the introduction of fringe benefits tax and the modification of sales tax to wine and other beverages.
1. 1. 3 Social and cultural trends Although nowadays, there is a strong trend away from alcohol beverages and alcohol consumption, quality table wine still be a favourite one for consumers. The image of a man drinking wine, bottles to bottles until get drunk is no longer seen. People do not drink wine in quantity but prefer quality alcohol. Sales in cask wine decline whereas profits in bottled semi-premium or premium wine increase.
The reason for this can be explained by: – Quality table wine has its own image and status, engenders high consumer involvement, provides variety, and has a range of flavour complexity. It is therefore a stronger alternative to other non-alcoholic beverages (soft drinks, bottled water, fruit drinks and coffee) than is beer or spirits. – Quality wine has acknowledged health attributes. Recent research showed its effects in reducing cardio vascular disease. – People look for more spiritual meaning in their lives.
They favour healthy products, healthy lifestyle and show environmental concerns. Media, advertising, transparency, and openness in marketing. Many of these trends favour the Australian wine industry. Wine will meet the future consumer’s demand for individualised, customised products which are natural, environmentally friendly and healthy. 1. 1. 4 Political and legal forces The Australian wine industry has set a target to be the world’s most influential and profitable wine producer in the Year 2025.
It is supported by government in terms of providing a positive investment climate and facilitation infrastructure. Taxation – Certainty in the retention of the current taxation level and structure for wine and brandy – Review the method for valuing trading stock, particularly the maturation of wine stocks geared to premium wine production – Maintain the current vineyard depreciation provisions – Vary other taxation provisions which inhibit growth or prejudice quality. Facilitation – Maintain support for industry research and development – Enhance support for wine export promotion.
– Upgrade Government contributions to training and to strategic data collection – Continue the commitment to industry’s pro market self regulation – Adopt appropriate water access and pricing policies. 1. 1. 5 Technology Technology is of vital importance to Australia wine industry. It can help to improve productivity, economic of scale, efficiency and quality of products. In addition, the industry is also strongly committed to environmentally friendly production. At present, Australia is a world leader in innovative technology which ensures cost competitive-high quality grape and wine production.
1. 2 Key driving forces affecting the industry “The driving forces in an industry are the major causes of changing industry and competitive conditions” (Thompson & Strickland, 2001). The key driving forces affecting Australian wine industry are natural advantages, human advantages, technology advantages and changes in social attitudes and lifestyles. 1. 2. 1 Natural advantages The vintage is significantly affected by prevailing weather. Winter, spring rains, the heat and drier conditions can impact on the winegrape varieties.
They can influence wine producing regions, constrained production, quality and quantity of winegrape production. Australia has good supplies of quality land and water, a large choice of climate that clearly a competitive factor compared with other countries which has climatic restriction. 1. 2. 2 Human advantages The wine grapes cannot grow themselves. They need the hands of human to cultivate, nurture and harvest. Consequently, skilled viticulturists and winemakers can be factors to enhance the competitiveness. 1. 2. 3 Technology advantage.
Technology and improved management will reduce additional winery waste associated with increased processing capacity. In addition, technological changes allow suppliers to reliably produce qualities of quality wine at relatively low cost. Production, storage, crushing and fermentation facilities should be updated and modernized to meet the requirements of productivity, therefore lead to stronger competitive position. 1. 2. 4Changes in social attitudes and lifestyles Changing social attitudes and lifestyles also alter the pattern of competition.
Companies, which respond quickly and creatively, will be more successful. Nowadays, consumers support healthy products, healthy lifestyle and show environmental concerns. This in turn, becomes one of advantages of Australian wine industry as for its clean, green physical environment. The industry might use this image to reinforce the community acceptability of the product by highlighting its natural, food accompaniment and health attributes. 2. 0 Micro-economics environmental analysis 2. 1 Porter’s Five Forces Analysis Michael Porter provided a framework that models an industry as being influenced by five forces.
The strategic business manager seeking to develop a competitive advantage over rival firms can use this model to better understand the industry context in which the industry operates. To have greater understanding of the intensity of wine industry’s competitive advantage, “Porter’s Five Forces” is applied (Hitt, M. 1995). This model based on the insight that a corporate strategy should meet the opportunities and threats in the industry’s external environment. This forces determine the intensity of competition and hence the profitability and attractiveness of an industry. 2. 1.
1 The intensity of rivalry among competing firms – high The rivalry is stronger when demand for product is growing slowly (Thompson & Strickland, 2001). Many strong competitors have held the wine industry in market segment. Furthermore, imports make up about 7% of Australian wine sales. Imported wines offer significant competition to upmarket wines. 2. 1. 2 The threat of new entrants – HIGH The ease with which firms can enter into a new market or industry is a critical variable in the strategic management process. In some industries the barriers to entry are minimal. In other industries, the barriers to entry are formidable.
These barriers can take on many forms; among them: the amount of capital needed to enter into a specific industry may be great enough to put off entrants; the current participants in the industry may have product lines protected by patents; the switching costs for the company’s customers may be great enough to pose a barrier to entry to a new firm; and other factors. Similarly with Australian wine industry that has low-level barrier of new entrant. This is because wine industry involved the high costs of production. The major costs are the cost of grapes, the machinery of production, maturation, packaging materials and marketing.
A significant cost of productions is that of maturation, especially where imported oak is used. The high cost needs to be recovered in the cost of production of such products as chardonnay in the year of vintage. Maturation provides the industry with its profits as added value and is a feature of profitability (i. e. sales vintage wine). However, the low profitability of the industry couple with high interest rates has forced winemakers to forego value added gains with the more crucial need for working capital. This high cost is facing to small winemaking businesses or businesses new entrant to be considered to emerge in wine industry.
Significantly, there are over 1,000 wine producers and 4,000 grapes grower in Australia. It can say that wine market is on the high competition. Also there are three majors largest wine producers i. e. Southcorp, BRL-Hardy and Orlando-Wyndham group that dominate wine market with these three accounted for 51% of total production. 2. 1. 3 The threat of substitute products – Low In regarding to the Australian domestic wine sales continued increase from 2000-01. This represents an increase of wine consumption; with means Australian households spent their expenditure on wine rather than other alcohol beverage.
Even though it has wide variety of alcohol beverage in the Australian market such as Brandy, Whisky, Beers and etc. From the practical perspective, it can say that wine has not replaced by the other alcohol beverages. Moreover, health conscious can determine the low substitute product factor here. This is because wine is concerned as healthy products, which people looked for more spiritual meaning in their lives. 2. 1. 4 The bargaining power of suppliers – low According to ABS statistics, the Australian grape and wine industry continued to perform strongly through 2000-01, and fulfilling industry expectations.
The total area of vines currently not bearing grape decreased by 40% to 17,590 hectares, while the area of vines bearing grapes increased 18% to 130,599 hectares. From the above key factors, we can determine that the bargaining power of suppliers is lower level to exist. 2. 1. 5 The bargaining power of customers – high Customer service is a critical factor in any retail business. If customers don’t fell well for one wine, they can change to buy other beverages or alcohols. Even customers have excellent experience for their wines; they also can change their behaviour to buy others.
In 1997, around the Australia, there are 20 largest wine producers. It means customers can change their wine brands immediately. 2. 2 Opportunities & threat 2. 2. 1 opportunities Australian grape and wine industry continued to strongly growth throughout 2000-01. This represents a strong growth in exports and increase in domestic sales. The growing of Australian economy, it creates potential or rising wine consumption per capita. According to households expenditure survey, during 1998-99 Australian households spent an average of $5. 28 per week on wine. With comparing with 1993-94 it was a 40% increasing in weekly expenditure on wine.
The supporting of government policy creates opportunity grow for Australian wine export. Australian wine export has continued strong growth since 1980, according to the ABS survey. 2. 2. 2 Threats Purchasers or consumers price sensitive, possible because of the change to compare price that cause by high competition market, and also because of the usually unexciting buying experience. There appears to be unwillingness towards paying more than AUS$12. 00 for bottle. Wine contains so many intangible values that the purchaser has difficulty in placing a value of it.
The consumer is aided in his/her perception to the value of wine by product characteristics (i. e. awards, packing, advertising, publicity and sales technique). In Australia, government policies have affected pricing strategies in the wine industry: for example, wine producers cannot control the price for which their wine is sold at retail outlets. Wholesalers and retailers have taken control of setting of wine prices paid by the consumer at the same time as maintaining their standard margins, for example standard industry mark-up is 25 per cent, and 12 per cent at the wholesale, and 33.
3 per cent at the retail. In addition, Australian government also have had an influence on the pricing of Australian wine though monetary policy. This led to uncertain in value of the dollar in relation to other currencies in term of export market. 3. 0 Key success factors in the industry 3. 1 Physical supply factors Australia leads the world in physical supply factors. It has developed excellent varietal choice through vineyard development and it produces consistent quality at all given price points.
This makes it a strong competitor to countries such as New Zealand which has climatic restrictions and Traditional Europe (France/ Germany/Spain) which is restricted by appellation control. Australia’s lower land costs, a large choice of climate, terroir and moderate water availability means that the nation’s natural resources and environment will not restrict expansion. Australia’s closest competitor in terms of physical supply factors will be Chile, as a result of its low cost production, good supplies of quality land and water and its commitment to premium varieties such as Chardonnay and Cabernet Sauvignon.
3. 2 Human factors Australia ranks fourth behind Traditional Europe, Chile and California in terms of its human competitiveness. Australia compares favourably with Traditional Europe, California and New Zealand in terms of its skilled viticulturists and winemakers (who are equal to the best in the world), and its modern industry infrastructure and research institution network. It is also free of the regulatory rigidity which stifles European viticulture. Its greatest threat to competitiveness is a lack of government support.
Halliday points out that the Federal bureaucracy is strongly antipathetic to the industry and Federal politicians are neutral. This is backed up by a punitive tax system and little facilitative support. State Governments are seen as more supportive. 3. 3 Market factors Australia ranks second to Traditional Europe in terms of market competitiveness, well ahead of other competitors such as Italy, California and Chile. Traditional Europe’s dominance of the top end of the market in terms of image, reputation and branding makes it the world market leader.
However, Australia’s proactive relationship with and attitude to the market place, its product depth and diversity and its commitment to distribution networks and effective, hands-on promotion have delivered success. The assessment says Australia offers exemplary value for money and is well endowed with world scale corporate. 3. 4 Competitive strength assessment in relation to competitors In summary, Australia’s wine industry is strongly competitive because its strengths are across the board ? strong resource endowment, institutional support and marketing innovation.
These advantages will come under increasing competition but Australia is well placed to seize further market share as the leader of New World producers. http://www. winetitles. com. au/awol/overview/strategy2025/2025_11. asp 3. 5 Particular internal competencies For the Australian wine industry to achieve the vision of 6. 5% of the value of world wine production by 2025, grape production will need to rise from the existing peak of around 850,000 tonnes (1996) to 1,650,000 tonnes. There will also need to be a significant investment in storage capacity, expanded processing facilities, transport and human skills.
3. 5. 1 Vineyards Development of this magnitude will require productivity gains from existing vineyards–an estimated investment of $1200 million. The average annual planting rate will be 1500 hectares. Ongoing investment in redevelopment of existing vineyards also will be required. The history of the grapegrowing industry has not been a simple transition. Each shift in consumer preference from fortified to red to white wines and then to export table wines has been reflected in ‘boom and bust’ cycles which had serious financial implications for growers.
The relationship between grapegrower and winery is undergoing significant change which will be accentuated by future market demand for a substantial lift in fruit flavour intensity and complexity, and for more stable pricing undistorted by cyclical shortage premiums. A higher degree of sourcing from winery owned vineyards particularly for premium bottled products and greater reliance on robust longer term contractual arrangements will be manifestations of this change. There will be substantially greater differentiation between grapes on the basis of measured quality attributes and this will be reflected in prices.
New vineyard investment will have to meet best practice parameters on cost efficiency, quality specification and on location. Dryland regions are likely to increase their share from 53% to 60% of total vineyard area although major plantings are planned for inland irrigated areas as well. More intensive viticultural management will be required in inland areas to meet quality specifications. Central NSW, central Victoria and the South East of SA are the most attractive locations for new plantings in terms of water availability, climate, scale cost efficiency, and proximity to existing wine infrastructure.
Environmental management will also be an important factor in the increase in grape production. The environmental problems associated with increased irrigation can be resolved through Land and Water Management Plans and more effective timing and water scheduling. However, other issues such as spray drift, the qualified use of agricultural chemicals, noise pollution, consumer attitudes to chemical use and occupational health and safety issues will have to be addressed. 3. 5. 2 Processing Capacity
The increase in grape supply will also require a lift in production capacity and storage to cope with an estimated doubling in wine volume. Crushing capacity is expected to be adequate in the Riverina, Sunraysia, Riverland, Hunter Valley and Barossa, whereas expansion will be needed in the South East of SA and the Cowra and Mudgee regions of NSW. Red wine fermentation facilities are currently at capacity and wine storage will need to double. Technology and improved management will reduce additional winery waste associated with increased processing capacity. 3. 5. 3 Water.
Water is a priority issue in wine industry planning, not only for grape supply expansion but also for the long-term sustainability of existing supplies. It has a major impact on the industry’s cost competitiveness, the risk management of vintage variation and fluctuation, grape quality enhancement and flavour complexity. Its use also impinges on the wine industry’s performance and image as environmentally friendly. Vineyard expansion will create an additional demand for water estimated at 68,000ML by 2025. Processing expansion will generate demand for an additional 2000ML.
This water will come from efficiency gains in vineyards and wineries (40,000ML), crop diversion (20,000ML) and new sources (10,000ML). Water management policies now in place recommend the trading of water entitlements from low value broad acre agriculture to higher value crops such as viticulture. This, along with improved irrigation management, will improve water use efficiency and reduce salinity impacts in inland irrigated areas. There is unlikely to be an increase in water provisions in existing dryland viticultural areas and increases in water availability will come from greater water use efficiency.
To achieve the required water outcomes, the industry will pursue a strategy of influencing government policies relating to water access, transfer and pricing. 3. 5. 4 Skills The employment implications of the growth scenario will be the creation of an estimated 10,500 new jobs (full time equivalents) in the grapegrowing and wine industry alone. It is expected that a similar number of additional jobs will be created in supplier companies and associated industries such as tourism. Another requirement of the growth scenario is an increased supply of skills.
The increasing automation of winemaking processes and mechanisation of vineyard procedures, means that there will be a declining requirement for untrained manual labour and an increasing demand for employees with problem solving skills, who are willing to take greater responsibility and who are also prepared to learn scientific methods. The increasing globalisation of the industry will also put pressure on workers to increase productivity through more efficient work practices. Achievement of the necessary highly skilled, multi skilled and highly motivated workforce will require quality, relevant and accessible training.
This training will encompass the full range from tertiary degree to vocational on the job and from the vineyard employee to corporate management. It is estimated that, as an order of magnitude, training demand for new and existing employees could total 25,000 person years over the 30 year Strategy horizon. A national industry driven approach will be required to set the agenda and coordinate the provision of this training. 3. 5. 5 Funding The industry will require about $5 billion in funding to achieve its 2025 Vision. This will come from corporate retained earnings ($1. 4b), private grower investment ($0.
8b), the equity market and borrowings (together $2. 8b). There will be some flexibility in the mix of debt and equity but the latter will be the dominant requirement. To attract global capital the wine industry must offer better, or at least comparable returns, to other sources of investment. Listed wine company profits have grown from $55m in 1992-93 to $92m in 1994-95, buoyed by strong margin growth in domestic and export markets. Gross margins for all listed companies increased from 15. 1% to 17. 8% over the same period. The corresponding return on equity (ROE) has increased from 9% to 12%.
With a ROE of 13% in 1994-95 for all industrial companies, the wine industry compares favourably, given the massive investment program and adverse seasons of recent years. Indeed, the financial markets have acknowledged the outstanding longer term prospects of the wine industry, with much stronger growth in share prices for the listed companies than for all industrial companies. For instance over the last 12 months, capitalisation for BRL Hardy, Petaluma and Mildara Blass (est. ) has increased by 60%, 47% and 35% respectively, compared with 10% growth for all industrials.
However, given that wine represents such a small proportion of share market capitalisation and turnover, the industry will have to increase its efforts in communicating to investors its superior long term growth potential over the majority of listed industrial stocks. 3. 5. 6 Risk assessment Apart from the normal risks faced by any production business the wine industry has an extra dimension of uncertainty associated with its agricultural base. The importance of image to wine industry profitability also increases the industry’s vulnerability to adverse impacts.
Moreover its high dependence on exporting magnifies normal trading risks due to its exposure to exchange rate fluctuations. This Vision and its market scenarios are based on a range of assumptions. The suggested outcomes are not predictions or forecasts–they are achievable possibilities subject to the implementation of effective business strategies. 3. 5. 7 Strength measure For the above analysis, we cross through detail for weighed analysis. We find Australia is rank 2 and only behind U. S. A. for the key weakness is geography compared with U.
S. A WeightedUSAArgentinaSouth AfricaAustraliaChilliNew Zealand Geography10866666 Climate10889899 Land544. 5344. 54 Labour5344343 Capital10978968 Infrastructure10878866 Knowledge10968988 Domestic Market10966888 Network10978988 Government10867888 Economic variable10878988 Total1008368. 5758175. 579 4. 0 Conclusion In the wine industry case, collaboration was the means through which knowledge enhanced competitive performance. Collaboration was the means by which knowledge of export opportunities, and of innovation, was developed and disseminated.
A second key idea emerging from this study concerns the potential power of clustering. Through linkage in clusters, the competitive strength of individual firms can be augmented through association with related and supporting firms. Michael Porter argues: ‘The cluster concept represents a new way of thinking about national, state and city economies, and points to new roles for companies, governments, and other institutions striving to enhance competitiveness. ’80 The competitive leverage or stretch derived from cluster linkage can be decisive to success at the level of individual firms.
Contemporary conditions make attention to knowledge and clustering especially salient. The most prominent of these are economic globalization as the source of economic opportunities, and innovation as the driver of competitive success. The theory and practice that currently mostly informs policy in Australia assumes domestic competitive conditions are primary. It assumes that, if the domestic competitive regime is relatively undistorted, and if a market is generally free from regulation, participation in global markets and innovation will ‘naturally’ germinate.
But this approach does not recognize the problematic character of these latter activities. Technological development can be prohibitively expensive for individual firms; many of its phases require collaborative interactions between researchers and business. An exclusive reliance on price-based relationships in these phases is prohibitive, not facilitative. Moreover, the fact those national boundaries are relatively less significant as barriers to economic activity means firms are relatively more footloose.
Cluster linkages, embedded capabilities and knowledge infrastructure thus acquire much greater importance in anchoring firms to particular regions or countries. This creates wider public interest grounds for new policy approaches. These could focus on the identification and development of capabilities analogous to those that have contributed to the competitiveness of the wine industry. Finally, the real power of the wine industry example is not in precise imitation. It is rather in suggesting how other clusters might be encouraged to bootstrap their own aspirations, goals and performance.
The rationale for such an approach is thoroughly grounded in recent developments in scholarly theory. By such means, the competitiveness of an array of Australian clusters might be developed and their contribution to broader public policy objectives renewed. Refrences Hitt, Michael A. , Ireland, R Duane and Hoskisson, Robert E. (1995). Chapter 3 “The internal environment resources, capabilities, and competencies. ” In strategic management: competitiveness and globalization. St Paul, Minneapolis: West Publishing Company, pp 33-63.
Australian Bureau of Statistic 2002, Australian Wine and Grape Industry, Cat no. 1329. 0, ABS Australian Bureau of Statistic 2002, International Accounts and Trade, Feature Article – Australia’s Trade in Wine, Cat no. 11211, ABS Australian Bureau of Statistic 2002, Record Year for Wine and Grape in 2000, Cat no. 1329. 0, ABS Edwards, F. (1989). Marketing Wine from Small Wineries: Managing the Intangible, International Journal of Wine Marketing. Vol. 1. No. 1. Australian Wine and Brandy Producers Association, Submission to the Commonwealth Government of the Taxation of Wine 1999.
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 19 March 2017