The Australian wine industry has experienced an unprecedented expansion in terms of sales and profits in the last three decades. However, the current business environment is unsupportive and the industry is facing major challenges in maintaining profitability. Wine is traded globally and this means that the industry players have to consider the situation in the international market. The success of the Australian wine industry largely depends on the demand and supply of the product internationally (Warren 2).
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The international wine industry has the problem of excess production which has contributed to supply that is much greater than demand. This has inevitably put a downward pressure on the price levels in the industry. The current position in the market indicates that it will be many years before the global wine stocks reduce and the prices increase (Sheales et al 2006).
The situation has necessitated a change in production and consumption in the main producing and consuming parts of the world. This has presented opportunities for growth for the Australian wine industry. However, there are substantial threats to the long-term success of the industry (Hutton 29).
The history of Australian wine
To better understand the conditions in the Australian wine industry, it is necessary to consider the history of the industry. The story of the wine industry in Australia has not always been so rosy. It is only recently that the industry has picked up and became a significant part of the international wine industry.
According to Love, the Australian wine industry had very humble beginnings when Governor Phillip and Phillip Schaeffer started it in 1780. Unfortunately, these attempts were unsuccessful because of mismanagement and disease. The first wine producer to export wine was Gregory Blaxland who carried out experiments to find out the best way to grow vines in the Australians climate (Kelly 5).
When immigration began in the 1840’s, a number of vineyards were established in Australia, some of which are still operating today. This led to a rapid expansion of the industry. The stringent regulations that governed the industry were done away with thus, there was a doubling of the hectares set aside for vineyards.
The increase in production was also attributed to the distribution of guides and manuals that educated farmers and producers on viticulture (Warren 4). It is in the 1900’s that the industry burst into mass production and wine was being sold using private brands instead of in mass. After 1960, the industry bloomed into a lucrative investment which saw the Australian wine industry being ranked as the fourth biggest producer globally (Love).
The international wine industry
The worldwide consumption of wine has increased only marginally in the last three decades. This has created a lot of concern for the producers of wine because the situation means that there is very little room for growth in the industry (Warren 3).Wine has lost to competing products such as spirits and beer.
Between 2000 and 2004, the worldwide consumption rate of wine increased by only 0.1 percent in comparison to 2.2 percent for alcohol. Consumption of wine has reduced significantly from and average of 7.1 litre in the period between 1961 to 1964 to 4 litres in 2000 to 2004 (Sheales et al 15).
Determinants of demand in the wine industry
There are a number of factors which affect the demand of wine internationally. Determining the future consumption of wine is very complex as these factors may change with time. The main factors influencing wine demand are consumer incomes, age structure of the population, tastes or preferences and societal traditions (Sheales et al 8).
The key influencers of changes in demand in the United Kingdom and the United States are increasing incomes, variation in lifestyle and preferences. In china and Russia, increasing incomes and enlarging middle class have increased the consumption of wine (Bisson et al 697).
According to Sheales et al (12), the wine consumption increases with a rise in income and decreases as prices rise and the population over 65 years increases. Demographics of a market should be considered as it is the people between 30-60 who consume the most wine. This can be useful in the prediction of future trends in demand. Knowledge of the number of young people and the percentage that take wine is vital for the wine industry (Sheales et al 12).
Main export markets of Australian wine and their demand
It is important to consider the different countries which form the main market for the Australian wine. The main export markets are the United States, the United Kingdom, France, Italy and Spain (Anderson 24). The consumption of wine in the United Kingdom has increased significantly from an average of 1.7 litres per person to 17 litres. It is presumed that the rising income, changing tastes and lifestyles have caused this.
There has been an increase in exports of Australian exports to the United Kingdom. Increasing the market share of the wine industry in the UK has been very crucial to the Australian wine producers. Retail consolidation is likely to make it difficult to sell wine to supermarket chains thus the wine industry will be very competitive. The Australian wine producers need to take advantage of the opportunity to sell wine in restaurants in the United Kingdom (Sheales et al 24).
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The consumption of wine in the United States has increased since the 1980’s from 8 litres to 10.4 litres per person in the year 2005. There is a large diversity of wines in the United States in terms of price and quality. This presents the opportunity of increased familiarity thus the US consumers can be persuaded to buy higher priced products. However, the export of Australian wine to the United States in the recent past has mainly consisted of low priced variety (Sheales et al 24).
When the demographics of the American market are taken into consideration, it is clear that there will be some problems for the Australian wine producers who export to the country. It is expected that there will be a reduction in the consumption of wine because of the changes in demographics of the United States. It is estimated that the proportion of the number of people who are over 65 years old will increase to 25 percent of the total population in the near future. (Sheales et al 25).
International wine production
In order to effectively realize the future of the wine industry, it is important to examine the international trend of wine production. Currently, the production of wine globally is increasing. Conversely, there has been a reduction in the production in the two largest wine producing countries i.e. France and Italy.
This presents an opportunity for the Australian wine producers to increase sales. Even with the decline in production by Italy and France, these two countries are still the largest wine producers in the world. Australia’s wine production has also increased by more than 1 billion litres between 1990 and 2004. This is an increase of about 230 percent (Kelly 60).
The European Union has come up with policies which are bound to affect the wine producers in Australia. The policies that are implemented by the European Union have a major impact on the international wine industry because France, Spain and Italy produce half of the world’s wine. The policies by the European Union are aimed at improving their competitive position in the world wine market. In addition, the rules and regulations governing the wine industry within the European Union are to be simplified (Sheales et al 25).
In the long run, there will be some negative effects in the wine markets due to the European Union policies. The wine producers in the European Union will enjoy increased competitiveness in the world wine market.
Simplifying the regulations that concern labelling, quality and other winemaking processes will improve the flexibility and efficiency of the European wine makers thus making them more competitive. A less regulated market will make it difficult for smaller wine producers to compete with the European producers (McCarthy and Ewing-Mulligan 215).
The implications for the Australian wine industry
The Australian wine industry is heavily reliant on exports for sales. Although the country is successful in exporting to the overseas markets, it is still a very small wine producer internationally. Therefore, it is a price taker and cannot have much influence on the price of Australian wine in the world market.
Competition from other producers has made it imperative that the Australian wine makers improve their position through marketing internationally. In addition, the wine producers have to carry out market research to ensure that the product they are offering is profitable. (Kelley 6)
Australia’s position in the world wine market
Australia is among the countries referred to as New World producers. Other such wine producers include South Africa, New Zealand and Chile. In the past this producers had a negative publicity and were regarded as mediocre in terms of quality. Most importers preferred European wine as they had a superb reputation worldwide.
However, today, the New World producers especially Australia have become a force to recon with in the world wine market (Aylward and Zanko 2). Since Australia is separate from other wine manufacturers especially Europe, it developed its own winemaking technology. This has contributed to the unique and distinct Australian wine (Sharpe and May 180).
Australia’s success in the world wine industry can be attributed to the role of the Australian Wine Research Institute and the Cooperative Research Centre for Viticulture. The institutions provided advice, wine education, brand development and trade. The industry was able to work with a common purpose, set targets and developing a yardstick for the entire industry. The focus was to ensure that the production process was geared towards satisfying the consumer needs (Aylward and Zanko 4).
According to the South Australian Research and Development Institute (3), innovation and creativity have to be employed if Australia is to retain and improve its position in the world wine market. The country aims to improve the infrastructure that supports the wine industry so as to enhance the wine industry’s competitive advantage. Research and development initiatives have been put up including recruiting and retaining the best researchers (SARDI 1).
The effects of the changes in the exchange rate should be considered because most of the sales of Australian wine are to external markets. The exchange rates create greater risk for the producers of wine as they may not achieve the expected profits levels. A decrease in the interest rates will reduce the profits and this may discourage wine producers from dealing with customers from a specific country. (Sharpe and Danny 182)
The current global financial crisis
The on-going global financial crisis has affected almost all industries and the Australian wine industry is not exception. The latest export figures have shown a decrease in the wine exports. The Australian wine exported was 11 percent less in volume and 18 percent less in value in the year 2008. In addition, the value per litre of wine fell by 7.6 percent. The Australian wine producers have to find ways to cope with this problem otherwise this industry will tumble (Sheales et al 43).
The financial crisis has also affected demand from the key markets such as the United States and the United Kingdom. The total value of wine exports to the United Kingdom dropped by 18 percent while those of the United States fell by a whooping 26 percent. Although there has been a downward trend in most markets, China was positive as the exports to china increased by more than 32 percent (Alibaba).
Wine tourism is an important business strategy which assists small wine producers to increase their sales thus enhancing profitability. The tourists get an opportunity to talk to the wine-maker and tour the cellar. In addition, the tourists are given a total winery experience where they can learn and enjoy themselves. There is wine tasting and other activities which ensure that the tourists really experience the winery (Charters 59).
Australian wine producers have fully embanked on wine tourism. There are wine related events and occasions that are carried out in different parts of the country. For instance, Canberra District hosts an event called ‘The days of Wine and Roses’ where local hotels and restaurants are hosted. Wineries showcase their products so as to educate the public on the wine and winemaking process. The Wine Tourism Development Executive is responsible for the success of wine tourism in Australia (Hall 95).
Like in any other venture there are some challenges that are being faced in conducting wine tourism. It has been difficult to create a whole tourist experience instead of only visiting cellars. The availability and dissemination of wine tourism information has also been quite challenging. (Hall 96)
The future of Australian wine Industry
The wine producers of Australia are currently bent on products of superior quality in response to the conditions at the world wine market. It had become apparent that other New World producers of wine are also improving on the quality of their product. On the other hand, there is a significant decline on the consumption of wine.
This means that Australian wine producers have a great challenge in terms of maintaining or even improving their position (Warren 3). Although market conditions are difficult, the Australian wine industry can continue in its growth. The industry can develop and thrive if it utilizes the opportunities in the market and manages any threats to its continuity. (McCarthy and Ewing-Mulligan 215)
The producers have to enhance their competitiveness in the world market by ensuring that the industry runs in an efficient manner. Therefore the production, marketing and operations costs have to be as low as possible. This will ensure sustainability in the market even when the Australian wine producers are only price takers.
The industry and individual companies have to be innovative, adaptive and flexible. Failing to take this into consideration will destroy this industry which has been built for the past three decades. The differentiation of Australia’s wine products in the market will give a competitive edge over other competitors (Anderson 267).
From the above evaluation, it is clear that the Australian wine industry has room for growth. However, the growth rate may be at a lower rate than the in previous years because of issues such as a declining international consumption of wine and the global financial crisis. The expansion of the industry will be enhanced by the increased innovation and creativity that the industry has been involved in. Innovation will set the Australian wine industry apart from other competitors particularly those from Europe
(SARDI 1).The industry will face certain challenges such as increased competition from the Old World producers such as France, Italy and Spain. The policies that have been proposed by the European Union will improve the position of European producers (Warren 5). The Australian wine producers can deal with this set back by increased marketing and innovation. Australia has an impressive history in the global wine market and it is safe to project its continued success (SARDI 1).
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