Australia Looks to Boost Wine Sales Rather Than Uproot Vines

Grape glut Down Under could keep quality and selection high--and prices low

Eric Arnold

Posted: Tuesday, August 08, 2006

Europe and Australia share the same problem: Massive grape oversupply, to the tune of about 1 billion liters of unsold wine sitting in tanks. But while the European Union is offering funds to growers to encourage them to rip out their vines (which few, if any, are agreeing to), the more conservative Australian government is staying relatively hands-off. Instead, the hope is that, over time, the industry will balance itself out.

Unlike in Europe, the problem isn't slumping sales of inconsistent wines in the low and moderate price ranges. The demand for Australian wine remains strong, especially in the United States, and Australian wine exports overall rose 12 percent for the 2006 fiscal year.

Instead, Australia's problem is that the industry grew too quickly. After Australian wines first gained international success in the early 1990s, the government began offering incentives for farmers to plant new vineyards. The amount of vineyard land in Australia shot up from about 160,000 acres then to more than 400,000 acres today. (There's so much Aussie wine that "cleanskins"--unlabeled bottles of wine sold in Australian liquor stores--actually sell for less than water).

Therefore, many in the wine industry see efforts to increase sales as the right solution. "Vine-pull or grower payments will not succeed, in my opinion," said Peter Osborne, who runs Langhorne Creek, a 650-acre vineyard near Adelaide that supplies wineries such as Two Hands and BRL Hardys. "[The] industry and government have to work harder to sell more wine."

Along those lines, the government has offered up a grant of AUS$50,000 that the Winemakers' Federation of Australia and Wine Grape Growers Australia will use jointly to research ways to keep wine quality high and to develop opportunities in new markets, such as China (which has already imported 13 million liters of wine from Australia this year). In the meantime, consumers should have plenty of high quality Australian wine available at low prices. But big wineries and growers are hurting.

"The impact on our margin has been significant," said McWilliam's CEO George Wahby of the glut. While McWilliam's is meeting its current demand, he said, it's also building inventories of its higher quality wines and letting them mature. The idea is that, over time, McWilliam's will be able to beat its competition by offering those higher quality wines at lower price points.

But not many large wineries have that luxury since they're public companies with sagging stock prices, and are therefore struggling to survive. Evans & Tate, for example, has debts in the range of AUS$160 million according to its 2005 financial report. The company recently sold two of its vinification facilities, one for AUS$8 million and another for AUS$22 million. Its bank, ANZ, has been helping the winery stay afloat, having recently waived a AUS$12 million payment that the winery owed by the end of June.

Growers don't have it any easier. Nationwide, high quality Shiraz grapes from the 2006 vintage sold for an average price of about AUS$600 per ton, said Bill Hardy, head winemaker at Hardy Wine Company. For grapes from the Riverland area of South Australia, one of the country's largest winegrowing regions, prices ranged from AUS$900 per ton all the way down to AUS$150. "Hardys, as probably the largest purchaser of Riverland Shiraz, paid an average price per ton of AUS$410 for this variety," he said.

"Gross income has reduced by about 50 percent over the last three years," said Osborne, who has had to cut his staff by about one-third. As a result, he gives the best vineyard treatment, such as pruning by hand, only to blocks of vines that he knows will go into high-level wines. Osborne--whose contracts with winery clients run for another two years--is now spending more time and money focusing on varieties that are in demand. "We have pulled out some vines and replaced them with different, more saleable varieties," such as Pinot Gris and Sauvignon Blanc, he said. "[We'll] continue to do so, up to 10 percent of the vineyard."

Many growers have had their large winery clients cancel their contracts outright. This has turned out to be an advantage for small vintners, who are now able to get high quality grapes at an extremely low cost--and subsequently offer good wines to consumers at low prices.

Boutique facility Red Heads Studio, in McLaren Vale, has no shortage of fruit or winemakers. "Small producers needed a place to ferment small quantities of high quality grapes that had become impractical for large wineries to handle or market," explained Justin Lane, founder of Red Heads, which he likens to an independent recording studio. He has been overwhelmed by the number of small companies hoping to move their production to his facility, but space is limited. "It has been heartbreaking to have to turn away large parcels of excellent fruit," Lane said.

Red Heads' unique setup has allowed the winery to grow rapidly, more than doubling in capacity from 2004 to 2006. The wines exported each year to the United Kingdom sell out in only a few days, Lane said, and they're becoming popular in the United States as well. "Next month I will bottle 15,000 cases of wine under the Yard Dog label," he said. "This is up from the debut production of 4,500 cases."

So while there's plenty of concern among Australian growers and winemakers, there's plenty of optimism as well, provided that the government abolishes incentives for planting new vineyards and growers and wineries maintain good relationships. "The EU solution is to seek government support; the Australian solution is to accept the commercial reality and manage the process," said Wahby. "The next 10 years will determine which is more successful."

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