Australia’s not alone in its woes

29 October, 2010

What’s happening to the Australian wine industry at the moment reminds me of the famous line from Oscar Wilde’s play, The Importance of Being Earnest: “To lose one parent may be regarded as a misfortune; to lose both looks like carelessness.”?The departure of Wine Australia’s UK director Lisa McGovern and Paul Henry, general manager for market development at the Australian Wine & Brandy Corporation, within weeks of one another is extremely careless, even if the latter will continue to act as a consultant to the AWBC down under.

I’ve no idea what prompted these people to leave – there are all sorts of rumours circulating – but it suggests serious dis­agreement about the best way to promote Australian wine. This seems unlikely to abate, now that Peter Lehmann has left the UK campaign, joining Australian Vintage outside the tent pissing in, to borrow Lyndon B Johnson’s graphic phrase.

Henry and Paul Schaafsma, Australian Vintage’s general manager for UK and Europe, have argued their positions. These may be summarised as follows: “the current trading profile of Australia is not something we want to preserve” (Henry); “92.6% of all Australian wine is sold below £6, so for Wine Australia to be allocating the majority of its budget to regional wines over and above £7 or £8 seems to be slightly flawed” (Schaafsma).

The two positions are very different. Henry believes Australia needs to promote its regions and smaller producers, seeking to “challenge and improve” the consumer’s perception of Aussie wine. He is thinking like a marketeer, planning for the future and adding value.

Schaafsma thinks it’s all about “delivering wines with flavour, appropriateness and consistency at highly competitive price points”. He is thinking like a salesman, focusing on the present.

Who is right? The answer is that both of them are to a certain extent. Australia’s core business is cheap supermarket wines (many of them sold on meaningless promotions), but it also needs to think strategically. The strength of the Australian dollar and the scarcity of water in the country’s irrigated vinous heartland make a change of tack unavoidable. To put it bluntly: Australia cannot continue to make and sell wine of decent quality at under £5. Or rather it can, but only if it is prepared to do so at a loss.

The debate is not restricted to Australia. It concerns the entire wine industry. Charles Sydney, one of the top courtiers in the Loire Valley, recently sent out a one-page summary of what’s happening in the UK market and its impact on the Muscadet region, where 60 growers have gone bankrupt since the 2010 harvest. He warns, darkly, of the “coming meltdown of the market”.

Regular readers of this column will be familiar with a version of Sydney’s argument. In the space of five years, the impact of duty increases, VAT rates and the weakness of the pound has meant that the share of a £5.99 bottle of Muscadet going into the wine itself has gone from

E2.60 (£1.74) in 2006 to E1.38 (£1.21) today. The figure might be even worse, as it happens. Sydney is assuming a 40% margin, but excluding shipping costs. Growers and producers all over the world can’t take much more of this. Sydney doesn’t mention them by name, but the major UK retailers have asked the supply chain to foot the bill for these increases.

“In that very same period,” he says, “the average producer has held prices in the face of rising costs of manpower and dry goods.” The result? “There will soon be no wine from independent European wineries at affordable prices on the UK market.” And probably elsewhere, too.

Sydney’s solution is to change the way duty is charged in the UK, reducing the fixed duty per bottle to £1 plus an?additional 10% sales tax on wine.

This would reduce the percentage of duty on a £6 wine to 39.7% and would enable the producer to sell E2, not E1.38 worth of wine.

This assumes – and it’s a big assumption – that retailers wouldn’t just pocket the difference themselves.

I think the solution lies elsewhere. Even at E2 (or the equivalent in Chilean pesos, South African rand or Aussie dollars), it is becoming increasingly difficult to make money out of wine. I suspect those bankrupt vignerons wouldn’t have been saved by a slight increase in the price paid for their Muscadet.

It is a matter of urgency that we tell consumers about the true cost of wine.

Prices are kept artificially low – Asda is promoting three-for-£10 again, for heaven’s sake – to enable supermarkets to drive footfall into their stores.

If they stay where they are, we won’t have a meaningful wine industry in 10 years’ time.

The more I think about it, the more I agree with Henry. “Unsustainable and increasingly unprofitable price points” are the deadest of dead ends.

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