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The great wine squeeze: Forget Coles and Woolworths, China is the vineyard’s new best friend

Published 06 March 2013 23:58, Updated 07 March 2013 00:03

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The great wine squeeze: Forget Coles and Woolworths, China is the vineyard’s new best friend

Moves by Woolworths and Coles to open liquor outlets in Margaret River have got local producers up in arms in defence of their cellar door sales. Photo: Tourism WA

About 3½ hours’ drive south of Perth lies Margaret River, a wine region that’s home to about 150 producers, including renowned brands such as Voyager Estate, Leeuwin Estate, Vasse Felix, Cullen and Cape Mentelle.

Since the first vines were planted more than 45 years ago, Margaret River has gone through a dramatic shift.

It’s now one of West Australia’s most-visited areas, helped by its stunning surroundings, including the karri forests and pristine beaches with some of the best surf in Australia.

However, as tourism brings in more activity and development, it also produces new problems. The most recent is plans by Coles and Woolworths to open liquor stores in Margaret River township.

Some residents and wine producers are outraged, believing the stores are a threat to the premier wine region.

“The issue that the wineries in Margaret River are most worried about is how it affects their cellar dollar,” the general manager of industry body Wines of Western Australia, Aymee Mastaglia, says.

“When big wholesaler-retailers like Woolworths and Coles come to town, their modus operandi is on price,” she says. “They’ll cut prices in order to get the volume. Let’s say you have the cellar door selling a bottle for $20 but Woolworths and Coles come in and sell it at $15. It becomes very hard to compete.”

According to a recent report by IBISWorld the increasing dominance of Coles and Woolworths in liquor retailing is a major concern for wine producers across Australia.

The report notes how Woolworths and Wesfarmers (owner of Coles) have “aggressively” increased their share of liquor retailing, expanding the number of Dan Murphy’s, Woolworths Liquor, BWS, Cellarmasters, Liquorland and First Choice outlets, and thereby capturing 70 per cent of the liquor retail market.

“This dominance in liquor retailing has given Woolworths and Wesfarmers significantly more bargaining power over wine producers,” the report says. “The market-wide discounting of these two operators has contributed to limited wholesale price growth over the past five years. Increasingly, the supermarket duopoly has also exploited its market power to reduce shelf space for branded products and push their own label and control-label wines.”

IBISWorld expects the pair will continue to do so over the coming years, capturing more market share from smaller and medium-sized players.

The only choice smaller boutique wineries have, according to Robert Oatley Vineyards chief executive Anthony Roberts , is to carve out a market niche and limit the amount of product they sell through the big supermarket chains. “When [supermarkets] control brand profit, they have the ability to adjust their margins and keep shelf prices down,” he says. “But it’s still possible to work with restaurants and independent retailers. We only have about 4 per cent of our business with the big retailers.”

While wine producers have been trying to reduce their reliance on Coles and Woolworths by producing quality wines and building cellar door and online sales, the retailers now want a greater slice of the premium market.

Woolworths is considering buying Barossa Valley Estates, which went into receivership in January. The move would strengthen its own house brands and give it control of some high-quality shiraz, for which the Barossa region is renowned worldwide.

Woolworths will not comment on the planned acquisition but makes no secret about its ambitions to have “vertically integrated” wine production. In 2011 it snapped up the Dorrien Estate Winery and Vinpac bottling operation as part of the Cellarmasters Group acquisition. It also snapped up Pinnacle Liquor Group last August last, noting in its profit result report how it “aligns production, marketing and product development teams for our own and exclusive brands” and is an “evolution” in its private label brand development.

In its profit results handed down last week, Woolworths said group liquor sales (including its pokie venue liquor sales) for the first half of 2012 totalled $3.8 billion. It opened 11 Dan Murphy’s and 30 BWS stores during that period bringing the number of total liquor outlets to 1,346.

A Woolworths-owned Barossa Vallley Estates is anathema to the Winemakers’ Federation of Australia. It wants the regulator to stop the planned move, saying it will lessen competition. “We would expect the Australian Competition and Consumer Commission to consider closely any acquisition in the market that could impact on competition and market power,” chief executive Paul Evans says.

The Wine Grape Growers Association is also concerned. Executive director Lawrie Stanford has warned if retailers keep buying estates in order to control their own brands, wine growers may face the same fate as milk producers.

“As retailers become increasingly integrated into production, they get inside wine producers’ financials and diminish their ability to negotiate price in the marketplace,” he says.

Even Australia’s second-largest wine company, Treasury Wine Estates, opposes Woolies owning wineries.

“There’s already an awful lot of competition, with over 2500 wineries in Australia,” chief executive David Dearie says. He says Woolworths and Coles are expanding their private label wines because the wine producers have aided them in doing so.

“Private label exists only because wine companies sell their wine in bulk to retailers and let the retailers put their labels on it,” he says. “If the wine makers don’t want to compete with the retailers, don’t sell to them. If you’re not big enough to stand on own two feet, you’ve got to question whether your brand is strong enough.”

Part of the reason small wine producers have wanted to sell bulk wine to Coles and Woolworths is because exports have been so tough.

Until last year, wine exports were declining and Australia had a massive oversupply of wine.

The Wolf Blass Foundation is now helping fund a major review of the sector that will look at problems such as a domestic oversupply of wine, declining exports, heavy discounting by liquor retailers and the tax arrangements around wine. The sector is commonly calling for better and more targeted marketing of Australia’s most-treasured wine regions.

While Wine Australia gets government funding to do this now, those in industry say it’s not enough.

It’s also inevitably the bigger players with deeper pockets who can do most to maket themselves overseas.

Australian wine commentator Jeremy Oliver says the wine sector faces an “imbalance of power”. The gap between the larger and smaller players means “if you’re a small wine producer, your avenues to market are very limited”.

“To get into pubs, clubs and restaurants you need a wholesale representative,” he says. “Distributors get calls every 10 minutes. This is why wineries are more reliant on their own cellar doors and are attempting to grow their customer base this way. But every means by which the larger retailers exclude other wines from their shelves, either through stocking more of their own brands or through purchasing their own wineries, makes it tougher for small wine producers. All they can do is export to countries and markets that are less sensitive to price. That’s where China comes into the equation.”

Smart Australian wine producers are joining distributors to develop long-term relationships in China. It is the only export market where bulk wine is not the order of the day. Australian wine exports to China increased by 7 per cent to 44 million litres last year, largely thanks to quality bottled wine being in high demand.

While bulk wine exports to China declined by 15 per cent to 8.1 million litres in 2012, Australian bottled wine exports to China grew 15 per cent to 35 million litres and the average value of bottled exports grew by 6 per cent to $6.39 a litre. Australian wine priced above the $10 a litre mark recorded 40 per cent growth to 4.8 million litres in that market.

“China consolidated its position as the biggest destination for Australian bottled exports above $7.50 per litre, ahead of Canada and the US, while the average value of Australian bottled wine exports to China was above that of France,” Wine Australia’s chief executive, Andrew Cheesman , says.

He says the high Australian dollar is a challenge but local makers’ success in making premium wine and exporting to the growing Chinese market gives hope. “Australian wine continues to build and cement its positive reputation in the emerging China market,” he says.

Even Casella Wines – one of Australia’s great export success stories, which created its Yellow Tail label mainly for the US market – is now looking to China after the high Australian dollar contributed to its first loss in 20 years in 2011-12.

“China is a definite growth market but we are also looking at products that give us higher margins, such as higher-priced wines,” says managing director John Casella. “Yellow Tail already has a reputable brand and solid production and distribution base, so we could grow with no major investment other than in the grapes”.

Wine legend Wolf Blass says expanding into China isn’t easy. He says bulk shipment is the “evil” of the industry and those who think they can sell bulk to China and survive long-term are fooling themselves. He says that that if a wine producer can’t convince the local market it has a premium brand, it won’t have a hope.

The Barossa Valley’s Torbreck Wines, which produces 60,000 cases a year, has been exporting to China for more than a decade and Asia now accounts for 30 per cent of sales.

“We haven’t changed our production levels but we have shifted our price point by selling premium wine to China,” says managing director and chief winemaker Dave Powell. “My business is a lot smaller than others but we’re making more money because we’re skewed towards the higher end.”

Powell says the Chinese will pay for quality wine but it takes time to build that image. “I spend a lot of time in China,” he says. “Last year, I spent 200 days away from home, a lot of that was in Asia. You have to be there. They want to meet the person behind
the brand.”

Wirra Wirra has been in China for seven years and is in more than 200 wine shops. Managing director Andrew Kay says the company is now targeting more remote cities. “It’s about getting away from Beijing and Shanghai and going to smaller cities where they are hungry to learn about wine.”

He says the Chinese are obsessed with brands and brand-building is crucial. “I think it’s really important for the long-term to treat the Chinese wine market with respect,” Kay says. “We still have a premium reputation there and we shouldn’t take short cuts that will erode that. Otherwise we will find ourselves in the same position as we’ve got in other markets around the world, having a reputation for wine that’s cheap and cheerful not premium.”

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