So Mrs D and I were in Berlin and ordered some wine while on a boat cruise. The choice was limited to “red” or “white” and so sight unseen we ordered “white”. While we expecting something “local”, possibly French, we ended up drinking an Australian wine. We had a good laugh – travel half way around the world to drink a wine we probably wouldn’t drink at home.
Wine is a major export business and like all Australian exports is struggling with the high value of the dollar. I suspect the high dollar is going to be with us for a while. That means that export businesses are going to have to work within an additional constraint. Anyone relying on the dollar depreciating in the short run is probably going to struggle.
Joe Sternberg, of the Wall Street Journal, wrote about the Australian wine industry a couple of weeks ago. He was writing in the context of Casella Wines that has recently reported a quarterly loss.
“The alleged culprit behind these misfortunes is a strong Australian dollar, which is another way of saying a weak greenback in the U.S., one of Australia’s most important wine export markets. A surge in demand for the Aussie due to Ben Bernanke’s money printing and China’s commodity guzzling has propelled the Down Under currency from around 75 U.S. cents per Australian dollar in the middle of the last decade to roughly $1.05 today.
Australia, whose currency has appreciated much faster than other wine-exporting countries, has been particularly hard hit. Australians themselves are spurning local vintages in favor of New Zealand imports made “cheaper” by the strong Aussie dollar.”
Joe Sternberg then makes a very important point – firms do not compete on price alone.
Although a certain kind of economist believes that exchange rates determine trade balances, overall competitiveness—that mix of adaptability, productivity, ingenuity and the like—ultimately matters much more over the long term.
What our marketing friends refer to as the 4Ps – price, product, place and promote. My old marketing professor used to literally jump up and down whenever the class suggested that products compete on price. He reckoned that price was the easiest component of the marketing mix for competitors to copy.
Okay – So Australian business facing a high dollar have to make one of two choices. Lower costs or move their product up the value chain. Or a combination of those two choices. But you get the idea.
Joe Sternberg reckons that Australian wineries should move up the value chain:
… the country predominantly produces high volumes of lower-quality wines, a market segment in which consumers are particularly price-sensitive, global competition is fierce, and profit margins are thin. Australians have pioneered marketing techniques to appeal to such buyers, such as cutesy animal-themed labeling that has earned Australian products the nickname “critter wines.” But no one pays a premium for a picture of a wallaby or a penguin.
To be fair – that is not a bad thing. So-called critter wines introduce a lot of new consumers to the market who can then make their own choices as they move up the wine sophistication curve (if such a curve exists). At the same time changing your product is a risky and long term proposition (especially in wine). So something has to be done about costs.
“We don’t ship glass around the world, we ship wine,” Richard Lloyd, global manufacturing director for Accolade, said by email.
So the wine gets exported in bladders.
Hardys became Britain’s best-selling Australian wine by selling bottles for as little as £3.40 ($5) in the face of a rising domestic currency. To do that and still earn a profit, the winemaker turned to plastic bags – 24,000-litre plastic bags.
Accolade Wines, the maker of Hardys, pared shipping costs that can amount to as much as $US3 a case by eliminating glass bottles and shipping the alcohol in bladders. After the 16,000 kilometre journey, the wine is bottled at a plant next to a scrap merchant a two-hour drive from London.
Of course, Australian wineries face creative destruction:
The US and South Africa, the third- and fourth-largest exporters outside of Europe, also shipped about half their wine as bulk in 2010 and 2011, according to reports by the US Department of Agriculture and Wines of South Africa, an industry body.
About 35 per cent of New Zealand’s wine exports were made in bulk during 2012, according to New Zealand Winegrowers, a government-backed industry body.
The container bladders are oversized versions of the bag-in-a-box packaging pioneered in 1965 by Australian producer Angove’s, a family winery three hours east of Accolade’s Adelaide head office.
So in time they will have to come up with something else to keep costs down.