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.
This article in the Age caught my eye.
“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.
Fantastic.
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.
We probably need better mechanical picking machinery or an expansion of the seasonal workers program bringing in cheap labour from South Pacific islands to pick the grapes. Otherwise the majority of the Australian wine industry is stuffed.
Tim
1 Feb 13 at 9:07 pm
It also depends on whether the higher nominal exchange rate is due to relatively lower inflation (and hence the real exchange rate has not appreciated to the same extent). Also, one needs to remember that there are a lot of imported inputs to production, including Australian wine, which have got cheaper. And if our ToT have increased, we can buy more imports for a given quantity of exports. Finally, to the extent that one’s purchasing power is increasing, there should be a moderation in wage demands (which the government’s labour market rules are well established to meet).
Samuel J
1 Feb 13 at 9:10 pm
The wine equalisation tax penalises wines with higher value. Sternberg seems to have missed that.
Milton Von Smith
1 Feb 13 at 9:20 pm
Even with the high dollar I can still purchase Australian wine cheaper in the US and many parts of Asia than here.
Australia is a toilet. But a lovely place to pretend it’s not.
$11 a pint for beer in Perth. Call the fucking cops.
Infidel Tiger
1 Feb 13 at 9:21 pm
Tim – we’ve got 16% youth unemployment in Australia – why bring in islanders until that number is lower?
Sinclair Davidson
1 Feb 13 at 9:22 pm
$4.90 a pint at the Balga. There’s a plug.
sdfc
1 Feb 13 at 9:23 pm
Milton Von Smith – I did email him before hand about the WET but he didn’t follow that up.
Sinclair Davidson
1 Feb 13 at 9:23 pm
Cool! I have a cost cutting option.
After the Fisk doctrine comes in I have a job for the incarcerated greenfilth and communists, picking white and red grapes respectively for 16 hours a day, under the lashing whips of cruel, sneering overseers.
Should keep costs down (and the overseers pay the exchequer for their jobs) and finally get some economic use out of the useless rent-seeking sods.
Start practising your sneering face, folks.
Mk50 of Brisbane
1 Feb 13 at 9:30 pm
That youth would have to want to pick grapes. It’s not easy work. Can’t see it happening. The dole is easier, especially with the government about to raise it to make life easier for the poor buggers.
I’ve mostly given up on buying wine – I’m sick of paying the taxes. Home Brewing and Home Distilling is the solution.
Tim
1 Feb 13 at 9:33 pm
Sinclair,
I had to work as a farm labourer in the Kimberley years ago during another mining downturn. There is no way the 16% youth unemployment is going to be solved under the present system and not even hiring backpackers is plausible.
I worked on a banana plantation and there is not immediate possibility of this fruit being harvested mechanically.
Put simply, as you well know, our 16% have been priced out of the market by government policy.
Louis Hissink
1 Feb 13 at 9:33 pm
Youths can still pick fruit, but the lazy ones let backpackers do it instead.
sdfc
1 Feb 13 at 9:37 pm
Sem Chard, eh? Lovely stuff…
I used to work in the industry, and it seems that very few outfits are able to make a go of the production side of the wine trade. Many called etc. Lots of cashed up red-nosed retiring lawyer types who think that their enjoyment of a drop or vat or so combined with all the capital they can throw at the venture (and usually a lot more) could be a wildly successful lifestyle choice. Lots of failed boutique wineries. And the premium end of the market doesn’t seem to be much of a money spinner either – I knew a few blokes whose wineries produced stuff that Robert Parker fancied. They didn’t sell via the standard retail channels – order only, or via the cellar door to the clueless label hunters in less than optimal vintages. They weren’t coining it in the slightest, despite their enviable reputations and the fact they hardly had to market their produce to sell it.
Oh come on
1 Feb 13 at 9:40 pm
I must say, Mrs Davidson has very soft looking hands.
Moisturiser I suspect, to be encouraged among women folk.
jumpnmcar
1 Feb 13 at 9:44 pm
Oh come on, yeah, I also worked in the Hi Fi retail game and you made your money from the bread and butter lines, but never from the expensive, “audiophile” stuff.
I suspect as long as you produce a passable chateau cardboard or chateau bladder, then that should pay the bills. The Granges etc are then the crème de la crème and your “super” profits as some of the lampreys here see it.
Louis Hissink
1 Feb 13 at 9:46 pm
Wine – always go for a Tucks Ridge Pinot or a Merricks Estate Cab Sav.
Carpe Jugulum
1 Feb 13 at 9:47 pm
jumpnmcar – Mrs D reckons they are great hands.
Sinclair Davidson
1 Feb 13 at 9:49 pm
Of beer?
Infidel Tiger
1 Feb 13 at 10:02 pm
George Costanza like they are, keep em safe
jumpnmcar
1 Feb 13 at 10:10 pm
24000 liter goon bags.
Where will one find a clothesline large enough to hang them from?
duncanm
1 Feb 13 at 10:17 pm
Forget hanging the 24000l goon bag from line, duncam. I’m emptying the pool!
Turnip
1 Feb 13 at 10:43 pm
They could be the hands of a petite female Asian surgeon.
Infidel Tiger
1 Feb 13 at 10:50 pm
There is no WET or GST on exports. Only local sales
Phillip
1 Feb 13 at 10:53 pm
Can anyone seek a FOI on the Lodges extensive wine cellar inventory, pre and post Juliar/Timmy ?
jumpnmcar
1 Feb 13 at 11:01 pm
Of beer?
Yes couldn’t believe it myself, I thought it was happy hour at first.
Stubbies of jacks and cola were $6.50. Got pretty messy.
sdfc
1 Feb 13 at 11:06 pm
Most wine grapes are already mechanically harvested, Done at night to preserve the quality of the fruit. The cost of water, power bills to pump the damn water, fertilizer, herbicides, pesticides, capital equipment, costs of pruning, Compliance costs for oh & s and other wages, tractors, set up costs to recover, the need for farmers to actually earn enough to pay their loans and earn a wage, all push up the price for bulk wine. And then there are the years where the weather wipes them out – rain, extreme heat, hail, frost, take your pick.
A couple of years ago I worked for a large wine corp and they wanted to pay farmers $200/tonne for one variety when their own vineyards could not grow it for less than $400. The. Smaller family farms produced good quality at far less cost but the farmers were getting f**k all. A lot just left it. To rot on the vine. Many have now pulled out their wine grapes.
Dianeh
1 Feb 13 at 11:14 pm
Most wine grapes are already mechanically harvested,
Which is why we have no banana wine……
Louis Hissink
2 Feb 13 at 12:03 am
Here in London I’ve picked up a couple of Hardys 2012 Bankside Shiraz. I hadn’t noticed but the importers label says “Imported and Filled by”. The wine is appropriate for quaffing midweek or perhaps as a that third bottle that no one really needs opened. Still for £4 or $6.25 it’s hard to fault.
Super D
2 Feb 13 at 12:57 am
Friend who lives here in Thailand but works in Barrow Island just told me he was at the Windsor in South Perth last week, and they are charging $13 for a stubby.
Yobbo
2 Feb 13 at 7:11 am
24000 litres in a big bag in a cool room in the house….mmmm lovely. It would have to be cheap but how do I get it in the house?
sfw
2 Feb 13 at 7:43 am