The Business of Booze

As a commodity wine and alcoholic beverages are as interesting in their market behaviour as they are to consume. In July 2011 the Australian beverage category declined for the first time in five years. While markets whirled and shook the world over throughout 2008, total beverage retail sales increased. Not until three years after the world’s greatest financial crisis since the Great Depression did the domestic retail sales decline.

It is possible to conceive that during times of hardship people may turn to alcohol to help them through. The idea being that they simply continue to drink but substitute from one price point into another lower level brand. This may be one reason the sales have remained buoyant, however there are few other key elements at play, which have dictated the movement of Australian produced alcohol and wine in particular. Despite the seemingly continued growth in the market through pure sales figures, the Australian wine market is in crisis.

From the 1980’s to the early 2000’s Australian produced wine was the Golden child of the global industry. It assisted in the development of a consumer market worldwide and particularly in the UK, the USA and Canada. Australia built itself up to be the 6^th largest wine producer in the world after (France, Italy, Spain, the USA and Argentina).

The great advantage Australia has in its capacity to produce wine is the vast differences in the climate range. Grape varieties from all over the world have been brought to Australia and grown successfully in conditions not that far off their original old world climate counterparts. In Australia’s ability to produce quality wine and sell it on the international market at a lower price than competitors throughout the 80’s and 90’s, it did.

Due to the success of the export industry investment continued to flow into the industry and vines continued to be planted in our vast land. All the success came to a screeching halt however when all of a sudden the Australian dollar increased in value and we no longer became competitive. The local industry was stuck with an immense oversupply of grapes and unsellable wine.

Farmers began to go broke, unable to sell their fruit; wine makers couldn’t sell their wine and were forced to sell at a basement price in unlabelled ‘clean skin’ bottles; and distributers could not export as the other new world wine countries had become more competitive as the value of the Aussie dollar remained sky high.

This is the reality that the industry remains in today. While the wine glut may have subsided somewhat from it’s highest point, there still remains an oversupply. The Australian wine industry is completely dependent on export as in reality there simply are not enough people in Australia to consume the product, even if every man, woman, child and pet drank a bottle a week.

The problem that the industry faces over the next few years remains to be a simple economic concept of demand and supply. While there is low discretionary spending throughout the rest of the world, low consumer sentiment and a high Australian dollar it is not possible to recreate balance within the demand and supply relationship.

However, as always there is another player that comes into the picture when we talk about Australia. Asia is our neighbour, kind of like our big brother who keeps just out of trouble just enough so mum and dad don’t find out. If somehow Australia can speed up the process of Asian consumers coming around to the taste and custom of drinking wine, then maybe a bright future is closer than we thought.

Just something to ponder over your next glass of wine. Alex Mac.