In the China pot
China holds huge potential for Australian wine exports. However, it also holds huge potential for internal and international political upset. There is a tendency for most Australians to think of all 1 billion-plus Chinese as Chinese when in fact it is several ethnic groups of people such as Uighurs, Tibetans, Hui, Dongxiang, Tajiks, Mongolians and many more who (at the moment) are under the tight control of the ruling Han. Look closer and discontent is brewing.
Internationally China appears a nervous and distrusting country at which the arrogant US enjoys poking a stick. Let’s hope push doesn’t come to shove between the two. China’s relations with North Korea and several unstable African nations are rather unsettling to Western observers. If any Australian wine exporter thinks internal and international Chinese politics are not of relevance to them, they need to think again.
The written word
Fortunately, in regards to the wine press we are getting good coverage in most places across the planet, but the media at home remains the same. A personal opinion is that much of it is so very dull. It’s dull because wineries often think no deeper then the wine they make, scampering around like inbred spaniels for a titbit of praise, wetting themselves if five stars or 95 points are awarded and bursting into spontaneous orgasm with a trophy win. The result is they release the wine media from writing anything that is broader, deeper and more interesting. Add the banality that many bloggers offer and all who have an opinion can wildly voice it nowadays. The craft of skilful and witty wine writing or intellectual debate and criticism is way down the list.
High society losing its shine
The Australian Wine Consumers’ Co-operative Society Ltd (Wine Society) is struggling. The past three financial years show:
2010-11 loss of $2,575,100
2009-10 loss of $569,033
2008-09 loss of $592,023
The last surplus recorded was a 2007-08 surplus of $918,274.
The society is giving reassurances that all is well and it is working with the bank etc. However, the bank is being tight with the society and the 64-year relationship counts for nothing. Most of the 2011 loss came from having to write down the value of the Bay Street, Ultimo, premises by $1,765,000.
It’s somewhat sad when desperately seeking good news the society feels it needs to include its show success during the year. If it can calculate the amount of extra business that three gold, three silver and 18 bronze medals generated it will do the whole industry a huge favour.
The 2011 annual report also says: “The Board is well aware of longstanding ongoing support given by many of our creditors and we will certainly be looking to fully reciprocate in these relationships.” Did the board not have the wit between them to see the trap in such a statement? It’s tantamount to saying to suppliers: “Thanks, buddy. You looked after us, we will look after you.” The job of the society is to find the best wine it can for its members, not cosy up to certain suppliers who will let it overrun credit limits or extend payment terms.
Will it win any accolades?
Accolade wines have appeared somewhat negligent in seeking opportunity in the Chinese market although they make the claim they are, “already one of the largest Australia exporters.” Without financial or shipment figures it’s hard to believe as news of Accolade brands success has been....restrained. This may have been due to being part of Constellation Brands who grew too fast and suffered from doing so. Now under the control of CHAMP Private Equity Accolade is moving in on China.
They have taken a majority stake in their Chinese distributor Shanghai-based CWC Wine Trading Co Ltd. They now have offices in Shanghai and Beijing and in theory go conquer. It will be interesting to observe how they progress in this market, will they open retail space to showcase their wines. What brands will the lead with? No doubt we will find out
Truth or dare it's February
Pre results: Back in November Australian Vintage reported it was “cautiously optimistic that we can be competitive and profitable”. The market appears to agree, as the share price rose from 26-27 cents to 30 cents and over in December, where it remains (32 cents at time of writing).
Pre results: Treasury Wine Estates is due to release results on February 17. For the majority of November the share price remained above $3.70. After starting December at a high of $3.90 it went into decline throughout the rest of the month and has continued in the same fashion in January, closing at $3.46 on January 30.
Just how well Treasury can manage its portfolio of leading brands remains to be seen. The company makes great noise about the quality of brands but the question remains: does the current management really know how to handle them? There appear to be double standards at play within the company. A recent inquiry from TK on the subject of brands was rebuffed with the statement: “We’re in a blackout period for media commentary until our half-year results are released on 17 Feb.”
Meanwhile in the US, Treasury CEO David Dearie was singing like the preverbal canary. In an interview with Shanken News Daily, Dearie is reported as saying: “We’re seeking to offer wines for every occasion – wines which can compete against all beverage alcohol categories.”
Although Dearie and his gang think they are being fresh and leading the pack, the rationale behind the latest offerings holds a lot of “tried before”. As far as TKR is aware these products are made in America for the American market.
The wine brand “Be.” targets sophisticated women who seek a more chic, stylish yet casual approach to wine. Styles are chardonnay, riesling, pink moscato and pinot grigio. The retail price is US$12.99. (What tosh, sophisticated women enjoy wine as it is. Women trying hard to be sophisticated may be tempted)
Emma Pearl is aimed at females age 30 and over, and has higher sugar content, or a “subtle hint of sweetness” as the company phrases it. Retail US$16.
There are several other additions or brand extensions. How they will work will be seen in the year end, this or even next year. The rubbish about a media blackout for the half-year is more suggestive of a very nervous management. Roll on February 17.
According to a report in The Australian, Lion, the Australian part of Kirin, has written down more than $200 million of its beer, wine and spirits business. Add dairy and the write-down is said to be more than $1 billion.
Reports in the media suggest Casella Wines is looking at ways to raise prices as an antidote to the strong dollar. It’s a family-owned company that is totally focused on its Yellowtail brand. However, sales are in decline and observing the company from the outside one has to wonder if the Cyclops approach is working. In the financial year 2008-09 Casella reported sales of $426.7 million. In 2009-10 they were down to about $395 million, and in 2010-11 had fallen to $344.1 million. The largest market is the US, with Canada next in line. In a recent interview (for another publication) CEO John Casella said: “Our commitment is to keep growing our Yellowtail brand.” The commitment and loyalty to the brand is admirable but the word “growing” somewhat conflicts with declining sales.
Woolworths (Australia’s largest wine retailer) has released its first-half sales: up 5 per cent to a total of $29.7 billion. Australian food and liquor was almost $19.6 billion, an increase of 4.3 per cent. In comparable store sales the increase was just 1.5 per cent. A telling sentence in the report was: “Sales growth was impacted in the second quarter by significant deflation, particularly in produce, seafood, bakery and deli.” The statement on liquor from Steve Greentree (director of liquor) said not a lot but was positive:
“Liquor experienced another quarter of strong growth across all brands, particularly Dan Murphy’s and BWS, gaining further market share despite increased competitor activity around the Christmas period. Our multichannel business in Cellarmasters and Dan Murphy’s had an outstanding quarter as customers switch between in-store and online.”
Six new Dan Murphy’s stores are due to open in 2012, following 14 new stores last year. If all goes to plan the total DMs at the end of this year will be 160.
Woolworths’ pub estate totals 294 houses, either fully owned or in joint venture. Sales for the half totalled $636 million, an increase of 2.9 per cent.
Rival supermarket group Coles has also released half year results. Food and liquor for the period was $13.6 billion, an increase of 4.9 per cent. In total Coles has 886 liquor stores having opened 19 new stores during the second quarter. 1st Choice the rival to Dan Murphy’s now totals 81 stores.
Quitting various New Zealand assets has cost Pernod Ricard NZ$99 million ($77 million).
Newer mid the waffle look at the figures
The Wine Export Approval Report to the year ending December 2011 shows that in the 12 months wine exports declined 10 per cent to 703 million litres valued at $1.89 billion. In previous years:
•2010: exports increased 2 % to 781 million litres valued at $2.1 billion.
•2009: exports increased 9 % to 764 million litres valued at $2.3 billion.
•2008: exports declined 11 % to 698 million litres valued at $2.46 billion
•2007 exports were 771 million litres valued at $2.95 billion.
More than a billion dollars worth of exports lost in just five years. Looking at the decline a different way, a lot more wine is exported in bulk for overseas bottling nowadays, which explains some (but not all) of the drop in value. The difference between the figures below and those above is accounted for mainly by soft packs (cask) exported and alternative packaging (flagon, Tetra Pak, PET, aluminium):
• 2011 bulk exports: 342 million litres valued at $345 million.
• 2011 bottle exports: 353 million litres valued at $1.5 billion.
• 2008 bulk exports: 185 million litres valued at $225 million.
• 2008 bottle exports: 507 million litres valued at $2.1 billion.
In the latest report a highlight is the average FOB price per litre: bulk at $1.01 a litre and bottle at $4.31 a litre. However, in 2008 bulk was $1.22 and bottle $4.36. Taking inflation into account, in 2011 bulk should be more than $1.30 litre and bottle close to $4.60. The reality is not a step forwards but backwards.
If the export figures are to be used as a measure then it’s an industry in decline. To quote from the 2011 report: “Australian wine [production] has fallen over recent years, from a peak of 1.42 billion litres in 2005 to 1.07 billion litres in 2011. Stock levels have also fallen, reducing the availability of wine to export.”
This is not about availability; it’s about the inability to sell the wine produced at prices that are suitable to Australian production cost. It’s time to accept the simple truth that the world doesn’t want all the wine that Australia produces at fair value. Declining exports also mean more wine on the domestic market. This leads to severe discounting to move stock. Wine Australia, company CEOs and members of the first families can all blow the positivity trumpet long and loud but the figures don’t support all the silly bonhomie and bounding enthusiasm that the collective feels is compulsory to recite. At times it’s hard to believe the Australian wine industry is not a chapter in a Winnie the Pooh story.
Our top five export markets, accounting for about 80 per cent of volume shipped, are:
• UK down 9 per cent to 248 million litres.
• US down 13 per cent to 179 million litres.
• Canada down 10 per cent to 50 million litres.
• China down 26 per cent to 41 million litres.
• Germany up 13 per cent to 41 million litres.
The reported good news in the UK being: “It is important to note that Australia remains the number one category in the UK off-trade. While the volume of sales declined, the average price paid for Australian wine increased by 6 per cent to £4.87 [$7.20] per bottle. This average price is higher than the market average of £4.75 and of the seven major suppliers, exceeded only by France at £5.35.”
Perhaps it’s the Australian obsession with sport that makes being the UK’s number one wine supplier important. The reality being it’s the bottom-line that really counts and being the 12th or 20th listed supplier with a fat profit is a better position. The fuss about bottle sales below £4 falling is a Wine Australia waffle diversion as customs duty and value added tax have forced a lot of wine to retail above £4.
On average the wine shipped in bulk during 2011 to the UK was about $1 a litre. That is tight on margin but if large enough sales can be achieved it should show a slim profit. About 64.3 million litres of bottled wine went to the UK: 7.14 million cases, with the average FOB price being about $32 a case. That’s not a huge value. If looking for decent returns, the amounts shipped at higher FOB prices than $5 a litre is the place to seek comfort. That boils down to about 5.85 million litres or 650,000 cases. The obvious question is: why are most wine producers still bothering with the UK? The TKR answer is: because they have nowhere else to offload the wine. We tighten our prediction that the UK will fall below 200 million litres within two years.
It wasn’t too many years ago when Australian wine people used to criticise the Brits for being mean and not wanting to pay full value for wine. Unlike the Americans, who knew what quality-to-value ratio was. It’s a statement that has become weaker in recent years. In 2007 our wine exports to the US were running at more than 190 million litres with a total worth of about $860 million at a FOB litre average in the region of $4.50. Last year 179 million litres went to America but its value was only $477 million and bottled FOB was down to $3.35 a litre.
In five years the amount of wine shipped in bulk to the US has quadrupled to more than 50 million litres, with roughly half being in the 50 cents to $1 a litre bracket. The other (loose) half is $1 to $1.50 a litre. Amounts above $1.50 a litre come to “not a lot” and in that sector the tight-fisted Brits leave their American cousins for dead.
In the profitable over-$5 a litre FOB bracket, Americans still outshine the Brits, importing twice as many cases: 1.34 million. At this point in time there is nothing to suggest the downward trend of Australian wine sales in the US won’t continue throughout 2012.
The figures relating to the Canadian market are disappointing in regard to volume, but value was down only 4 per cent. Canada was the one Western market that provided reasons for optimism in 2011. Wine Australia had an incredible success with a promotion in Ontario in May 2011, which resulted in a $4.61 million increase in total net sales of Australian wine compared with the same period in 2010. Robert Hill Smith sent an email to TKR saying how well a First Families of Wine presentation and tasting in Canada had been received.
Red and white wine shipped in bulk was down, as was bottled white wine. Red wine shipments remained static. A small amount of bottled wine was shipped at $2.50 a litre or less but the majority comes in the $2.50 to $4.99 bracket, where 20.5 million litres went across the water. However, Canada’s strength (in proportion to total sales) was in the 14.2 million litres shipped at $5 a litre and above. The 1.57 million cases was a greater amount then in the UK or US. If a Canadian market of about 50 million litres can be maintained and finetuned, it’s conceivable it could grow during the coming year. It would be good to see it move back over $200 million a year.
China has taken a dive in volume of 26 per cent but the value of wine shipped rose 23 per cent. Red and white shipped in bulk dropped dramatically and bottled white wine was also down. Conversely, value was up 21 per cent, totalling $201.5 million. Demonstrating the gold rush mentality are the 812 Australian wine exporters prospecting in China, compared to just 270 in Canada, a market worth just a little less.
“Well” said Pooh, “what I like best—” and then he had to stop and think. Because although Eating Honey was a very good thing to do, there was a moment just before you began to eat it which was better than when you were, but he didn’t know what it was called.
What the Chinese market likes best is red wine: 28.1 million litres of bottled and 6.7 million litres shipped in bulk. Of the $201 million worth of wine in total, $183 million was red. The real sweet spot for exports to China is that the average value per litre is just over $6. One has to wonder, with so many paws in the honey pot, will it be like the UK and US and be tipped over?
In volume terms Germany is still in the top five countries to which we export. Most of the wine shipped is roughly an even split of red and white in bulk format (our third largest market). The average price per litre is just 88 cents; is there a margin in this all the way back to grape grower? On the bright side it’s up 11.9 per cent on last year’s average of 79 cents a litre. It’s also above New Zealand (our seventh largest market), which has been getting wine shipped in bulk at an average of 85 cents a litre. The German bottle exports amount to 4.9 million litres. Prices are not high, though there has been a pleasing increase of 41 per cent in the $7.50 to $9.99 FOB litre bracket.
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