Australian winemaking 2009 – it’s a tale of two industries: mature, vibrant, small and medium producers with their strong regional identities; and the headline-grabbing wreckage of the ‘brand Australia’ juggernaut.

A recent Winemakers’ Federation of Australia (WFA) report, Wine industry must confront the reality of oversupply, detailed the horror behind the chilling headlines.

The report concluded “at least 20% of bearing vines in Australia are surplus to requirement, with few long-term prospects. On cost of production alone, at least 17% of vineyard capacity is uneconomic. The problems are national – although some regions are more adversely affected – and are not restricted to specific varieties or price points”.

The quiet panic behind a decline in exports and domestic sales of Australian wine manifested itself most obviously in the sell off of vineyards and wineries by two of our largest wine producers, Constellation Wines Australia (formerly BRL Hardy) and Foster’s.

Constellation simply continued the dumping of assets that began with their departure from Canberra, announced late in 2006. But the asset dumping increased in scale towards the end of 2008 as they put three wineries up for sale – Goundrey, in Western Australia, the historic Leasingham Winery in Clare and the Stonehaven Winery at Padthaway. Only the Goundrey winery sold. The other two were mothballed in the absence of buyers.

Earlier this year, borrowing a well-worn political phrase, Foster’s said it would sell 36 ‘non-core’ vineyards and close three wineries. This came on top off widespread value destruction following their acquisition of Southcorp Wines for $2.5 billion in 2005.

While many of the problems facing Foster’s may have been self-inflicted, the larger backdrop of the global financial crisis and a rising Australian dollar exaggerated the effects of incipient oversupply – and sucked the industry along with it.

Australian exports peaked in October 2007, says the WFA, and have since declined by eight million cases and 21 per cent in value. This coincided with a decline in domestic sales of Australian wine and an even larger rise in the volume of imports, spurred by the rising dollar.

The combination of rising supply and falling demand leaves Australia with a surplus of more than 100 million cases. And this is set to double over the next two years because we’re producing 20–40 million cases a year more than we sell.

This, of course, explains the amazing range of wine bargains being thrown at us from all directions – the big, direct-importing retailers; wine club operators, including the Wine Society, Cellarmasters and Wine Selectors; the more aggressive independent retailers, including cleanskin specialists; and even the auction houses, notably GraysOnline.com

While Coles and Woolworths continue to dominate liquor retailing, the wine surplus encourages to the growth of alternative channels as the wine clubs and clean skin specialist boost sales of labels totally under their control.

Indeed, this aspect of wine selling (and it includes the big retailers with their direct imports and private domestic wine labels) concerns winemakers deeply. WFA points the finger at supermarkets, declaring “excess supplies have allowed supermarkets to move from customers to competitors by launching their own low-price products, without the need to invest in capital infrastructure or long-term health of the industry. This clutters the market place and eats into margins”.

But if the retailers exploit the surplus (and we all benefit from lower prices while it lasts) they didn’t create it.

Unquestionably, the strong Australian dollar makes many producers internationally uncompetitive through no fault of their own. But the WFA says that producers in many regions bear production costs that are simply too high for the quality of fruit they produce.

While this means bargains galore as producers seek to offload surplus wine, ultimately it isn’t unsustainable, meaning that many enterprises will go bust. Thankfully, the WFA calls on the industry to sort out its own problems. It doesn’t seek government subsidies other than exit packages for small growers and wineries along the lines of those for small block irrigators – in other words, one-off help to get out of the industry, not a subsidy to perpetuate oversupply.

While the low margins forced by massive oversupply affects the profitability of most makers, there’s a multi-faceted, energetic and mature industry that’s not oversupplied and has a pretty clear vision of where it’s headed.

We have only to drive up the Barton or Federal Highways to see this regionally based industry on our doorstep. It’s been hard yakka, sustained over decades, but producers like Brindabella Hills, Jeir Creek, Helm, Shaw Vineyard Estate, Clonakilla, Lark Hill and Lerida Estate have successfully built brands and customer bases – some in overseas markets.

The same story unfolds across Australia from east to west, and from the high country in Queensland in the north to the coolest reaches of Tasmania. Down there a few weeks back, Steve and Monique Lubiana told me they continued to export successfully despite the rising dollar – a benefit of selling a strongly branding, high quality luxury product. Of course, not all makers can be up there.

But if we sniff around, we see not just regional specialties, but minute subdivision of these regions. A good example is the small army of small, mostly young makers criss-crossing the Barossa Valley making tiny quantities of beautiful shiraz, grenache and mourvedre from ancient vines whose fruit no longer goes to the anonymous blending vats of large companies.

Ironically, given the pain they’ve felt, both Foster’s and Constellation continue to make cutting edge wines like Penfolds Yattarna Chardonnay and the magnificent Tasmanian based House of Arras bubblies made by Constellation’s Ed Carr.

As overproduction winds back, it’s possible to see for Australia a new industry based on what various regions do best. That may mean our exit, domestically and internationally, from very low price points and that much of our cheaper quaffing wine could come from better-watered countries – a future where we drink Chilean cask wine but bottles of Cowra chardonnay, Yarra Valley Pinot and Barossa shiraz.

Copyright © Chris Shanahan 2009