Letter from Andreas Clark, Export report analysis

Letter from Andreas Clark

Thanks for the opportunity to comment further on our Shiraz terroir project and how it helps underpin our priority to increase demand and the premium paid for all Australian wine.

As you know, we have set a very ambitious, cross-generational goal for Australia to be recognised as the world’s pre-eminent wine producing country. We believe that our natural endowment of diverse, unique and superior terroirs, combined with our skilled and innovative people, means that we have the capacity to be recognised as the best in the world.

As Brian Croser said in our media release, “Australia makes wines of exceptional quality and finesse that reflect their provenance and terroir, but they don’t currently receive the international recognition they merit”.

We believe that these wines are the ones that will excite and delight the wine influencers in the media and trade, that they will help enhance the image of Australia wine and lift opinions about the wines we produce to where they should justifiably be.  

Our Shiraz terroir project is one of the ways to build the case for our wines. It will help provide the new insights and understanding about the sensory impact of terroir on our most planted grape variety, and this in turn will underpin our assertions about the unique and wonderful wines we produce.

The German wine scientist Dr Ulrich Fischer is noted for his ground-breaking research on “The Sensory Finger Print of Terroir in German Riesling”. He said “terroir yields an individual sensory profile, which allows the production of diverse wines of higher quality. This forms the basis of a regional realisation of added value.’’

I’m not sure if you heard his presentation at the AWITC, or spoke to him when he at the AWRI on sabbatical; he has said on several occasions that, as soon as his terroir research began and before his findings were announced, the perception of quality German Riesling was enhanced.

The research

We don’t need R&D to prove that terroir exists nor to identify what, in general, makes wines different from different sites; we already know that the most important factors are climate, topography, soil chemistry and soil physical properties. What we do need to do is understand how these factors work (how does an environmental signal translate to physiological changes in the grapevine to result in changes in berries that impact on “the expression of terroir”/uniqueness in wine?), and to determine if and how we can use this knowledge to refine the expression of terroir (what levers can winegrowers pull?).

The research has two key projects. The first is a shorter-term sensory-focused project led by Dr Leigh Schmidtke at the National Wine and Grape Industry Centre. This benchmarking project will approach terroir from the perspectives of the wines rather than the vines. It’s based on the premise that the concept of terroir is only relevant if it makes a difference in the glass. The team will look for correlations between the sensory properties of a relatively large and diverse set of Australian Shiraz wines, their chemical profiles and the climatic regions from which the grapes were sourced.

The second, longer-term project will be led by Dr Cassandra Collins at the University of Adelaide using data from vineyard sites to determine marker compounds and chemical profiles for unique Australian Shiraz wines and to understand how vines respond to express terroir. The project will use data from these sites to determine marker compounds and chemical profiles for unique Australian Shiraz wines and to understand how vines respond to express terroir.

This investment in terroir research – some 4 per cent of the estimated $130m we will invest in R&D over the next six years – will deepen our understanding of our unique and irreplicable terroir.

The outcome 

The knowledge from this research will allow the wine community to produce Shiraz wines that express their unique terroir with greater confidence and through using the most appropriate viticultural and winemaking techniques. The information generated through the projects’ activities will also add credence to narratives about our unique Australian Shiraz wines.  

To this end, as part of the research we are engaging the top international sommeliers who we will be hosting as part of the World’s 50 Best Restaurants to add their expert and international perspective on a sub set of Australian Shiraz. This provides an excellent opportunity to collect data for the project while continuing to reset the environment in which the world thinks about Australian wines.  

This research will help create an environment of heightened recognition and demand for our wines, and in is in this environment in which wine brands will conduct their commercial negotiations. It will particularly assist the majority of our levy payers who have small and medium sized wineries where they produce regionally branded wines and trade off their terroirs. It is such wines that are underpinning the burgeoning interest of the global influencers (wine trade, media, sommeliers) in our key export markets.

As you know, Wine Australia engages with the global influencers to shape the broad perception of Australian wines and we facilitate market access to set the most optimal environment in which Australian wine brands can seek to sell their wines.

We firmly believe that our investment of $5.3 million over the next six years to deepen our understanding of our unique and irreplicable terroir and Australia Shiraz is well placed and will help prosecute the case for our wines receiving the recognition and acclaim they deserve.

TKR: It will indeed deepen understanding of terroir, but there is not one scrap of evidence it will increase prices across the board for Australian wine in the global market.

Exports booming

The big news of the week: wine exports are booming. For the calendar year 2016 they hit $2.22 billion, an impressive increase of 7 per cent.

Though the value increase was impressive, volume was up only 1 per cent. This in itself is good news, as we need to get more money for less wine.

To that end, the most important news was that the average value per litre exported grew by 6 per cent to $2.96 a litre. That’s the highest level since 2009.

It’s easier to understand if the value is split into wine shipped in bulk and shipped in bottle:

  • Bottled exports: average $5.48 a litre
  • Wine shipped in bulk: average $0.97 a litre

It’s also worth noting the volume split:

  • Bottled exports: 328.7 million litres (44 per cent)
  • Wine shipped in bulk: 413.15 million litres (55 per cent)
  • Other: 8.12 million litres (1 per cent)

For the largest producers – Treasury, Accolade, Australian Vintage, Casella, Pernod Ricard, Kingston Estate and Angove plus a few others ­– 97 cents a litre will be mean a profit, but not a large one. To obtain margin, producers need to make sure staff and production costs are tight. Tighter still must be the price paid for grapes, as the export report says the value per litre has remained below $1 for three years.

Wine Australia (WA) says the pressure on Australian bulk wine comes from “big European producers, particularly Spain. In the 12 months ended October 2016, Spain exported 1.3 billion litres of bulk wine at $0.58 per litre; to put this in context, Australia’s total production in 2015 was 1.2 billion litres of wine.”

It’s WA’s ambition to push Australian wine into higher average price brackets. It’s a fine ambition, fully supported by TKR. But should not more focus be on the 413.15 million litres – a staggering 55 per cent of Australian wine exports – that leave the country at an average price of 97 cents a litre?

Average bulk sector value per litre:

  • $0.50 and under: total $572,000, an average price of 41 cents
  • $0.50 to $1: total $206,881,000, an average price of 76 cents
  • $1 to $1.50: total $121,968,000, an average price of $1.14
  • $1.50 to $2: total $32,344,000, an average price of $1.73
  • $2 to $2.50: total $17,358,000, an average price of $2.20
  • $2.50 and above: total $21,121,000, an average price of $3.42

It’s hard to see how 41 cents can be profitable unless it’s bundled with higher priced wine to cut a deal.

The biggest sector – $0.50 to $1 – accounts for 66 per cent of total bulk volume shipped. If profit is tight at 97 cents it’s damn skinny at 76 cents. This is where we need greater division of the figures that WA presents: 50 to 100 cents should at the least be in 10-cent increments.

It seems to TKR that the greater proportion of the Australian wine industry is on a knife edge. To keep it from slicing an artery, producers need to keep the price of grapes down and this does not bode well for growers this 2017 season.

It also reinforces the argument (supported by TKR) that the grape harvest needs to be no more than 1.5 million tonnes, in our view 1.2 million tonnes.

Given time, that may be the situation Australian grape growers find themselves in. But how much financial strife will be involved is yet to be calculated.

A shortage of grapes will mean higher prices, but can producers then find markets for the wine at the prices that the large retailers demand? Revisit the quote on Spanish bulk wine above.

Wine Australia appears to be turning away from the struggling and throwing its support behind the upper end of the market.

It makes much of the exports at $10 and above:

“Wine exports priced at $10 per litre or more saw the strongest growth, up 19 per cent to a record $574 million. This reflects the increasing demand for premium Australian wines in most regions around the world.”

The complete sector list:

As can be seen, the $10 and above sectors are performing magnificently and we should be proud of that. But it is a broad fact, a statistic. Where is the wine coming from? The question is forked. Is it defined site, Geographical Indication (region) or brand?

A hint of region can be found in the table of bottled wine average price per litre:

2016 2015
South Eastern Australia 3.56 3.42 14 4.1%
Western Australia 6.31 5.90 41 7%
Victoria 6.33 6.96 66 (9%)
Langhorne Creek/McLaren Vale 6.53 6.01 52 8.6%
Limestone Coast 6.65 5.49 1.16 21%
South Australia 8.22 8.90 68 (7.6%)
Langhorne Creek 8.38 7.96 44 5.3%
Adelaide Hills 9.24 8.81 53 5%
Clare Valley 9.48 9.35 13 1.3%
Coonawarra 9.66 11.17 51 (13.6%)
Barossa 10.37 9.75 62 6.4%
McLaren Vale 10.86 10.97 13 (1%)
Margaret River 11.85 11.40 45 3.9%
Yarra Valley 12.56 11.27 1.29 11.4%
Barossa Valley 16.28 16.08 20 1.2%

Good to see the nefarious South East Australia has increased 14 cents a litre, but it still only makes $32.04 a case or $2.67 a 75cl bottle FOB. Deduct an estimated $12.04 for packaging etc and it’s down to $20 a case. Tight margins there.

Tying this in with terroir research, there is a greater need to phase out South East Australia (SEA) by offering the consumer a more defined region, such as Victoria or Riverland.

As an aside, it’s our opinion the vast reliance on SEA wines is a difficulty that CHAMP is facing in floating Accolade Wines. Though Accolade is making money, can CHAMP get as huge a return on its investment as it wants?

Can potential investors get a return on the investment that CHAMP is hoping they will make?

Returning to the above table, one can see the value in Margaret River over Western Australia; Yarra Valley over Victoria; and Barossa Valley over South Australia. Is this terroir-based or just regional recognition? It’s something Wine Australia’s $5.3 million investment in shiraz terroir should go some way to explaining.

Though South Australia has dropped in value, why is it almost $2 more than Victoria or WA? Is this the magic of terroir working or is it the several Penfolds and Wolf Blass wines, including Grange, that just use the South Australian GI?

The drop in value for Coonawarra wine looks large. We wonder what the explanation is behind it. It’s ironic that exports of cabernet sauvignon grew by 12 per cent to $284 million, as Coonawarra is still recognised as the leading cabernet region.

When it comes to the various markets, the WA report covers them in some depth, especially Asia, with a focus on China. WA says the Australian share of the Chinese wine market is now 24 per cent. This has been somewhat counteracted by the decline in exports to Hong Kong due to reduced tariffs as a result of the China-Australia Free Trade Agreement (ChAFTA).  Direct shipping to China is making the Hong Kong route redundant.

The Asian figures are very impressive. Including mainland China, value increased 19 per cent to $875 million and volume was up 25 per cent to 141 million litres. The average value declined by 4 per cent to $6.22 a litre.

Mainland China alone accounted for $520 million of wine exports. The increase was across all price sectors, apart from $2.50 and below. Bottled wine:

Per litre $2.49 & under $2.50-$4.99 $5-$7.49 $7.50-$9.99 $10-$19.99 $20-$49.99 $50-plus
‘000 $ 8497

-15%

145,644

+34%

80,896

+35%

40,162

+30%

80,184

+22%

69,996

+82%

64,576

+52%

The bulk sector showed

Per litre $0.50 & under $0.50-$1 $1-$1.50 $1.50-$2 $2-$2.50 $2.50 & above
‘000 $ 0

-100%

15,478

+165%

3256

-7%

1892

+383%

2562

+412%

5483

+135%

When it comes to the higher price sectors (bottled), one wonders how much Treasury Wine Estates is responsible for in China.

The latest figures from Kantar Worldpanel China, for the 12 weeks ending 2 December 2016, show consumer spending on fast-moving consumer goods (FMCG) grew 2.2 per cent compared to the same period the previous year. Modern trade increased by 0.5 per cent, while ecommerce grew by 50 per cent during the latest 12 weeks.

China’s leading supermarket group, RT-Mart, has about 400 supermarkets and 3000 convenience stores across China. Kantar believes the group is losing penetration at national level, but that this is mainly happening in provincial capital and prefecture level cities. In county level cities and counties, RT-Mart is still recruiting new shoppers. It has also managed to grow its shopper per trip spending, especially in higher tier cities, with the average spend per trip reaching 97.8 RMB ($18.82) in the latest 12 weeks. This compares to Wal-Mart’s 102.8 RMB average spend per trip.

1 thought on “Letter from Andreas Clark, Export report analysis”

  1. G’day Tony. Interesting dissection of numbers as always.

    Just in reference to “Direct shipping to China is making the Hong Kong route redundant.” I wonder who’s statement that was? As it has always been possible to hold wine under bond on the mainland there is no valid reason to go to the extra expense of shipping wine to China via Hong Kong…. unless… it has been going across the border at midnight… and I would be surprised if reputable Australian companies were playing that game.

    Rather I suggest that since HK tax came off, every man and his dog has become a wine importer and the pipeline is now well and truly full. I certainly wouldn’t want to be holding stock on consignment there.

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