US wine exports seeking same markets as Australia

US exports vs Australian

The US wine export figures for 2016 were released last week. Like Australia’s exports, they are on the increase. Total value was US$1.62 billion ($2.11 billion), not that far behind Australian exports for the same period, which totalled $2.22 billion.

US volume was 412.7 million litres (90 per cent from California). Australia dispatched 750 million litres overseas. One can see the discrepancy: Australia shipped an extra 337.3 million litres for not much more money.

The top 10 export markets for California wines are shown in the following table. US dollars have been converted into Australian dollars for ease of comparison. We have also separated the UK from the EU, hence there are 11 entries.

Market US exports in A$millions Australian exports in A$millions
EU’s 28 member countries (including UK) $815.02 $551.48
UK $439.98 $355.10
Canada $562.04 $192.74
Hong Kong $129.23 $109.92
Japan $113.45 $45.64
China $106.93 $519.99
Mexico $31.32 $1.05
South Korea $30.01 $13.8
Switzerland $24.79 $6.87
Singapore $18.27 $69.16
Philippines $16.96 $7.15

Excluding the UK, and lacking more detailed information from the Wine Institute, one wonders what markets in the EU are strong enough for American wines to total $375.04 million where Australia can only manage $196.38 million. We asked Mark Rowley, senior analyst at Wine Australia, if he had any idea how or why the US was doing so much better in the EU than Australia. He sent the following paper, for which we thank Mark and Wine Australia deeply:

Australian and United States export performance in continental Europe

Mark Rowley, February 2017

Key points

  • Both countries have recorded declining volumes

o   Spain’s large 2013 vintage is likely a major cause

  • The US’s average value has increased whereas Australia’s has remained flat

o   An appreciating USD is making US wine more expensive in Europe

o   US wineries can pass on these costs due to a bouyant US market and low export focus

o   There is a global premiumisation trend occuring and Australia is more focused on China and Asia in general

Australian and United States’ export performance into Europe have mimicked each other over the past eight years. In 2011, exports peaked (in the short-term), and then rapidly declined during 2012 to 2014. Much of the decline was recorded in 2013, when Spain delivered a record vintage (up 40% on the year prior). This extra wine that Spain produced was roughly equivalent to what Australia produces in any given year.

Figure 1: Wine imports of wine into continental Europe (volume)

However, there is a strong differential in trends when these exports are reported in US dollars. Where Australia once easily exceeded the US, the reverse has been true for the past two years. The dynamics between supply, demand and exchange rates makes for a complicated analysis.

Figure 2: Wine imports of wine into continental Europe (value)

Figure 3 presents the average price of Australian wine versus United States wine by bulk and bottled containers. For much of the eight years, the two countries’ average price matched each other for both container types. However, there has been a strong divergence in the past three years. This period has been a period of strong USD appreciation against world currencies (see black line). There are a two key points here;

  • In AUD, the average value of Australian bottled wine has appreciated consistently for the past seven years (bulk has bounced from A$1.10 to A$1.28 per litre)

o   Therefore, the depreciation in the average value of Australian wine reported in USD is a function of the appreciating USD

  • European consumers of US wine have faced increasing prices attributable to dual effect of increasing average value in USD and also a depreciating Euro

The real question is, why has the US average price increased?

The major reason would be United States’ position of strength at this moment in time. United States wineries have the luxury of having their domestic market as the world’s largest wine market. The US market has been very bouyant with growing consumption and a patriotic consumer base. They also export a very low proportion of their production (less than 20% compared to Australia at 63%). The strong domestic market along with their low export focus gives United States strong bargaining power.

The United States has increased the average value of both bulk and bottled wine. However, this has came at the expense of volume (see figure 1). As prices increase, more price-sensitive lower-priced wine segments are impacted to a higher degree. Therefore, there is a feedback loop which is triggered by exchange rate appreciation where cheaper wine exits the mix which in turn mathematically lifts the average value of what is left (even though the price of each SKU does not necessarily increase). 

 

The third reason is the market of focus. The ‘Premiumisation’ trend is occurring globally. Australian wineries have had great success into China and Asia more broadly, whereas the United States growth into China has been much more tempered. Proximity to these markets cannot be ignored. San Francisco to Berlin is a 13 hour flight compared to 24 from Sydney, whereas Australia has the advantage into China.

Canada’s proximity makes it an easy market for the US to deal with. There was this comment from Tom LaFaille, Wine Institute vice president and international trade counsel:

“We applaud US government efforts to eliminate these [trade] barriers and strengthen our competitiveness globally, including the World Trade Organisation (WTO) challenge against Canada which seeks to ensure that British Columbia grocery store consumers can choose from the vast array of the world’s great wines.”

Should the WTO be successful, this would also benefit Australia.

The UK difference in value is due to the majority of US wine being shipped in bottle whereas a lot of Australian wine is shipped in bulk. The difference in the figures above is made up of wine shipped in cask.

  • Australian bottled shipments to UK, 2016 value: $171.14 million
  • Australian wine shipped in bulk to UK, 2016 value: $183.85 million

Nonetheless, the US poses a threat to Australia, as they are after the same market sector. Putting aside the higher value wines (for which both countries boast about increases), the real battle is between the big brands. According to IRI figures, for the 52 weeks to 16 July 2016, the UK off-trade top 10 brands were:

Brand Total value Average bottle price
Hardy’s £315.7 million £5.18
Blossom Hill £207.9 million £4.93
Echo Falls £191.4 million £4.97
Casillero del Diablo £120.2 million £6.13
McGuigan £119.9 million £5.15
Barefoot £107.3 million £5.79
Gallo £98.6 million £5.48
Isla Negra £90.8 million £5.04
Jacob’s Creek £88 million £6.01
Yellow Tail £85.8 million £5.96

The figures are eight months old and have probably changed by now. At the time, Hardy’s and Blossom Hill were both showing declines on 2015. Hardy’s and Echo Falls (increasing) are both Accolade brands, but Blossom Hill is now part of the Treasury Wine Estates (TWE) portfolio. Again, putting aside both companies’ rhetoric about increasing sales of higher value top-end wines, TWE will want to take market share from Accolade. It will also be looking to increase its average retail price and keep at bay the brands below Blossom Hill on the table.

Hong Kong is interesting. The US is $20 million ahead but the average American price is $10.30 a litre while Australia’s is $13.63. Less is more?

The Americans sell double Australia’s value in Japan. We appear to have stagnated there, while America is down almost 20 per cent. It would be good if we could take advantage of their decline.

The Americans must be spitting wood chips regarding China. Why has Australia become the second largest wine suppler after France? Why not the US? Is it, as Rowley says, about Australia’s proximity? The US did increase volume in 2016 (up 11.11 per cent), and value (up 46.55 per cent). Part of the reason for TWE CEO Michael Clarke spending more time in the US is to get more of TWE’s American portfolio on the export road to China, and Asia in general.

Like Canada, Mexico shares a border with the US. It’s not surprising that wine exports from the US top $30 million, whereas, in comparison, Australia is a minnow at just over $1 million. An opportunity for Australia may lie in the political maelstrom that President Trump is generating with his clampdown on illegal immigrants and the proposed wall. Possibly there is opportunity to be grasped. The question being: can Australia find the path. Another point being: it’s going to be hard work, as China appears the easier route, so why bother?

The California wine industry is trying to keep good relations with Mexican importers and retailers. Forty producers visited Mexico this month to present seminars and meet key people.

South Korea is on the rise for Australia, with 2016 figures showing a 19 per cent increase in value, coming close to the 2007 record of $14.4 million. There is still some way to go to catch the US, but we are advancing, and the US is showing a slight decline in both volume and value.

Switzerland is puzzling. How come the Americans have such a lead on Australia? As yet, TKR has been unable to find any solid reason. Perhaps there are more American financial houses with an offshoot in Switzerland.

Singapore will be a disappointment for the Americans, with exports down 9 per cent in value and almost 20 per cent in volume. In contrast, Australian exports to Singapore rose in value by 16 per cent to $69 million and volume by 5 per cent to 5 million litres. One would think this market will be in Mr Clarke’s sights for top-end Beringer wines.

The Americans have had a long involvement in the Philippines so it’s logical their wine exports beat Australia’s. This means opportunity, but it’s a tough market.

The cover-all tag “New World” is the collective term, but TKR thinks Australia is breaking out of the collective and starting to establish an individual identity.

A Virgin Christmas

An article in Off Licence News by Martin Green on 17 February reported on Virgin Wines’ UK Christmas trading. Green says Virgin grew sales 15.4 per cent in the nine weeks to 30 December.

Well done to Virgin, but the interesting part of the article was that Virgin said the main reason for the increase was its appeal to millennials.

There is a quote from chief executive Jay Wright:

“A lot of people think the wine trade is old-fashioned, stuck in its ways, snobby and out of touch. We are not like that and we can capitalise.”

What TKR finds interesting is the obsession with the wine trade being old-fashioned, snobby and out of touch. We question that in 2017. There was a time when it was true, but that was when TK was entering the English wine trade in the early 1970s.

Since then, the trade/industry has changed considerably. We think it is very much in touch. The only old-fashioned aspect is the age of some merchants and producers, which is used to demonstrate stability. With so much wine available from all parts of the world, being in touch is a must. It’s not something that can be ignored.

But Wright’s statement persists, and is used time and again. It’s TKR’s opinion that most of the snobbery comes from those who buy wine but are not involved in the industry.

Virgin wants to boost its hipster and cool status, and its website is full of photos of young people having fun while drinking wine, not old blokes with nose in glass and deep contemplation creasing their brows.

Virgin has also implemented more practical changes. It has introduced WineBank, into which consumers can deposit money. Cleverly, Virgin says: “For every £5 you pay into your account, we give you £1 more.”

TKR isn’t sure if that is an extra £1 or a 20 per cent deduction on the next order. In the Australian wine section Virgin stocks 107 wines in the following price brackets:

  • Under £7 [$11.30] (1)
  • £7 to £9 (15)
  • £9 to £11 (17)
  • £11 to £15 (43)
  • Over £15 (31)

Many of the wines appear to be house brands or exclusive to Virgin, with a few better-known names interspaced. It’s no matter, as Virgin is appealing to a section of the population that many wine retailers find difficult to engage.

Also for Wine Bank members the £8 per case delivery charge has been scrapped. This has appeal, as according to Wright, WineBank customers have increased from 60,000 to 75,000 in six months.

Virgin also operates in Australia, where the prices are about the same. None are what could be described as bargain basement:

  • Wines $10-$15 (6)
  • Wines $15-$20 (107)
  • Wines $20-$30 (81)
  • Wines over $30 (11)

Virgin Wine US carries just over 20 Australian wines and the prices are about the same, with a focus on own brand. All in all, it’s a neat set-up. As is Vinomofo. If it’s this form of retail that attracts younger consumers it’s up to the industry to understand it better.

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