Australian Wine Industry

The Australian wine industry is one of the rapid grow industry in Australia as a result of both internal and external markets.

This industry experienced many technological chances, first, looking for cost competitiveness against substitute industries and nowadays, to be more competitive against the external producers, trying to introduce better wines to achieve better profits.1.1 Trends in number of wineriesFigure 1Source: Australian Wine & Brandy Cooperation, 2003.In Australia as shown in figure 1 number of wineries slightly increases form year to year. Currently there are 1625 wineries in comparison, by 2002 increase by 200 wineries. Therefore entry and exit to Australian wine industry market is open.

1.2 Number of wineries who own location for wine grape crush.From 1625 wineries only 21.5% own location for grape crush.

In 2002, 350 wineries owned 398 locations for wine grape crush. In comparison in 2001 306 wineries owned 351 locations. There is increase by 44 wineries, which own these locations as well as number of location increased by 47(ABS, 2003). Wineries which own locations for wine grape crush can decrease cost for producing wine, therefore winery become more competitive.

For more information on location for wine grape crush, see Appendix 1.1.3 ProductionFigure 2BEVERAGE WINE PRODUCTIONSource: ABS, 2003In year 2000-01 production increased to 1,174.1 million litres, which include domestic consumption and exports, up to 13.5% that was on the previous record volume of 1,034.

8 million litres in 2000-01. Production of fortified wine rose by 25.9% to 23.2 million litres, increasing its 1.8% share of total beverage wine production in 2000-01 to 2.

0% in 2001-02. Unfortified wine production accounted for 96.6% of the increase and up to 13.2% to 1,150.9 million litres. In addition, it is logical that the increase from wine production from 1991 to 2001 has significantly increased from 350 to 1,174.

1 million litres (ABS, 2003). Therefore, it can be said that investment to wine production has been important to the contribution of the economy from the last decade.1.4 Trends in wine pricesThe average price of wine fall by 0.2% in 2003 (ABS, 2003).

The average value of wine cleared for home consumption in July 2003 was $11.54 per liter, up from $8.16 per liter in July 2002. This shows that consumers in Australia and overseas are 'trading up' to quality alcohol consumption rather than quantity. This is reflected in declining sales of bulk or cask wines and an increase in sales of bottled semi-premium ($7 to $10) and premium ($10 to $15) wines (Australian wine on line, 2003).Investor should invest in winery which put emphasis to produce qualitative and bottle wine.

1.5 EmploymentThe employment rate within the wine industry can be shown in the table below.Table 1Source: Adapted from ABS, 2003Employees cover 90.6% of all persons employed in wine manufacturing, while only 62.7% of employment within the grape-growing industry, across all industries the category comprise 82.2%.

At the time of the Census, the proportion of persons working full-time in the grape-growing (71.2%) and wine manufacturing (78.0%) industries was higher than for all industries (64.6%).1.6 InvestmentInvestment in Wine Industry increases every year.

Money is being invested in vineyard area, wine grape crush and production as can be seen in table below:Australian Wine Industry results during 1998-2003 years.Table 2Source: ABS, 2003.Investment in wine bearing areas, wine grape crush increases slightly. As number of wineries grows, investment in wineries increases as well. Therefore finances allocated in wine industry increases.

For more information on investment return and inventory, see appendix 3.For more information about other factors that influence Australian wine industry, such as inflation and government investment in research and development for Australian wine industry, see appendix 4.2. Market for Australian industry.2.

1 SupplyAustralian Wine industry has gross over-production. Smaller wineries should either shut down or consolidated by larger wineries. Increased production of wine has not been matched by an increase in consumption. In year 2002 Australian wines industry earned profit for 2.288 million Australian dollars. This is 30 % more then previous year.

In domestic market, profit rise as well (Australian Wine on Line, 2002).But current situation is that the industry is producing about 120 million cases a year, of which 40 million are being consumed locally, 40 million are exported, and 40 million are still looking for a home, which has led to massive discounting (ABC News on line, 2003).2.1.

1 TechnologyMechanical harvester was first brought in to Australia to cope with the shortages of casual labor and approximately 80% of Australia wine grape crop is now mechanically harvest. It is also estimated that the mechanical harvesting has reduced the overall cost of harvesting grape by about $1500 per hectare (Productivity Commission, 2003).2.1.2 Input costsThe following chart shows the percentage of the cost structure of input cost in winemaking in Australia.

Figure 3Source: Productivity Commission, 2003Chart Figure 3 states that cost of grapes is very high of winemaking cost structure, accounting for 30.7%. Packaging cost, labor costs and Gross operating surplus are also factors which influence amount of wine supply. Consequently, many wine makers try to find solutions to deals with high cost of grapes by owing their vineyards or having contractual agreement with growers or completing on the open market for the crops of independent grape grower. It is estimated that about 21% of grape used for wine production are produced from winery owned vineyards, while 79% would purchase from independent growers (ABS, 2003).

2.2 DemandAustralian domestic wine demand is expected to be modest, with grow around of 2 % per annum. On the other hand demand for Australian wines overseas will increase. Total wine demand for main three export countries -England, USA and Canada continue to grow and Australia's position in these markets remains strong.

International market will remain highly competitive due to growing world wine production (AWBC, 2002).There are three main factors which determine demand of Australian wine and they are following:2.2.1 Price of related goods such as beer and spiritsThe following figure illustrates the relative price of wine to beer and spirits.

Figure 4 Relative Price of wine to beer and spiritsSource: Adopted from Hui-Shung, Chang, Griffith. G., ; Bettington, N., 2002.Figure 4 presents the prices of wine relative to beer (W/B price) and to spirits (W/S price). The wine price, in relative terms, dropped steadily; the price of wine in relation to beer and to spirits is bigger than one in the 1979s and 1980s but is less than one in the 1990s.

These outcomes represent the price of wine relative to beer and spirits has declined as well as wine price has become cheaper than both beer and spirits. As a result, population switched toward to more consume wine which is substitute to beer.2.2.2 Consumer preferencesWine consumer trend is changing from cheaper cask wine towards more expensive and better quality bottled wine. Also, the health effects of red wine changed the quantity of wine consumed as shown in following figure.

Figure 5 Apparent per capita consumption of wineSource: Source: Hui-Shung, Chang, Griffith. G., ; Bettington, N., 2002.As can be seen in Figure 2, per capita beer consumed has decreased markedly from 1975 to1998.

By comparison, the consumption of wine per capita has increased significantly. Australian wine consumption was constant for a few years before it began to increase again in 1996. This may due to the positive health effects of wine.