James Halliday's Top 100 Wines of 2013

Dan Murphy's

Australian Wine Today: Heads or Tails?

Heads is the wine consumer’s perspective, and is unambiguously good. The quality of the wines being sold on the domestic market has never been better. This is especially so once the downwards pressure on prices has been factored in. A number of strands are in play here.

First is the quality of the 2010 to 2013 vintages. I hear you cry what about the cool and wet 2011 harvest? Well, it produced outstanding chardonnays from the cool climate regions of eastern Australia, excellent riesling, and Hunter Valley semillon. In one of nature’s quirks, Hunter shiraz is the best for many years, for the rain that often makes men out of boys in this region passed either to the west or east of the Hunter as it made its way south.

Western Australia had yet another trouble-free vintage, with both white and red wines excellent, and Tasmania also defeated the odds. Coming back to the east, 2010 and 2012 have already well and truly proved to be great vintages. The odd one is 2013, a bad pun perhaps, but looking certain to break the long series of even years producing the best wines (since 1980) in most of South Eastern Australia.

Odd, also because there was a record-breaking run of days over 30˚C in southern Victoria, yet the vintage gave rise to some great pinot noir, and excellent shiraz and cabernet across South Australia. The best explanation is that the temperatures were generally in the low to mid 30˚C range, and were not accompanied by desiccating wind – which might have led to a very different outcome.

Next, some very sophisticated grape sorting equipment is making its way onto the scene, some onboard mechanical harvesters, some (using similar technology) installed in wineries. Peristaltic pumps (so gentle they can pump live goldfish) are also proliferating.

As the rate of planting new vines has dramatically slowed, the average age of the classic varieties in the cool and temperate regions has increased, and will continue to do so until demand outstrips supply. That day will come, but when is anyone’s guess – in much the same way as the future exchange rate of the Australian dollar. Dry economic theory points to US 85 cents to the $A, with one of the major banks suggesting the middle of next year. If that were to happen, it would be a major game-breaker.

Tails

Which takes me into the other side of the coin, the tail. This looks at the state of play from the perspective of the wine producers, and – so far as domestic sales are concerned – it’s pretty grim. The one piece of good news is that between 2007 and 2012 inclusive global supply of wine has fallen short of global consumption. Stuart McNab, Chief Supply Officer of Global Wine Production of Treasury Wine Estates, presented a paper at the recent Savour Australia event citing statistics from the International Organization of Vine and Wine (OIV) to illustrate what has been a major break-out from excess supply between 1979 and 1992. Since 1993 demand has had a 1% compound annual growth rate, but with no comparable increase in supply.

First and foremost is the ever-increasing stranglehold of Woolworths (Dan Murphy) and Coles (Vintage Cellars) on the sale of wine, beer and spirits. So far as wine is concerned, their share of total retail sales (including imported wines) is estimated to be 76% retail (off trade). The fact that they are battling each other for a larger slice of the pie is of cold comfort to winemakers, even if the size of the pie is increasing.

The UK market, where the power of the supermarkets is even greater than it is in Australia, should frighten producers and consumers alike. Pretending that wine quality has not suffered as a consequence of the remorseless squeeze on margins to keep the same price for a given wine over a period of years in the face of cumulative inflation and of tax that rises every year is sheer nonsense.

The result has been a downwards spiral in quality of the major brands, and some of the largest producers have withdrawn a number of products from the UK market, or deliberately reduced the volume. It’s a toss-up to decide whether the medium to large producers suffer more from this situation than the small, quality-oriented makers. But it’s quite certain that a small brand can suffer major damage if sales targets are not met, leading to deep discounts, or a loss-leading promotion by the retail chain which results in the same outcome.

For the small winery a well-designed, up-to-date website becomes evermore important, ideally as an adjunct to an attractive, well located, cellar door. If the small winery also has a demand-driven export programme in place, it should be able to survive in what is a viciously and relentlessly competitive Australian market place. If it has a distributor who believes in the brand, and has good penetration of top class restaurants and independent, quality-oriented retailers, it should be profitable. Whether Wolf Blass is correct in saying that 70% of Australia’s 2800 plus wineries are losing money is doubtful, but if he is even half correct, there is only one solution: export.

Here all roads lead to Asia, and more specifically, China. The statistics seem overwhelming. For the 12 months to June 2013 China imported 4.9 million litres of Australian wine with an FOB tax-free value of $10 per litre or above; over the same period and same value, the UK imported 864,000 litres, and the US 1.54 million litres. Hong Kong imported an additional 1.86 million litres, Singapore and Malaysia over one million litres each, the only non-Asian destination Canada with 1.38 million litres.

Thus Asia is taking 58% of the category most likely to be profitable, compared to 9.7% for the US, and 5.4% to the UK. To make the China market even more attractive, the country has half a billion internet users; 350 million have mobile phones with internet access; 250 million are using the Chinese equivalent of twitter; and 194 million purchased something online in 2011. (All these figures come from wineintelligence.com) It comes as no surprise to find that Dean Person, National Australia Bank’s head of industry analysis, has pointed to the ‘huge potential’ of the premium end of the wine market in China. ‘As China’s middle class continues to grow, so should its demand for more premium products, including quality [wines] that can’t be produced en masse locally.’ If all this were not enough, Chinese imports from EU countries have decreased by 27.9% for this year compared to the same period last year, while imports from the New World, and specifically Chile, Australia and the US, have increased significantly.

So to say it’s a glittering prize is an understatement, but so is the need to be careful. The sheer speed of the rate of growth into a market that is newborn should sound a large alarm bell. It is quite certain tears will be shed, and financial blood will be spilt over the next few years. The few with a real understanding of the complexity of the market all say the same things: traps for the unwary abound; the loss of a given sum of money will have far greater impact on the Australian exporter than the Chinese importer; importer-distributor margins (50% to 70%) presently being sought are unsustainable; the knowledge of wine and food matching is scant, with Bordeaux seen as a normal match for Cantonese seafood; and counterfeiting is a major issue for well known brands.

The list goes on and on, but there is one over-arching truth learnt from the lessons of centuries – indeed millennia – of history. Where a trade relationship develops between two countries with a core product at the outset, other goods and products are swept along by the tide. If, as reported, 35,000 new Australian millionaires were created in the last financial year, the telephone book numbers of newly, and hugely, affluent, Chinese (and greater Asian) consumers will inevitably make these markets the world’s largest. Factor in physical proximity, minimal time change shifts, and Australia has to be a key beneficiary.

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