Winemakers are facing a perfect storm of adversity, writes Eli Greenblat.
The nation's biggest and best-known family-owned wine companies have posted flat revenue and shrinking earnings for the past financial year, as the sector faces a maelstrom of external shocks, led by the high dollar, which has cut exports, and a grape glut and competition from new world producers.
The only bright spot on the horizon is the growing wine boom in China, although the market remains too small and immature to compensate for lost sales in developed markets such as Europe.
The revenue of the 150-year old Tahbilk Wines, in the Nagambie Lakes region of central Victoria, where it directs production of 100,000 cases a year, fell to $13.675 million for 2010-11, from $13.887 million previously, as its net profit dropped to $235,137 from $341,804.
"As far as our industry is concerned, we are still in the eye of a perfect storm," Tahbilk's chief executive, Alister Purbrick, said.
"I started work in the Coonawarra. My first vintage was 1976. This is absolutely the hardest time that you could ever imagine the industry could be in. There is nothing else that could go wrong in our industry that's not [already] wrong at the moment.
"It's still impossible to achieve price increases and, of course, your cost base continues to increase, so your margin is impacted on a continuing basis. And the retail chains and banner groups are, if anything, asking for even greater promotional contributions than they were 12 months ago and, of course, that erodes margins as well.
"The Australian dollar is still strong in all our main export markets, so we have margin erosion there as well."
The impact of the high dollar for winemakers, not just those that are privately owned, is that it makes Australian wine more expensive for overseas drinkers – allowing competitors, such as New Zealand and the new world producers of Chile and Argentina, to steal Australia's markets on price.
The double hit is that imported wine is also cheaper in Australia, robbing these same Australian companies of domestic sales as well.
The heads of family-owned wine companies said Australian wine was especially being undercut in Europe, Britain and North America by wines from South America.
"At entry-level [prices], we have lost the fight to Chile and Argentina and I don't think it will ever come back," said Peter Toohey, the managing director of Beelgara Estate. Beelgara is Australia's 20th biggest wine group, with a history that stretches back to 1930.
"UK supermarkets, like Tesco etc, [are] commodity-driven. There is also a tax-free kick in South America that we don't have – but also their wines are very good, they are clean, the packaging is very good and their input costs are just at a level we can't replicate," Mr Toohey said.
Beelgara recorded a fall in revenue from $18.2 million to $16.6 million in 2010-11, as profit dropped from $388,164 to $172,179 for the latest period. Pre-tax profit rose from $641,512 in 2010 to $649,467 in financial 2011.
Mr Toohey said Beelgara had sought to diversify its exposure away from troubled markets overseas by pulling out of key European and North American regions to focus on Australian cafes, restaurants and bars, also known as "on premise".
"We are very, very strong in the on-premise market, and that isn't part of potential duopoly of Coles and Woolworths, and that's not a criticism, it's an honest observation. We are very strong in a market where no multinational will ever have a massive hold," he said.
Beelgara had also made a successful push into China at both premium price point and entry level.
The currency remains the single biggest problem for wine companies, and Mr Purbrick believes weaker overseas currencies have helped imported wines go from a 5 per cent market share three or four years ago to more than 20 per cent of the Australian market.
"The imported wines are certainly squeezing local product off retail shelves," he said.
Ross Brown, who until this year led Victorian wine group Brown Brothers for a decade, said cheaper wine from Chile and Argentina not only posed a threat to Australian winemakers but cheaper wine from within Europe was also finding its way into the British market.
"'When the exchange rate changed by 40 per cent, that's a dramatic change to be able to compete with and that's beyond our control. The only thing we have in our control is to leverage our premium price points and reposition the quality and image of Australian wine."
Brown Brothers reported flat revenue in 2010-11 – it had targeted growth of around 8 per cent – and its profit fell sharply after booking a writedown on losses linked to a poor vintage.
The sales and marketing general manager at d'Arenberg, Philip Jeffries, said a contributing factor to its lower earnings in 2010-11 was the currency, with up to 70 per cent of earnings for the 100-year-old wine group flowing from exports.
D'Arenberg had flat sales of $25.06 million in 2010-11 as profit slid to $435,000 from $1.65 million.
Mr Jeffries said stronger sales in China and Hong Kong had helped ease the earnings pain.
"It [Asia] is a positive thing at the moment. It doesn't replace more mature markets of the UK and those areas, but it can help balance a little bit in difficult times," he said.
The chief executive of Taylors Wines, Mitchell Taylor, said his company had increased revenue to $48.82 million in 2010-11 from $44.33 million as it focused on quality wine sold at higher prices.
"The sweet spot we found in the market was for quality premium table wines above $15 to the $30 segment. There is good growth in that segment, domestic growth," he said.
Taylors Wines lost $3.19 million in 2010-11 against a profit of $1.08 million, the fall triggered by accounting changes and a $4 million writeoff from a poor vintage.