Group 10

Section 3: Case Summary

The Australian Wine Industry

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NAMES OF PARTICIPATING MEMBERS

Amann, George Howard IV

Appleberry, Daine Christophe

Armbruster, David Henri Jr

Bowers, Lauren N

Brito, Roger Adolfo

Fairchild, Lee Michael

Fontestad, Jose V

Frierson, John Bolinger Jr

Hufft, Gantt Matthew

Mabray, John Trimble Jr

Mathurin, Dominique Ronald

Thompson, Erica Alexandra

Weckwerth, Timothy James Jr

TABLE OF CONTENTS

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Introduction……………………………………………………….4

Goals……………………………………………………………...4

Constraints………………………………………………………..5

Barriers to Entry…………………………………………………..5

Threat of Substitutes……………………………………………...6

Power of Buyers………………………………………………….8

Power of Suppliers………………………………………………..8

Rivalry Among Existing Competitors…………………………….9

Blue Ocean Strategy……………………………………………...10

Problems………………………………………………………….12

Central Problem…………………………………………………..13

Alternative Solutions……………………………………………..14

Best Alternative…………………………………………………..16

Implementation…………………………………………………...16

Executive Summary……………………………………………….18

Bibliography……………………………………………………….19

INTRODUCTION

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As viticulture, or the cultivation of grapes, spread throughout the Mediterranean region

under the Roman Empire popularity of wine drinking soared. As a result of wine’s newfound

popularity wine drinking soon became the drink of choice throughout Europe. During the middle

ages, competition between nobility and the quality of their wine a niche market was born for

premium wines.

In most societies, wine can be found as a component of celebration or religious

ceremony, but in today’s world wine has been put into a new arena-a battlefield of tradition and

innovation, where old world conservatives clash with new world revolutionaries. The difficulty

of producers to achieve “branding” and to establish themselves in a modern, global market has

caused the two conflicting worlds to adjust their practices. Wine-makers and new industry

players alike find themselves challenged.

In the following paper group ten collectively presents the research and case analysis of

the article, “Global Wine War 2009: New World versus Old”, written by Christopher Bartlett.

This paper will present the goals and constraints of the new world Australian wine industry

breaking into the United States, along with our competitive analysis. We will show you the

hurdles that this new world industry faces in a competitive environment and outline their

strengths and weaknesses. After identifying the central problems, we will present alternative

strategies that the Australian industry can use and the best alternative to take. Finally, we will

present a way to implement the best alternative decision.

GOALS

Since Australia’s wine market is so new compared to the old world’s market (France and

Italy), the major goal of Australia’s new world market was to first establish itself, and then work

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to be more recognized world-wide through distinguished brands. To complete this goal, Australia

would need to start a campaign that would focus the entire industry in one unified direction,

instead of having the wine industry spread out like in the old world, with no unified idea, and

thousands of different wine makers.

This major goal of gaining market share in the world’s wine market brought upon

Australia’s first major action to become more recognizable. In 1996, a campaign began called

“Strategy 2025,” in which Australian wine makers would make their product “the world’s most

influential and profitable supplier of branded wines by 2025” (Bartlett, 2009). Realizing that the

wine market had been stuck on old world ways of production and style, Australia would need to

set itself apart from the thousands of other wine producers in the world. By creating a brand

recognized worldwide, Australian wine makers would create a blue ocean strategy for wine

making.

Before Australia had begun this unified system of wine making, large brands of quality

wine that was not to expensive were not very common. Australia’s idea of a unified brand

quickly flourished, and the goals of “Strategy 2025,” which was suppose to take thirty years to

complete, have now been nearly completed in only ten years.

CONSTRAINTS

As Australia began trying to break into the wine industry, they were faced with many

constraints. Despite having clearly stated goals with their “Strategy 2025”, this would prove to

be a tough task. Australia’s climate significantly limited them; the hot and dry climate was not

suitable for growing premium grapes. Many farmers were reluctant to take their lands out of

current production of other crops and began growing grapes. Wine industry promoters were

faced with the hurdle of convincing farmers that grapes could be profitable.

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Secondly, and perhaps the biggest obstacle that promoters faced was the heritage of the

former British colony. The hot and dry climate coupled with being steeped in British traditions,

made beer the drink of choice for most Australians. Promoters of the new industry were faced

with the task of convincing not only farmers, but a culture steeped in its love for beer, to make a

wholesale switch to wine. A drink they felt could become a hugely profitable business for the

country.

With most of Australia’s exports being cheap bulk wines, this made the industry

incredibly dependent on market conditions at the bottom end of the market. This is not a good

thing when price competition in the wine industry is very fierce. With other countries catching

on to the “cheap and cheerful” (Bartlett, 2009) wine trend, they were finding ways to lower the

cost of production and undercutting the price of Australian wine. Other New World industries,

like Argentina and Chile, were able to produce at lower costs because of cheap land and labor.

Also, French wines were part of the problem. The wine industry in the South of France is badly

fragmented, with tiny family vineyards that do not count the cost of inherited capital or family

labor so they are able to undercut Australian wines. Australia’s competitive position in the U.S.

market was being seriously challenged.

BARRIERS TO ENTRY

A barrier to the entry of Australia’s wine markets are the tariffs placed on the imports of

Australian wine to other countries. Some of the old world countries would place substantial

taxes on all imports of foreign wine. This increased the total cost for these smaller producers

leaving some of them with the inability to sell their products overseas.

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A second barrier of entry was the costs associated with the mass production of wine.

Australia’s wine market was new to the market, so they had to compete initially with the old

market wine suppliers for costs associated with the production of wine. Things like fertilizer,

pesticides, and equipment for wine production had to be paid for with very little discounts.

While there were many costs associated with the products needed to produce wine, there was

also the cost of land for this production. Favorable wine making land is limited in Australia

because of the climate conditions of the country. Another cost that the wine makers of Australia

began to find was that of their inexperience curve. Costs to produce the product were initially

very steep due to the producers not having ever worked in the industry before.

The U.S. wine market has been one of the most difficult markets to crack into because of

the distance from most producing countries, the state to state restrictions and its complex three-

tier distribution system; this forced every sale to go through state-licensed wholesalers. The

wholesalers involved an extra cost and they also exercised great power. In 2005 the Supreme

Court ruled in favor of allowing interstate wine shipments. This triggered several state and

federal regulations that became huge challenges in the U.S. distribution system. This was the

beginning of the largest entry barrier for wine imports in the U.S.

THREAT OF SUBSTITUTES

The threat of substitutes can be easily be located when examining the consumption of

wine in Australia. While production of wine has been very successful, the consumption in the

country has been rather unsuccessful in comparison. This is due to the high level of beer

consumption of the country.

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Australia’s average consumption of wine in a year for a single individual is 22.5 liters.

This number is much lower than the 106 liters consumed of beer per year.

(http://www.nationmaster.com) Another problem faced by producers is that there is such a

variety of wine available to the public at any given time. It may be hard for a consumer to

choose the Australian wine maker’s product over the more expensive brand from France.

POWER OF BUYERS

A challenge facing the producers in Australia is the power that some larger level

consumers have. A company such as Walmart, who is a major buyer of [yellowtail] (Australia’s

most recognizable wine company), can demand a decrease in the prices it will be paying for each

purchase due to the enormous orders Walmart makes each day.

Situations arise where the products being produced are from smaller scale wine

producers. Sometimes in this situation, the small producer only has one consumer who buys

their entire product. If the consumer demands either a smaller price, or they will not purchase

the product, there is nothing these smaller producers can do other than find a new consumer who

may ask for an even bigger discount in price than the initial consumer.

POWER OF SUPPLIERS

The conditions that make a buyer to powerful are the same as conditions that leave

suppliers with to much power. (Porter) However, issues like buyers holding so much power that

they can demand a set lower price are not prevalent in the supply of wine. For a supplier to have

to much power, there needs to be very few companies in the industry. This is not applicable to

the wine industry due to the vast amount of wine producers worldwide. In fact, the suppliers

currently have very little power because of the market saturation in the wine industry due to over

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production. Also, compared to the other alcohol products sold, wine consumption is on the

lower end of the consumption spectrum.

RIVALRY AMONG EXISTING COMPETITORS

While Australian wine companies first entered and gained a share of the world market,

they found it much easier than what was expected. A new generation of wine drinkers had arose

in the market and the tastes of the market had changed. Australian wine makers quickly realized

this change in tastes and took advantage, capitalizing on old world wine makers being lost in all

the change of the market. The wine makers of Australia had begun using new techniques to

produce mass amounts of wine available throughout the year instead of the old aged barrel

techniques of the old world wine makers.

Australian wine makers were attacked with claims from old world makers saying that the

quality of these new industries was far worse than the old world. Since the older wine makers

were more established and well known to the consumer, Australia’s wine industry had a hard

time convincing consumers that their products were made with just as much quality and care that

the old world makers used.

Another issue facing the wine industry in Australia was the competitive prices other

countries began to implement after seeing that Australia was producing quality wines at prices

ten times lower than what old world producers had been selling at. Once consumers realize that

this wine being produced in Australia had a level of quality equal to the old world producers for

a much lower price, consumers began demanding these lower prices all over the market. This

decrease in price by Australian wine producers left a lower level of profit for all other producers

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in the market. With this low level of profit for the other producers in the wine market, the

industry has begun to slow in growth.

BLUE OCEAN STRATEGY

Australia’s breakthrough in the market did not happen overnight. Many events took

place, which enabled them to creatively market and organize a new face for the wine industry.

Traditional producers, such as the French, followed certain production principles which were

established under the Appellation d” Origin Controllee (AOC) in 1935. These laws defined

regional boundaries and set strict standards for vineyards. Italy had a similar system, named

Denominazione di Origne Controllate (DOC). These contained established practices, which

needed to be followed in the wine industry.

New World countries such as the U.S., Australia, Chile and Argentina started to set up

wine vineyards in the 18th century. These countries decided to use a blue ocean strategy. They

broke many traditions of wine production and did things that were against the AOC regulations.

The innovation brought by the New World has changed the wine industry and has become a

wake-up call for traditional wine makers. The Judgment of Paris, which consisted of the French

and United States wine competing against each other, gave great encouragement to the New

World countries. The American wines where top rated and this gave them the confidence of

pursuing their blue ocean strategy while entering the market. They became the leaders into a new

strategy of producing, marketing, and selling wine, which many countries followed suite in,

especially Australia.

Australia started experimenting with controlled drip irrigation, which allowed them to

expand under marginal land and reducing vintage variability. Irrigation was not permitted by

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AOC regulations, which the French strictly followed in the wine production. Several New World

producers also developed processes that allowed fermentation and aging to occur in large tanks

instead of the tradition oak barrels. This was another practice, which was condemned by Old

World countries. Most of the new world practices were criticized by the Old World because they

were thought to be “removing the poetry of wine.” Australian producers developed the “wine-in-

a-box” package. This reduced shipping costs and also was more convenient for consumers to

store in their refrigerators. Australians also replaced the cork stoppers with screw caps. One of

the main purposes was based on economic, but also on the fact that most of the delicate white

wines where susceptible to spoiling if corks were deficient. 

[yellowtail] entered the U.S. market and was very successful. The strategy canvas for the

U.S. wine industry shows that price, above the line marketing, aging quality, vineyard prestige

and legacy, wine complexity, and wine range were all important factors for entering the industry.

[yellowtail] was able to enter and compete successfully by lowering price, marketing to the

young-social drinking crowd and not making their wine to complex. Although, they didn’t have

legacy and vineyard prestige along with aging quality, this helped them create their Blue Ocean

Strategy by not making wine choice between competitors to difficult. The easy labeling and fun

colors made [yellowtail] a prime choice for buyers who didn’t understand all the different brands

and types.

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PROBLEMS

Australia faced many problems as they began to try and gain a share of the market.

Higher land prices contributed to the problem of low cost production. There was also the

problem of global oversupply which was becoming worse as signs of saturation appeared in

several major export markets. Australia’s wine export value was growing at less than half the

rate of volume sales to its largest export market, the UK. The oversupply problem caused New

World industries to aggressively lower prices, which in turn smeared their image.

Australian wine was also facing image and price problems in the U.S. market. The

constraint of overproduction since 2000 led Australian producers to aggressively reduce prices in

all of its export markets. Although, this led to a rise in export sales, it established an image of

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Australian wines being “cheap and cheerful” (Bartlett, 2009). Weather caused another constraint

for the Australian wine industry. Droughts led to cost increases for water at the same time that

global energy prices were high, and the cheerful image that had been created became

problematic when these factors caused a major increase in production costs. Australian producers

realized that regardless of their greater efficiency, other New World industries, like Argentina

and Chile, were producing at lower costs and Australia’s position in the U.S. market was under

attack.

CENTRAL PROBLEM

Along with Australia’s goals and accomplishments, came many hardships and

constraints. As quickly as Australia tasted success and gained market share, they lost it.

Oversupply and under consumption soon became Australia’s central problem. Australia

had gained market share and as they did they began producing more and more wine. Australia

had flooded the market; with this influx of wine Australia’s market share soon plummeted and

they began drastically reducing prices in attempt to gain back some of their lost market share. In

this attempt to gain back their lost share, Australia had effectively made their wine seem cheap.

With this new cheap image, many loyal consumers stopped purchasing Australian wine. As

people started drinking less wine, Australia’s “cheap” image made it harder for them to compete

with brands that were being consumed. Also, other new world industries such as Argentina and

Chile, were producing wine at a lower cost than Australia allowing them to compete better in the

U.S. market. Many wine consumers soon began to think of Australian wine as an inferior

product.

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ALTERNATIVE SOLUTIONS

There are many alternative solutions to Australia’s critical problems of overproduction

and under consumption. One alternative is for the government of Australia to use subsidies and

bailouts that would encourage wine makers to shift production to other crops and in turn slow

down production. This slow down in production would decrease the world supply of Australian

wine. As wine becomes less readily available we could see this balloon of oversupply that is

plaguing the Australian wine industry start to deflate, and over time possibly disappear, allowing

Australia to compete with brands from other countries on a more even playing field than that of

the current situation.

A second alternative is that Australian wine makers could get rid of vines and open their

land up to alternative agricultural products. As recently as this Christmas, Constellation Wines,

an Australian wine producer, got rid of all of its grower contracts in the Murray Valley portion of

Australia. This reduced the grape intake from the inner region of Australia, the area where most

of the cheaper Australian wines come from, by 70,000 metric tons (Porter). Now while this

seems like a lot of vines to get rid of, it is nowhere near enough for Australia to overcome their

problem of oversupply. The country needs to cut out at least 300,000 metric tons of fruit in order

to overcome this problem (Porter).

A third alternative for Australia is to diversify their brands that are exported to the United

States. According to James Gosper, Wine Australia’s director of North America, “The Australian

wine industry is far better suited for long-term growth by promoting higher-value wines, which

better support our cost of production,” he continues, “We need to get our diversity and

regionality story out there” (Kesmodel). What Mr. Gosper is referring to is changing the habit of

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Americans who lump all Australian wines together into the same category. The Australian wine

maker wants their wines to be thought of in the same way as those from Old World wine

producers, such as France. In France, wines are referred to by the different wine making regions

of France, where Australian wines are bunched together into one reference.

To combat this common notion in the U.S. wine market, Australian wine makers are

sponsoring music concerts in New York, October’s Vancouver International Film Festival and

the Chicago Jazz Festival as well as hosting seminars in 8 cities throughout the U.S. to teach

American wine professionals the ins and out of Australian wines. The early success of the

Australian wine business helped itself dig this hole of mediocrity it currently lives in. With the

success of such brands as [yellowtail] and Lindemans, many Americans have written off the

entire Australian industry as “pretty good, yet cheap and generic” (Kesmodel).

Finally, one of the major factors that will come into play for the Australian wine industry

is the emerging new market of Asia. The Winemakers Federation of Australia, the Australian

Wine and Brandy Corporation, and the Grape and Wine Research and Development Corporation

released a statement to the entire wine industry of Australia. In it they offered some alternative

solutions that the industry should consider in order to solve these problems in their wine market.

Among their proposed alternatives was a way to tap into the new Asian market. They said that

there are an increasing number of people in the Asian market with growing affluence and their

preference in wine is shifting towards a market that Australia can take advantage of. According

to their statement, one of the strategies they can use to capture market share in this market is to

emphasize on educating and promoting their wines to this new group of customers, perhaps in a

way similar to that which they are already doing in the American market. Sponsorship and

seminars may help to establish the attention of the Asian market. With a built in competitive

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advantage over their competitors due to their proximity to this emerging market Australia has a

very good chance of capturing this market if they can get their brands in the forefront early.

BEST ALTERNATIVE

It has always been more advantageous for any company to start fresh than work against

prejudices previously established. Therefore, we believe the best alternative solution to adopt

would be that of establishing ourselves in the Asian market. It would be more difficult to try and

reconstruct a smeared image of ourselves in the US market. Instead, we could start fresh in a

growing market which holds little expectation of us.

Introducing Australian wine as a basis for the new Asian wine connoisseur, we will

forever be the foundation on which their growing opinions are based. We hold the advantage in

that we are in close proximity to the market, which will benefit Australia by reducing its

shipping costs, or rather having comparatively lower shipping costs then our competitors, both in

the US and South America. Seminars would be held to educate the inexperienced market.

Sponsorships would also allow promote our labels. By sponsoring local events, Australia could

generate a long-founding recognition in our brands and will create a growing patronage.

IMPLEMENTATION

In 2009, growth skyrocketed in the value of Australian wine shipped to China. The value

of exports to the Chinese market increased by 77%. This ranked China as Australia's fourth

largest market by value and number one for value growth. Strong growth was recorded in both

bottled (up 60%), and bulk, up (378%). As bulk wine accounts for most of the growth, Australian

producers need to continue to raise the awareness of their new-found consumers. While China is

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not exactly an ideal trade route for perishable goods, shipping in bulk to overseas bottling

companies will help lower cost of shipment and help preserve the freshness of their product. The

Australian wine industry could also begin a mass marking campaign specifically for the Asian

market. This would cost millions of dollars in research and development for the wine industry,

however, the returns from becoming the major distributor of wine in Asia could leave producers

with a major increase in profit potential.

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EXECUTIVE SUMMARY

The Australian wine market has had its ups and downs in the market. In the beginning,

the wine industry of Australia was looked down upon by the old world industry for its new

innovative ways to produce wine. After dealing with false reports from high level producers

from the old world market, Australia’s wine industry had a mission that they would try to

become the leader in innovation and style in the changing wine market. To complete this

mission, Australian wine makers must focus on and complete all the goals listed such as

uniformity in the industry and proper pricing of products. These producers must also overcome

the constraints to these goals such as problems facing the potential farming land. With the

completion of all goals, and the limitation of the constraints, the wine industry of Australia can

compete successfully in the market

The major problem that the Australian wine market must take control of is

overproduction in the industry. Analysis of the possible alternatives that our group came up with

is only the beginning of possible solutions for the industry. Some of the alternatives listed

include, 1) the issuance of subsidies and bailouts by the Australian government that will help

limit the over production. 2) Some of the producers that are having trouble selling the wine due

to overconsumption could remove the grape vines on under producing farms and switch to an

alternative agricultural product. 3) Diversify exports to new unexplored profit potentials such as

in Asia.

By weighing the goals and constraints to these alternatives, we believed the most

successful option was to export to Asia and begin a new market since these will cover the goals

previously listed.

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BIBLIOGRAPHY

Bartlett, Christopher A. Global Wine War 2009: New World versus Old. 2009

DailyWineNews. (2009, October 11) Retrieved March 3, 2010, from Wine Biz website http://www.winebiz.com.au/dwn/details.asp?ID=2807

Wine Industry Must Confront the Reality of Oversupply. (2009, November) Retrieved March 5, 2010, from Winemakers’ Federation of Australia website http://www.wgga.com

Porter, Jeni. (2009, December 27) Flood of Cheap Wine Sours Local Industry. Retrieved March 5, 2010, from North Queensland Register website http://nqr.farmonline.com.au

Kesmodel, David. (n.d.) Australian Wine Makers Push to Renew Sales in U.S. Retrieved March 6, 2010, from The Wall Street Journal website http://online.wsj.com

Eckersley, Nicole. (2010, February 11) Australian Wine Grape Crisis Worsens. Retrieved March 6, 2010, from AFN Thought for Food website http://www.ausfoodnews.com.au

Kim and Malbourgne. (n.d) Creating Blue Oceans Retrieved from Moodle

http://www.nationmaster.com/graph/foo_bee_con-food-beer-consumption

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