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It has been truly awful sitting on the sideline watching the Australian wine industry tear itself to pieces over the reform of WET (Wine Equalisation Tax).

On the one hand, I do have sympathy for those who have invested in assets, have to figure them into their cost base only to get out-competed by those who buy tail end grapes, use excess production capacity, claim the rebate and then split it with the buyer. There is nothing seemingly “fair” about this sort of competition.

On the other hand, a lot of the most exciting and innovative wine brands are the result of the work of winemakers who don’t own assets.

This is the whole basis of free market capitalism. The prize goes to whomever achieves the best return of capital employed and the most creative usually win. This sort of disruptive change is not unique to wine or Australia and always occurs when there is excess supply and/or capacity.

What seems to be missing in all of the discussion that has been publicised to date is any sort of clarity in relation to what the real issues are and a go forward strategy for the industry.

The wine industry, even at the volume end, will never be sufficiently concentrated that destroying competitors by introducing, for example, a volumetric tax to wipe out cask wine or scrapping the WET rebate to crush a bunch of smaller players will magically make the world a better place for anyone.

The answer lies not in trying to eliminate competition but in effectively responding to it by developing a better value proposition.

In a world that is becoming rapidly more sophisticated and demanding of wine producers, it is the premium part of the offer that sets the image, determines the reputation and will drive the Australian category forward.

This should be blindingly obvious and it is deeply troubling to watch some industry participants behaving as if they can do this on their own without fundamentally changing their own offer, without the small passionate players who light up the room and with help from the WFA to weaken or destroy local competition. Nothing could be further from the truth.

So what does Australia need to do to turn the Australian Wine brand around?

Number One – Stop pushing the wrong product into the wrong channels.

If we look at Australia’s position in the UK On-Premise, for example, in 2012 Australia had 5 brands in the Top 30 most listed despite the listed companies already having exited that space. This year, Australia has only one (and it was 30th and you’ve never heard of it). The large Australian family wine companies have been obliterated and in their place come a pack of no-name non-regional wines from opportunistic producers.

Non-regional wines now make up 55% of the Australian wine offer in the UK On-Premise, up 20% from last year. In Canada that number is 63% up 6% on last year, according to our research. This compares with only around 8% on Australian wine lists. No wonder Australia is the fastest plummeting category in both of these critical export markets.

Number Two – Promote premium wine more aggressively

Australian wine companies, large ones in particular, have simply not been able to adjust fast enough so as to produce better quality wines that represent value at higher price points where the fastest growth, best margins and future of the wine industry lie. The industry is now attacking itself rather than the problem / opportunity.

The listed companies have all had a go at a premiumisation strategy. All have run out of patience before successfully implementing. It could be argued that it is just too hard given the short term demands of shareholders. These companies would be best served by supporting premium producers rather than trying to make it harder for them.

People are not buying Australian commercial wine (TWE has had to write off over a $160 Million in stock) because the image up the line isn’t there when compared to France, Italy and Spain (or even US wines in the case of the Canadian market). That’s the hard truth.

TWE, like many others, chose to chase shorter term profits selling ultra-high priced wines in Asian markets rather to do the hard slog required to rebuild their premium supply chain and their respect amongst the wine interested in established markets. They have also given up on the On-Premise in key markets.

In their place come opportunists who are capitalising on any residual value that the Australian brand has by providing lesser product under dodgy labels at the same low price points. Combined with the lack of action in relation to promoting the premium offer more aggressively, this constitutes a death spiral if something is not done immediately to address it.

No one can blame the large companies for exiting channels and markets that they deem not to be profitable but if the health of the Australia category as whole is not carefully thought about and properly managed, everyone suffers. If you are John Casella, you can probably leave other people to worry about that. It you produce 30 Million cases of wine as TWE do, you probably need to be smarter than that.

If we move up a level and focus now on the Aspirational wine consumer, the other “big idea” that is part of the WFA review is to stop the WET rebate going to New Zealand. Even if this could be done (it is doubtful given long standing trade agreements) should anyone believe that stopping $30 Million in rebates going to New Zealand is going to slow down a country whose exports are moving ever closer to parity in value terms to those of Australia? Has anybody stopped to think about how much of the New Zealand wine industry is owned and/or distributed by Australian companies in any case?

New Zealand won in Australia (and everywhere else in the Anglo Saxon world for that matter) because they thought about the Aspirational wine consumer and developed product that fitted their palate profile – Sauvignon Blanc, Pinot Noir etc. The Veneto in Italy has done the same thing and been even more successful using Pinot Grigio, Rose and Prosecco. In both cases, innovation won the day and it is only innovation that will save Australia’s large family wine companies.

Finally and most importantly, let’s focus on fine wine. Yes, the more Australian wine that appears on wine lists and in other premium channels that is somewhat less than premium, the harder Australia makes things for itself.

A fundamentally problem, however, is that the WET rebate provides a huge deterrent for small companies to export. It is they after all, who are best suited to develop the sort of wine brands and stories that the market is so willing to hear. Why not use some of the WET rebate funding pool to encourage quality regional wine producers to export? No need to change the total amount available but rather, redirect it.

If this were to be backed up with a Wine Australia program focused fully on promoting Australia’s premium wine offer leveraging the $10 Million plus investment Tourism Australia is about to make in its new platform ‘Restaurant Australia’ along with further investment made by the industry itself in showing its best face to the world then this might be the start of the turnaround the industry so desperately needs.

I once presented a paper to a global manufacturing conference in Italy holding out Australia as a world’s best practice model of collaborating in order to compete more effectively. We saw evidence of that spirit during Savour, the global relaunch of the Australian wine brand. Can we not work together now, each business understanding where they fit, what their role is and what they need to do to become globally competitive? It has been done before…