Wine Grape Growers Australia Page 1 2 October 2014 Wine Grape Growers Australia Page 1 2014 Wine Industry Outlook Conference Post Vintage 2014 implications.

Wine Grape Growers Australia Page 12 October 2014Wine Grape Growers Australia Page 1

2014 Wine Industry Outlook Conference

Post Vintage 2014 implications

Speaker: Lawrie Stanford, Executive Director, WGGA

Wine Grape Growers Australia Page 22 October 2014

The Agenda

1. Demand issues

2. Supply issues

3. Business models?


Wine sales in Australia – history

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

10 000

20 000

30 000

40 000

50 000

60 000

0

20

40

60

80

100

Domestic cases Imported cases Domestic unit values Imported unit values

Ca

se

s (

lin

es

)

Un

it v

ale

s (

do

ts -

$/c

as

e)

Not indicated on an axis

Flattening in domestic sales

volumes

Relatively constant prices

AUD strengthened – imports less expensive volumes commence rise – the continued price rise reflects strong demand

AUD weakened –imports more expensive, volumes decline

AUD continued to strengthen – volumes commence rapid rise and prices fell

AUD weakens – imports more expensive volumes steady

DOMESTIC FRONT >>>

IMPORTS >>>

Steady volume growth as local interest rises helped by overseas success and

supply coming on-stream


Sales of Australian wine - history

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

100 000

0

20

40

60

80

100

120

Domestic cases Exported cases Domestic unit values Exported unit values

Ca

se

s –

lin

es

Un

it v

ale

s (

do

ts -

$/c

as

e)

(Not indicated on an axis)

THE EVENTS >>>

PRICE RESPONSES >>>

The thoughtful see an impending

surge in supply

Everybody agrees the industry is structurally

oversupplied

A downward volume path

Early parity with returns from domestic sales

Export returns wilt under declining demand and a strong AUD – export returns significantly under-rate domestic returns

The GFC

AUD strengthened,

more expensive, demand falls


Prices and production

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

100

200

300

400

500

600

700

800

900

1.61

1.40

1.92

1.93 1.90

1.40

1.83

1.731.60 1.60 1.62

1.75

1.7

mill

ions

tonn

es

$/to

nne

Winegrape crush (LHA)

Winegrape price (RHA) – nominal

Winegrape price (RHA) – real

‘False’ start to launch into overseas markets

Inability to supply and

the recession

‘Catch-up’ complete

Three successive above-average yields – despite drought

Seasonally influenced -‘catch-up’ in prices from 2011

The thoughtful saw the supply surge coming

We all knew oversupply was here

Area reduction commences

GFC hits (UK and US in particular)

Season (annis fungeal

horribilis)

Three years of lower harvests - reduced area or

seasons??

… againEvidence ..

reduced production will improve prices?


Areas and net removals (13% of peak removed?)

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

130,000

135,000

140,000

145,000

150,000

155,000

160,000

165,000

Reported net planting (ha) Winegrape vine area (ha)

Ne

t pla

ntin

g (

ha

)

Win

eg

rap

e v

ine

are

a (

ha

)


A view of ‘balance’ – inventory just ‘better’ or ‘balanced’

Stocks-to-sales (raw) is stocks measured against all sales, Stocks-to-sales (adj.) is stocks measured against ‘profitable’ sales (using as an indicator, all sales net of export sales at <$1/litre)

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

1.00

1.20

1.40

1.60

1.80

2.00

2.20

Stocks-to-sales (raw)

Stocks-to-sales (adj for <$1/L fob)

Upper comfort level

Lower comfort level

Stoc

ks to

Sale

s Rati

o (re

tros

pecti

ve)

Repre- sents wine sales at <$1/L FOB


Comment PROPOSITION: Bulk wine for export, down to $1/litre FOB YIELD t/haTONNAGE tWINE CONVERSION RATE L/tVINEYARD COST OF PRODUCTION $/haVINEYARD UNIT COST OF PRODUCTION $/tGROWER NET MARGIN %GRAPE SALE PRICE GRAPE COST PER LITRE $/LWINE CONVERSION COST per LITRE (excl wg cost) $/LWINE PROCESSING COST per LITRE (incl wg cost) $/LWINE - OAK AND MATURING $/LWINE BOTTLING, BOXING, WAREHOUSING, FREIGHT $/LWINE COMPANY TOTAL COST $/LWINE COMPANY NET MARGIN %

WINE SALE PRICE pre-WET $/L

WET %

WINE SALE PRICE BY WINE COMPANY $/LWINE SALE PRICE BY WINE COMPANY $/bottleDOMESTIC RETAILER MARGIN %RETAILER WINE PRICE $/bottleGST %

SHELF PRICE $/bottle

19.0 Warm inland 19

750 Mega/bulk wine processorWarm 6 500

$34212% Significant margin sacrifice

$389$0.52

$0.35 $0.35 Mega/bulk processing facil ity $0.87

None $0.00None $0.00

$0.8713% Significant margin sacrifice

$1.00

0% No

$1.00na

na na

na

na INTERPRETATION: Achievable but at the cost of slim, unsustainable margins. As such, represents a conservative position in respect to defining sustainable sales - that is, provides an optimistic view of sustainable sales, a higher sales number and lower stocks-to-sales number than warranted - it could be worse!

Why a $1/Litre fob cut-off for sustainable exports?


International situation

Wine consumption Wine production

Growing affluence and demand for wine in emerging markets like Nth America and

Asia

Coincides with Australia realizing it’s production

had outstripped demand for Australian wine

GFC dents, but doesn’t eliminate,

the growth

Could this level rise again to 2007 peak?

Consumption steadies at lower than peak but an

elevated level

The case is weak for this decline to be structural adjustment in supply.

Dimension and timing of EU grubbing, entry of new world

producers

Seasonal factors far more influential on production outcomes? Series of low season due to seasons.

More influential seasonal factors 1: global ‘annis

fungeal horribilis’

More influential seasonal factors 2: 2013 bounce-back

Global inventory is better but is it in

balance?


0%10%20%30%40%50%60%70%80%90%

100%

Bulk Bottled

Sources: “Framework for grower opportunities in the Australian wine sector: global and Australian sup -ply and demand analysis, 2000 to 2013” L Stanford, WGGA, June 2014; Global Wine Markets statistical compendium; OIV world vitiviniculture situation, Wine Australia Export Report Note: 'Europe' is Western European wine net exporters (France, Italy, Portugal, Spain), 'New World' ex -cludes Australia (Argentina, Canada, Chile, New Zealand, South Africa, United States, Uruguay)

International situation – bottled and bulk

Volume Value0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bulk

Bulk

Bottled

Bottled


What happens if there’s profit at $0.50/litre?

Stocks-to-sales (raw) is stocks measured against all sales, Stocks-to-sales (adj.) is stocks measured against ‘profitable’ sales (using as an indicator, all sales net of either export sales at <$1/litre or export sales at <$0.50/litre)

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

1.00

1.20

1.40

1.60

1.80

2.00

2.20

Stocks-to-sales raw Stocks-to-sales (adj. for <$0.50/L)

Stocks-to-sales (adj. for <$1/L)

Upper comfort level

Lower comfort level

Stoc

ks to

Sal

es R

atio

(ret

rosp

ectiv

e)


Profitable exports at $0.50-$1/litre (bulk wine)? …Comment PROPOSITION: Bulk wine for export, down to $0.50/litre FOB

YIELD t/haTONNAGE tWINE CONVERSION RATE L/tVINEYARD COST OF PRODUCTION $/haVINEYARD UNIT COST OF PRODUCTION $/tGROWER NET MARGIN %GRAPE SALE PRICE GRAPE COST PER LITRE $/LWINE CONVERSION COST per LITRE (excl wg cost) $/LWINE PROCESSING COST per LITRE (incl wg cost) $/LWINE - OAK AND MATURING $/LWINE BOTTLING, BOXING, WAREHOUSING, FREIGHT $/LWINE COMPANY TOTAL COST $/LWINE COMPANY NET MARGIN %

WINE SALE PRICE pre-WET $/L

WET %

WINE SALE PRICE BY WINE COMPANY $/LWINE SALE PRICE BY WINE COMPANY $/bottleDOMESTIC RETAILER MARGIN %RETAILER WINE PRICE $/bottleGST %

SHELF PRICE $/bottle

25.0 Conjecture 25

750 Mega/bulk wine processorWarm 6 500

$260-73% Significant margin sacrifice

$150$0.20

$0.30 $0.30 Conjecture$0.50

None $0.00None $0.00

$0.500% Significant margin sacrifice

$0.50

0% No

$0.50na

na Super-normal marginna

na

na INTERPRETATION: In a qualified sense, this is acceptable to the wine producer - at least they don't lose money, they maintain control over unit fixed costs and therefore have better opportunities for sustainable profit on other product. However, it is unacceptable for the grower - who makes a loss ($150/tonne has frequently been registered in recent harvests). Note that break-even for both grower and wine producer would result in a $0.81/litre FOB meaning additional bulk wine could be quit without loss (at least) but not all.


Domestic outlets for cooler-temperate wine in under-demand?

A significant major retailer @ late September 2014

t/ha L/t $/ha % $/L $/L $/L % % $/L % $/bottle

Cleanskin - varietal but not regional - target $3.91/bottle

Buyer-own-brand - Red varietal and regionally identified - target $8.63/bottle

Buyer-own-brand - White varietal and regionally identified - target $5.65/bottle

9.0 700 $8,000 10% $0.70 $0.00 $1.10 15% 29% $4.87 20% $3.91

8.4 600 $8,000 30% $1.33 $0.15 $1.10 30% 29% $8.93 32% $8.36

9.9 600 $8,000 12% $1.33 $0.00 $1.10 17% 29% $6.18 30% $5.65


The story summarized … (1)

Supply adjustment has occurred

– but not to the commonly accepted and required level of 20% of the national vineyard at it’s peak, for supply to equal demand.

Production and inventory are declining from the peak, but …

at 1.7 mt in 2014, production is still high – but, at least …

inventory is declining – so - do we have ‘S&D balance’ or are things just ‘better’?

Australian wine sales are declining - driven by a decline in exports.

Stocks-to-sales ratio tells us that current production is still too high for ‘balance’. But does ‘balance’ imply for proprietary brands – what about profitable options for ‘the rest’?


The story summarized … (2)

Nuh

… but some? (all?)

Two points (i) price is key and (ii) it is a different business model.

There’s a place for under-demanded cooler-temperate wine in retailer generic and buyer-own-brands

There appears to be a ‘world’ of opportunity in global bulk wine trade.

What’s the alternative to proprietary brands?

Profitability of global bulk wine trade at $0.50/litre would see us ‘in balance’.


Questioning traditional/common beliefs …

“The industry is over-supplied”

Yes, for proprietary brands - how about dealing with the rest through alternative business models?

“The industry needs to get smaller”

This is reducing the industry to solely proprietary brands. But won’t wine company costs increase?

“The solution is growing demand”

Yes, it’s essential, but not sufficient – will definitely fix the symptoms, but not the causes, the

market is not working. ‘Let the market sort it?’

“Marketing will fix it”

‘Marketing’ is different from ‘improving market prospects’. ‘Market’ the top-end, ‘improve market

prospects’ for the lower.

“Restructuring is occurring ”

Both global and Australian production levels demonstrate a worrying susceptibility to seasonal

influences and the impact of structural adjustment is unconvincing. There are two markets

(broadly) business models need to adjust to suit


Where will the solution to supply-demand imbalance come from?

1. Reducing supply?

Yes, but is not sufficient

2. Increase demand?

Essential, but it is not sufficent

3. Reduce supply and increase demand?

Yes

4. Innovation?

Definitely – technical, packaging, market

intelligence, economic, commercial ….?

5. Serendipity?

(eg ERs)

Wine Grape Growers Australia Page 1 2 October 2014 Wine Grape Growers Australia Page 1 2014 Wine Industry Outlook Conference Post Vintage 2014 implications.

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