Analysis of the Australian wine industry Free Essay Example

This report is about contextual analysis of the Australian competitiveness and investment attractiveness of the wine industry. In this report there are 2 parts, Part 1, which conclude country specific analysis are explained using Porter’s National Diamond and Porter’s Five Factor. The second part of the report include the critical analysis for the Australian wine industry based on the argument of Porter’s National Diamond in Part 1 of this report.

2. Introduction In early 1970s, with the leading of Europe as the major wine producer, the new word wine is already starting to produce bulk wine in various qualities.

The Australian wine industry has experienced remarkable change in the mid-1980s, and that leads to today’s Australia Wine industry, which producing 1,683,643 tonnages of grapes, and ranking world’s sixth largest wine producer, and world fourth largest exporter for wine. Being a large continent with various land and climate, Australia is one of a few who can produce almost all kinds of grapes and process them into wine under one country.

Australia’s vineyards are mostly focus on southern part of the continent such as South Australia, New South Wales, Victoria, and Western Australia, where climates are more suitable for planting grapes compare to the tropical climate on the north. There are 62 registered wine regions, with around 172,676 hectares cultivated for wine grapes. The largest area of vineyards falls in South Australia with 75,531 hectares, accounting for 46.5% of the national total vineyard area. Second is New South Wales with 41,889 hectares (25.8% of the total), then follow by Victoria with 30,056 hectares (18.5% of the total vineyard area).

The vast continent and multiple climate existed in Australia allows winemakers to plant huge variety grapes and producing, hence allowing production of many varieties such as Shiraz, Cabernet Sauvignon, Merlot as grapes for red wine, and Chardonnay, Sauvignon Blanc, S�millon, Riesling as grapes for white wine, along with around 140 other varieties being produce and process into wine. There are approximately 2,300 wine companies and the sector employ around 31,000 people, along with a few main local brand such as Hardys, Banrock Station, Leasingham and Chateau Reynella.

Australia currently has Free Trade Agreements (FTAs) with Singapore, New Zealand, Thailand, the US and Chile, addressing both tariff issues and non-tariff barriers such as labeling, product standards and import certification. The availability access to all the rare material for making wine, as well as natural surrounding is one important factor why Australia was able to become one of the top producers of wine.

Agricultural Industry had contributed much towards the development in economic and quality of wine industries in Australia. Nearly $1.5 billion is spent each year alone for agricultural related research in Australia. On 2006-07, Australian farmers had spent over $3 billion on Natural Resource Management (NRM) in managing or preventing weed, pest, land and soil, native vegetation or water-related issues on their properties.

More than $2.3 billion was spent on weed and pest management alone, while land and soil-related activities accounted for $649 million of total expenditure. Company in wine industry need to undergo Australian Wine and Brandy Corporation (AWBC, or better known as Wine Australia in the present) wine exports regulation to ensure only the quality wine is exported. Australian Wine Research Institute and the Cooperative Research Centre for Viticulture played central roles in coordinating funding, research, information, exports and government lobbying, providing advice and practical assistance in all the little details in vineyard management and harvesting methods, providing vision for the wine industry. With the all the aid and support from various organizations, the quality of wine in Australia will gets better and the production of grapes will be improved as well, seeing that government is putting an eye on this industry.

People in Australia had begun to adapt the culture of wine drinking as a part of daily life. There were approximately 429.9 million liters of wine sold in domestic, and about 62.2 million liters of wine import to Australia in 2009, both increase by 0.6% and 16.7 % respectively. Global demand for Australia wine is increasing over the years, as they are able to produce many varieties of wine in cheaper bulk price. Canada, the third-largest export market for Australia, had been reported a volume growth of 19% to 56 million liters.

People no longer take wine as a privilege in life style, as wine is getting cheaper, people all around the world are starting to take this drinking habit in to their normal daily life, and this is not restricted to western country only, but also Asian and some eastern country, for example. China export volume had a 36% boost to 55 million liters in 2010, as more Chinese drinkers adopt Western-style drinking habits. Wine is becoming a trend among young consumers; hence the demand for good quality wine at affordable price is in highly demand. Australia wine industry focus on economic of scale, which fits the new trend perfectly.

Australian wine industry depends on their vast variety and quantity of grapes selection available from their vineyard to reach today’s economic volume. Taking advantage of various synergies of land, labor, and technology available, they are gradually becoming suppliers of wine instead being buyers from UK and European countries, creating fresh demands in new markets, which leads to bringing new customer to the industry.

Australia has all the infrastructure and rare materials they needed to produce wine, without depending on import materials, which gives them a huge advantage over production. The whole process of wine making to export of wine could be structure and regulated under local supervision. These huge volume gives Australia an advantage in economics of scale, enable Australia to sell their wines in bulk but cheaper price. Rivalry within the country is near non-existence as Australia had enough supply for local demand, although they do import a certain brand of wine from European country. The only potential rivalry in the future of international trading is China, as they are potentially able to produce quality wine, but cheaper cost.

Government had implemented a few legislations to protect the wine industry. In South Australia, there are 3 key legislation; Phylloxera and Grape Industry Act 1995, act as protecting vineyards from disease and provides support and assistance to the grape industry, Wine Grapes Industry Act 1991, for marketing of wine grapes, and Primary Industry Funding Schemes Act 1998 which assist in collecting industry funds from members of particular primary industry sectors.

Large corporate like Wine Australia was established by government statutory authority in 1981 to provide strategic support to the Australian wine sector. In December 2010 Government had even try to reduce export approval fee from $20.90 reduced to $13.20 for VI1 Certificate, Permit fees for WEA Users are from $43.70 reduced to $37.95, and from $60.65 reduced to $52.80 for Non-WEA Users. This means that government had put an eye on the wine industry, and is willing to provide support.

Below are the descriptions for Investment Attractiveness using porter’s five factor model. Australian wine in domestic market are untreated by imported wine in sales, with 429.9ML and 62.2ML sales respectively in 2009, but competitors in international market are fierce. In US market, Australian wine is facing competitors against New World wines such as New Zealand, South Africa and Chile. These New World producers are trying to increase entry barriers by operating on large volume and taking advantage of economies of scale.

In the present China had produces more wine than Spain and Portugal combined with stock already up in shelf of supermarkets in the West, competing successfully against New World wines from countries such as Chile. But consumers at the present still prefers imported wine, as they had mindset of imported wines are better in quality. Australia is expected to face more treat of new competitors in the future, as the new world wine continuing to develop in a fast phase, but with all the support from government and natural resources, the potential is much worth it.

The intensity of competitive rivalry In Europe, there are a huge number of players with no company having a significant market share. Most Europeans are extremely loyal to their national produce wine, although France, Germany, and Netherland are some of Australia’s largest export nation in Europe. In the new world, there exist large players with significant market share. Chile and Argentina had started investing heavily in viticulture and used price competition as their strategy, while Australia maintained their strategy using volume exports, resulting prices eroded dramatically in response to the new competition.

In the competition of Economic of Scale, Australia had won in sales volume, but lost in price value, due to the rising global demand for affordable bulk wine shipments, while average price for bottled wine drop. But nevertheless, Australia with enough natural resources and market, this temporary down fall of market will be fixed and overcome in near future. Wine has always been the preferred liquor in most European country, a few exceptions which prefers beer or stout. Asian or eastern country had always been different, with each cultures had their own liquor, like Japanese with Sake, Chinese with Rice liquor, and Russian with Vodka.

There aren’t really substitutions for wine currently, although Beverage Company had been coming with new ideas such as non-alcoholic wine substitute, using tea leaves and fruits to produce similar experience with wine, but there aren’t any one of them is popular among consumer, or simply the trend is still on wine on the present moment. Unlike any other liquor or beverage, wine is not easily substitute because wine tasting is a whole new range of experience comparing to other liquor beverages, as each taste, history, origin and variety of each one can be distinguish by consumers.

The bargaining power of customers is depending on the size of the producers. The old world producers operate on a low scales, hence they lack bargaining power when dealing with the hypermarket chains. Where else the new world producers operate in economics of scale. Due to their large market share and volumes, they can control their retail operations, thus reducing bargaining power of customers. That is why old world producers such as France sold their wine is a higher price, while new world producers like Australia can sell wine cheaper and even in a package of bulk wine. Consumers are demanding for good quality wine with affordable price, which is the main reason why Australian wine industry is the ideal producer for wine market globally.

The basic raw material of wine industry is grapes, which defines the quality of the wine. In Europe, the wine manufacturers hold majority of the bargaining power from the grapes farmers, forcing farmers tries to form cooperation with the wine manufacturers. But in the new world, however, many wine producers to control the operations from production to distribution via owning their own vineyards, thus reducing supplier’s bargaining power. This is not applicable in every place globally as grapes are highly sensible towards climate and surrounding environment. Australia had the upper hand in this case as they have huge lands, as well as various climates suitable for various kinds of grapes to grow.

First, in terms of factor condition, Australia had the advantage of geography and natural resources. With vast land and suitable climate for different types of grapes plantation, this allows Australia to produce almost all the variety of wines available in global market under one continent. Australia also had FTAs with a few countries, and more will come in the future. But high labor cost is an issue to be considered, as labor cost in Australia is more than the cost for labors in China or India. Second, Australia wine industry had quite a number of organization and industrial sector to help doing research in every aspect needed for wine industry.

Being rank in fourth global exporters of wine and ranking third in total export in Australia, government of Australia had put an eye on wine industry to support the industry. But as the trend goes on, new world wines might overthrown Australia in wine export to global markets, and Australia wine industry might lose all its privileges on research and government support. Third, the demand condition for Australian wine is due to the current trend of young consumer adapting a new life style. The demand for wine will always be there as long as the trend keeps on going, and consumers are in demand for good quality wine yet at bargain price, hence Australian wine is right on the right track of this trend.

But no trend will last forever; hence Australian wine is merely a current trend that associates with the current consumers, and oversupply is needed to be foreseen. Fourth, so far Australian wine industry had been using economic of scale as the basis of marketing, which export mass produce of various wine under a cheaper price compare to the old world producer’s wine. With the whole production line under the same region, wine producers can easily monitor and manage the process.

But exporting huge bulk of wine might lead to the risk of oversupply, resulting increase in volume but reduce in value. This could have huge impact on revenue of the wine industry. Fifth, government of Australia had been providing aid and support to their wine industry, which include in taxes, research, as well as infrastructure and labor force. Government also supports them in international market, such as EU Agreement to enable Australian winemakers to have better excess in European market.

Australian Wine Industry had proven its potential in international market, as well as its’ capacity to meet the demand. The demand for wine is expected to be continued to rise in the near future as younger consumers are adopting a new life style. In order to meet their bargaining power, good quality wine with affordable price is highly demand. Australia had met all the requirements to enter the market and the industry itself is still full of potential to go one step further into globalization on wine market.