Western Australian Wine Industry

Submission to the Senate inquiry into the Australian grape and wine industry

This submission has been prepared on behalf of the WA wine industry by Wines of Western Australia.

Wines of Western Australia provides support to producers and Regional Associations in the development of their region.

The mandate of Wines of Western Australia is to ensure government and its relevant agencies understand the position of WA Regions and their producers on key issues affecting their interests.

For further information, contact:

Larry Jorgensen Chief Executive Officer Wines of Western Australia T – 08 9284 3355 E – [email protected]

Wines of Western Australia Claremont Showgrounds, Lou Giglia Pavilion, Gate 1, Graylands Rd, CLAREMONT WA 6010 PO BOX 2091, Claremont North WA 6010 T– 9284 3355 F – 9284 2199 E – [email protected] W – www.winewa.asn

Wines of Western Australia Submission to the Senate Inquiry into the Australian Grape and Wine Industry

Introduction

The West Australian grape and wine industry has existed since 1834. The communities servicing wine regions continue to grow, despite recent challenges.

Wine jobs are in region, done by people living in region.

The WA wine industry, as a part of the agri-business sector, will provide the diversification of WA’s economy that is required to support growth as the iron ore cycle subsides.

The main issue affecting the industry are retail consolidation, the accessing of WET rebates by businesses for which it was not intended and inadequate resourcing of industry organisations.

Opportunities to significantly increase export value are developing. Resourcing market development to realise this should be prioritised by industry with short term support from the federal government through AGWA.

The WFA Actions for Industry Profitability provides a framework to achieve this.

Key Points  Integrity measure amendments to eligibility for the WET rebate are urgently required.  Market development offers the primary solution to the current supply/demand imbalance, however the dominance of Coles and Woolworth must also be addressed.  The WFA Actions for Industry Profitability provides a framework to achieve the above.  As a part of the Australian agri-business sector, the grape and wine industry should play a role in supporting a more diversified economy as the resources boom subsides.  Wine is a long term, in region, employment building industry.  Changing international economic circumstances combined with recently ratified FTAs in key Asian markets offer an opportunity to significantly grow export value if adequately resourced market development activities are available.  This requires that all levels of industry representation/organisation are adequately resourced and that these resources are utilised efficiently and effectively.  While adjustments on the supply side should also occur, these should be based on accurate market intelligence.

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A. The extent and nature of any market failure in the Australian grape and wine industry supply chain; In pure economic theory terms, market monopoly through the Coles/Woolworths duopoly is the key market failure affecting the Australian grape and wine industry. These two conglomerates account for over 70% of all retail wine sales through various channels they control (WFA Expert Report on the profitability and Dynamics of the Australian Wine Industry Aug 2013).

The market power of the duopoly adversely affects value chain profitability for all food and beverage sectors. We agree many producers actually have strong, profitable relationships with the duopoly, but with this comes at the market distortion. The duopoly’s dominance diminishes available shelf space for genuine producers (through displacement by buyer’s own brand products). A secondary effect is fewer wholesalers (the duopoly act as quasi wholesalers and remove that part of the supply chain) who provide wine producers with access to other retail opportunities.

In 2005, Coles and Woolworths had 5% of sales as home/exclusive brands. Today this is estimated at 20-25%. This trend also exists in other retail liquor chains. The ability of the duopoly to dominant the retail market and thus gain excessive market power vis-à-vis wholesalers and producers distorts the economy. This is exacerbated by:  allowing these two retailers to act as wholesalers (dealing direct with producers)  allowing these two retailers to operate as “producers” by owning private labels. The distortion is that an entire industry (e.g. food and beverage) is decimated, many small businesses are precluded from a reasonable opportunity to trade, the public are misled as to the true source and nature of the products offered, and legitimate traditional businesses and skills are lost – e.g. wholesaling, etc… The rewards for any perceived productivity gains are not shared equally by the community, diversity of products is lost, and the regional communities that host the primary farming activities are damaged with losses of jobs and services and ultimately a lower standard of living or ability to re-invest and regenerate. The key driver fueling this is the opportunities (Refer to point C) currently provided to businesses up the value chain from genuine producers who were never intended to be recipients of the WET rebate. The integrity measures outlined in the Winemakers’ Federation of Australia’s (WFA) “Actions for Profitability” paper must not be delayed. The benefits to small family run wine businesses mean more shelf space again. That means money back in the bush. Wines of WA (WoWA) suggests that agricultural industries work collectively to address the shrinking supply chain and access to market issues that continue to tighten. This collective should seek to establish a federal “ombudsman” that can enforce and impose corporate and individual penalties for breaches of the code i.e.: just like directors can be fined by the ASIC.

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B. The extent to which federal and state legislative regimes inhibit and support the production, processing, supply chain logistics and marketing of Australian wine; For the WA industry, outdated Liquor Control Act compliance requirements are problematic as are restrictions on how wine producers can engage with consumers. The benefits of recent reforms are acknowledged, however, WA businesses still establish licensed administrative outposts in other states to avoid restrictive WA legislation.

Workplace relations issues also pose problems for wine businesses. The seasonal nature of the production cycle is unique and does not fit well into one size fits all legislation. For those businesses also involved in Wine Tourism, weekends and public holiday penalty rates make it difficult to be profitable.

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C. Profitability of wine grape growers and the steps industry participants have taken to enhance industry profitability; Prior to the oversupply of wine-grapes, profitability of vineyards was sustainable. The negative international economic factors affecting all Australian exporters have also had an impact on the wine industry. Profitability has been adversely affected and the supply demand balance shifted to oversupply.

The response has been two-fold; industry exit/reduced supply and market development to increase demand. While reduced production may be a part of the answer, further decreases in the size and scale of our industry will further compromise our ability to undertake market development.

Market development is the key priority to restoring profitability to acceptable levels. Given the changing international economic conditions emerging and recently ratified FTAs in key Asian markets, real opportunities exist to significantly grow export value. This will have a flow on effect in the domestic market, reducing supply. It is, therefore, critical that adequate resources are available for market development activities. The WFA’s strategy to allocate Commonwealth savings through integrity measures applied to the WET rebate to these market development activities should be immediately implemented.

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D. The impact and application of the wine equalisation tax rebate on grape and wine industry supply chains; WoWA recognises that the current legislation did capture the intent to support regional grape-growers and winemakers. The WET rebate has secured a positive economic outcome for wine enterprises in regional communities. A survey conducted in 2011 by WoWA to WA producers establishes that 95% of producers confirmed the WET rebate contributed to their ongoing profitability and viability supporting regional employment and related economic benefits. Therefore, the intent has worked.

What the public dialogue needs to be focused on now is authenticity. The long term benefit from the WET rebate must be received at the regional level. The concept of abolishing the WET rebate without wider reform is destabilising for industry. WoWA supports the INTEGRITY measures proposed by the Winemakers Federation of Australia: maintaining the WET rebate for intended authentic regional wine industry participants on bottled product; and removing eligibility from New Zealand producers.

WoWA considers rorting exists in the way WET is reported to the ATO. We believe that the producer should only claim the WET that has been paid. At the end of every quarter, the distributor can quite easily quote to the producer the exact amount of WET on their sales for that period. That is a near on perfect system compared to what is in place now. This will eliminate one issue where a related party loads enough sales of wine in the July-Sept quarter using the accruals method under a commercial agreement and gets the $500k in the October BAS. This quoting system is a far more pragmatic approach that avoids the position where wine that was sold in Australia and WET claimed and was much later exported or lost in an domestic and export blend of wine. Let’s be pragmatic.

It also addresses the under-dipping issue to the producer. The original intent of the legislation was that ALL the WET was to return to the producer.

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E. The Extent to Which Grape and Wine Representation at Regional, State and National Levels Effectively Represents Growers and Winemakers with Respect to Equity in the Collection and Distribution of Levies; WoWA agrees that AGWA should be adequately funded to perform core operational functions. There should be an all of industry led process to determine what these core functions are - e.g.. gathering and disseminating market intelligence, compliance oversight, in-market support, facilitating trade exhibitions. Levy funding for market development should be increased through an amendment of the legislation governing the allocation of these to the implementation of AGWA’s mandate. Regional Associations (assuming they have an industry endorsed strategic plan) should have greater access to levy funding to execute market development programs.

The user pays system remains unpopular and creates disunity as it is perceived to cater to large companies only. If more of the levy funding was allocated to Regional Associations (a standard percentage of levies re-distributed back to the region from which it is collected), this would overcome that perceived inequity.

WoWA suggests the following initiatives should be implemented, allocating resources funded by levies where the greatest positive results for industry development can be achieved.

1. Increasing the demand for Australian wine while increasing value is essential.

This is best achieved through a focus on people, place and product. These stories are best told by producers and their Regional Associations. A focus on authentic wine (notice we don’t use the term fine wine), food and experiences will shift the perception of Australian wine in our target demographic across all markets most efficiently.

{We consider authentic wine covers the whole industry – the people, the place and how the product was made e.g.: This concept covers an organic Riverland Shiraz to Grange. We believe this more accurately expresses the qualities of a wine that captures the imagination and in doing so, changing perception. As noted in the Regional forum, price point is not the critical factor in determining what is meant by “fine wine”.}

A food and wine tourism strategy will support domestic and export markets and all sales channels – direct to consumer and through traditional distribution channels. Therefore, the Restaurant Australia campaign needs to be leveraged as far as it can possibly go. We are dismayed that Tourism Australia are not noted as a key contributor to this document.

The question then becomes, how is the most effective marketing campaign delivered for all industry participants when you have a marketing budget of approximately $8 million? If we are to assume that this number cannot be increased internally in the short to medium term (e.g.: changes to the WAC Act, increased levies or structure of such), then the only option is to form partnerships to leverage the $8 million into something substantial.

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These partnerships need to be formed with organisations such as:

 Tourism Australia and state and regional tourism bodies  State government funding sources e.g.: agriculture, food, arts, Regional Development Corporations  State and Regional wine associations  Commercial sponsor partners

Examples of how this works are Savour Australia and Margaret River Gourmet Escape. These partnerships can only be successful if organisational change within AGWA occurs – less staff, providing more available cash to initiate these partnerships.

2. AGWA Export Development Office – Perth, WA The WA Wine Industry Strategic Plan 2014-24 identifies doubling the value of wine exported from WA as a key objective (Strategic Focus 3 – Growing consumer and market demand pages 8 & 26). Essential to achieving this is adequate funding and resources, created through innovative partnerships between industry and government agencies.

An example of this is the WA International Marketing Plan (IMP), a partnership between the Department of Agriculture and Food WA (DAFWA) and the WA wine industry. Funding of $126, 000 per year provided by DAFWA is leveraged to over $300,000 of investment in market development through Regional Association and producer support. DAFWA has also provided in principal support to co-fund a Perth based WA Export Development Office. Developing this resource requires a partnership between DAFWA, WoWA and AGWA. Through a strategic and operational link to AGWA, the office will provide the drive required to get WA producers to the next level of export sales.

The resource can be provided through a partnership between Wines of WA (office, human resources, direct link to WA industry), DAFWA (funding, human resources, strategic resources) and AGWA (funding/strategic and operational/intel resources).

3. Increasing the competiveness of the Australian wine industry.

Innovation across the value chain must be encouraged, with an aim to increase net margin – through reduced input costs and increased value.

While technically based RD&E remains important, equally so is: vineyard foundation data analysis in understanding and researching market key factors; accurate and current data on key aspects of market conditions; the performance of Australian wine in key markets against competitors; trends in markets. Such information will allow our producers to more precisely match product to market.

WoWA also believes that in-trade market offices should be funded (or part thereof) from these R&D funds. These people are the eyes on the ground, researching and aiding the development of Australian wine. If these in-trade officers remain, there is a strong argument that they should be part funded by research.

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4. Increasing the capability our industry.

Adopting research outcomes requires resourcing from industry, industry bodies and government agencies. In each state, aligning these to achieve the best outcome will require a model suited to the unique requirements of the state. Wines of WA will look to form partnerships with industry and agencies to facilitate innovation that will provide unique competitive advantages.

In WA, our tertiary training and research facility for industry, the Curtin University Centre for Wine Excellence (CUCWE) is under review. The facility is of significant strategic importance to driving innovation and capability in the WA wine industry. Wines of WA will investigate how to facilitate partnerships to ensure the continued operation of the CUCWE.

When considering development of human resources, it must first be acknowledged that we compete with many other industries for people. Whilst industry leadership is important, ensuring we attract talented people to the industry in the first instance is also essential. This requires communicating the benefits of a career in the wine industry.

To summarise, each state and region should determine how best to tell their stories. AGWA should support this through a re-direction of funding and administrative support. RD&E should drive innovation across the value chain, providing greater efficiencies and market advantages. Increasing capability requires industry to establish partnerships with service providers and government agencies.

Most importantly, there is no one size fits all. States and regions need to determine their unique place and authentic wine and what their unique competitive advantages are. AGWA should then provide the support required for states and regions to capitalise on these.

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F. The work being undertaken by AGWA pertaining to levy collection information; A significant weakness of the Australian grape and wine industry is the lack of current. Accurate data related to production. Through the levy gathering process, an accurate annual report on production can be produced.

WoWA suggests that, in addition to gross tonnage of white and red grapes, levy reporting also captures production by grape variety, region of origin and value per tonne. This information can be aggregated to the appropriate level (regional, state or national or by segment (variety, region, price point) to provide valuable decision-making insights on future production.

This aggregated information can be compared to sales information, allowing producers to more efficiently adapt to market trends.

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G. The power and influence of retailers of Australian wine in domestic and export markets; Refer to point A regarding domestic retailers.

With regard to market power of both domestic and international retailers of Australian wine, the common strategy is to shift supply/demand balance in favour of Australian wine producers through appropriate market development activities.

While marketing and promotion forms a part of this, as important in domestic markets are appropriate regulation of retail consolidation and international markets, a level playing field with regard to tariffs, market access and compliance issues.

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H. The adequacy and effectiveness of market intelligence and signals in assisting industry and business planning; See point F above. The scarcity of timely and accurate market intelligence is an industry weakness. Industry must be prepared to adequately resource the collation and dissemination of relevant, accurate industry data. WoWA suggests the allocation of a greater proportion of levy funding to this task should be considered.

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I. The extent to which the Australian grape and wine industry benefits regional communities both directly and indirectly through employment, tourism and other means; The wine industry generates significant benefit in regional WA. Wine adds value by a factor of 10 from farm-gate to retail sale (see appendix 1). Much of the value is added in region, creating jobs directly through employment by wine businesses and utilisation of local service providers (trade, professional and casual labour).

Additionally, the wine industry attracts synergistic businesses, principally tourism/hospitality, but also niche agriculture (to supply local produce to restaurants) and the arts. When a critical mass of this diversity develops, the region attracts further population growth and with this the need for services – medical, professional, educational.

The prime example is the area between Busselton and Augusta. It is difficult to imagine what would now exist in this region, if not for the wine industry.

This has occurred over a 50 year period. It is long term and, with adequate support, can be permanent (consider the classic regions of Europe as examples). Pemberton/Manjimup will develop similarly and the Great Southern is well on the way to achieving what Margaret River has. The only thing that prevented the Swan Valley from being rezoned to low income housing estates was the wine industry. Ask the City of Swan now what they would prefer to have.

Contrast the above to WA wheat-belt towns. While the industry may be growing in revenue, it is not growing towns in regional WA.

The wine industry employs over 52,000 jobs directly. The food and beverage industry employs 553,000 people. Compare this to 30,000 in iron ore mining. These jobs are not fly in fly out. People live where they work and create communities.

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The Economic Value of the WA Wine Industry

 Western Australia produces about 45 million litres of wine annually, representing nearly 5% by volume of Australia’s production, but 12% of the value. It produces nearly one quarter of Australia’s fine wines (specialty and super-premium).  The average FOB price of WA export wines in 2012 was A$6.48 per litre compared with A$2.61 per litre for the rest of Australia. The average price across WA’s top five export markets was A$7.29 per litre.  Western Australian wine production is based predominantly on premium varieties, and cool and maritime climate viticulture. Western Australia is a relatively low yield, high cost producer of high quality fine regional wines. The future of the industry lies in the production of fine wines from WA’s premium wine regions at premium prices.  The wine industry is a significant contributor to the Western Australian economy. Wine is a major value-adding industry with significant regional economic and employment benefits. Wine is the largest value-adding horticulture industry in Western Australia according to estimates by the Department of Agriculture and Food shown in Tables 1, and 2 on page 2. (extracted from the WA Wine Industry Strategic Plan 2014-24 pages 18 – 19).  The value of wine at the point of final sale was estimated at $684 million in 2010 and expected to grow to $795 million by 2015.  The value of wine increases 10 times from the farm gate as grapes to the end consumer as wine. (Potatoes are the next highest, increasing value by seven times.) The average increase in value across all horticulture industries is three times.  Wine represented 41% of the $1.1 billion total value added by the main 11 horticulture industries in 2010. The total value of horticulture at the final point of sale was estimated at $2.35 billion of which wine accounted for about 30%.  Also note the value of exports and interstate sales. At $135 million per annum, this is more than double that of carrots.

Table 1 Western Australian horticulture industry value chain analysis for 2010 and estimate for 2015 Year 2010 2015

Farm gate value $725m $879m GVAP $829m $1.0b Value added $1.6b $1.9b Value of industry $2.3b $2.8b Ratio of final sale value to farm gate value 3.3 3.3 Ratio of final sale value to farm gate value for wine 10.5 10.5 Industry with highest farm gate value Wine Wine Highest value-adding industry Wine Wine Industry with highest flow-on benefits Wine Wine Industry with highest export value Carrots Carrots Industry with highest growth rate in value added by 2015 - Avocados

Table 6. Value chain analysis of selected horticultural industries for 2010 Product Farm Export Eastern Value Industry Final sale gate value states added1 value2 value/farm value ($m) sales ($m) ($m) gate value ($m) value ($m) Apples 34.3 0.9 3.2 59.5 79.7 2.3 Avocados 20.1 0.6 9.6 23.5 32.6 1.8 Carrots 56.4 50.4 11.8 65.0 105.1 1.9 Citrus 17.8 - 0.7 35.0 46.0 2.6 Cutflowers 35.3 4.6 23.9 81.6 103.1 2.9 Pears and stone 25.9 3.2 4.0 42.7 57.5 2.3 fruits Potatoes 54.1 7.1 2.6 268.0 384.2 7.1 Strawberries 55.4 3.9 31.5 53.8 93.7 1.7 Table grapes 27.5 1.1 1.0 42.3 47.2 1.7 Wine 65.1 32.9 102.3 427.9 684.4 10.5