Case

Australian (A) – A Global Challenger

Professor Örjan Sölvell at the Stockholm School of Economics, Center for Strategy and Competitiveness, prepared this case based on public

sources. The “” part of the case was carried out in collaboration with Professor Chris Bartlett at HBS in 2001. The case is developed

for class discussions in the course “On Strategy and Competitiveness”. All parts of this case may be reproduced, stored in a retrieval system

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An accompanying textbook “On Strategy and Competitiveness – 10 Recipes for Analytical Success” can be downloaded for free at:

http://www.clusterobservatory.eu/index.html#!view=documents;mode=one;sort=name;uid=77c78ae7-ec99-45a8-bfbf-ad89640f250b;id=

1

“The trick is to demystify what is in the bottle - simple labels, colorful packaging, and distinctive bottles” Keith Lambert, CEO Southcorp,

Europe with its leading ‘old world‘ wine producers — France, Italy, Germany, Spain and Portugal — had dominated the world wine industry since medieval times. However, during the last decade or so European grape production had moved from a 62% share of world in 2000 to only 39% in 20121. The global wine market was supplied by a highly fragmented and heterogeneous industry. The so called ‘new-world’ wine producers — from the U.S., Australia, , and South Africa — had been gaining market share in the major markets around the world. Many old world producers argued that in their drive for efficiency and consistency, the producers had lost the depth, character, and unpredictable differences that came with more variable made in traditional ways.

Within the wine producing nations, vineyards, wine making and blending companies and other related firms and organizations, were naturally clustered around particular regions, hills and valleys, such as in the case of Bordeaux in France, Napa Valley in the U.S. and in Australia.

1 http://www.bkwine.com/debate/world-wine-market-implications-for-winemakers-consumers-and-policy-makers/

2 Figure 1 A Typical Wine Cluster

Specialized Consumers Publications Equipment

Wholesale/Retail Barrels, tanks and wine storage Grape stock

fermentation Fertilizer, Pesticides, /Processing supplies Herbicides Facilities

Bottles , closures, Grape Harvesting Bulk wine trading labels and brokerage Equipment

Growers/Vineyards Transportation and Irrigation Technology logistics services

Marketing and Tourism advertising. Legal and financial Education, Research services.

Agricultural and food

processing Organizations State Government For Collaboration

After decades of being dismissed for their attempts to compete with exports from France and Italy, the new-world wine companies had begun to win international respect also in the medium and premium segments. However, in spite of recent successes by the producers, French and makers dominated world production and exports (Appendix 1 and 2). Global consolidation had begun in the 1990s and companies were particularly active. Out of the ten top selling brands in the world in 2013, five came from Australia (Appendix 3).

3 The Old World

Grape growing for wine making had been central to human culture at least since the ancient Greek and Roman civilizations. Particularly in Mediterranean countries almost every village had its local vineyards and winemakers. In the Christian era, as wine became part of liturgical services, monasteries began planting vines and building wineries. Eventually, the Benedictine monks raised to a new high level, making wine not only for religious use, but also to show hospitality to travelers requiring lodging. By the Middle Ages, the European nobility began planting vineyards as a mark of prestige, and a niche market for premium wine was born. from Bordeaux, referred to as “Clarets”, took a leading position.

Following the French Revolution in 1789, the government seized many large estates, broke them up, but within a few years sold them back at , often to rich wine trading families. Vineyards were often small and few farmers had the volume of grapes, or the time available, to make wine professionally. This became a specialist task undertaken by local wine makers and traders. For example in Bordeaux, the steps in the value chain from grapes to final markets were strictly regulated. As grapes were sold by weight, the growers’ emphasis was on maximizing . Only the large estates made their own wine, and were sometimes willing to sacrifice quantity for quality. To gain more control and compete with the larger estates, some small growers formed larger cooperatives. By sharing communal winemaking and bottling equipment, and sometimes pooling resources to distribute the finished product, they were able to participate in winemaking’s downstream profit.

Regulation and Classification The industry’s cultural and economic importance attracted a great deal of political attention, and over the years laws, regulations and norms controlled almost every aspect of winemaking. Germany introduced a wine classification scheme in 1644. By the 1830s, these regulations had expanded to encompass 65 classes of quality, legislation prescribing ripeness required for harvesting, definitions of minimum sugar content, and penalties specified for those who added sugar. Even as late as 1971, laws were passed in Germany requiring registration of each and the appointment of a government panel to taste each vineyard’s annual and assign it a quality level. Similar strict laws exist in France and Italy to this day.

Within the industry, regional producers often added to the classification schemes and regulatory controls, as a way of differentiating their product in an increasingly complex market for wine. The classic French classification system was created by the Bordeaux Event Committee in preparation for the 1855 Exposition in Paris. To help traders and consumers recognize different qualities of —and to help distinguish Bordeaux as the region most notable for fine wines—they classified vineyards on one of five levels, from premier cru () to cinquième cru (fifth growth). This marketing tool immediately gained wide recognition. As a result, the government later codified much of the 1855 classification in the d’Origin Controllée (AOC) laws that extended the original Bordeaux concept by defining boundaries and setting the standards for vineyards and winemakers in France’s

4 other major wine-growing regions. These laws came to prescribe almost all aspects of production, from the permissible types of grape to the alcohol content of the wine.

Later, other wine regions of France were given official recognition with the classification of Vins Delimités de Qualite Superieure (VDQS), but these usually regarded as of lower rank than AOC wines. Below VDQS were Vins de Pays or country wine primarily producing “vins ordinaires.” There was almost no movement within or between the hierarchies created by these classifications, since the French nurtured the concept of , the unique and almost mystical combination of soil, aspect, microclimate, rainfall, and cultivation that they believed was at the heart of the unique taste of each region’s — and indeed, each vineyard’s wine.

But terroir could not always guarantee quality. As an agricultural product, wine was always subject to the vagaries of weather and disease. In the last quarter of the nineteenth century, a deadly insect, , devastated the French vine stocks. From a production of over 5 million hectoliters in 1876, output dropped to just 2 million hectoliters by 1885. Government and industry mobilized, eventually finding a solution in an unexpected quarter. Phylloxera- resistant roots of vines from the upstart Californian wine industry were imported and French vines were successfully grafted onto them. It was the first time many in the old world acknowledged the existence of a wine industry outside Europe. But in fact there were already a number of established wine clusters in the “new world”: Chile (1500s), South Africa (1600s), and Australia (1700s).

Still in the 1980s and 1990s classification schemes were contested and there had been several scandals. Burgundy’s most famous vineyard, Chambertin, had its 32 acres divided among 23 different proprietors, and while a few had earned grand cru status, others were riding on that reputation to sell at $150 a bottle, legitimately labeled Chambertin, that according to Robert Parker was “thin, watery, and a complete rip-off”. Meanwhile, in Italy, the standards prescribed in DOC regulations were so often violated that the government was forced to introduce a DOCG classification in 1980 (where the G stood for guarantita) to restore consumer confidence to the most notable wine regions. And in Germany, government standards had become so diluted that, even for average vintages, over 75% of wine produced was labeled Qualitatswein (the German QbA quality standard) while less than 5% earned the more modest Tafelwein () designation.

Microeconomic Conditions Although vines had a productive life of 60 to 70 years, they typically took 3 to 4 years to produce their first , 5 to 7 years to reach full productive capacity, and up to 35 years to produce the best quality grapes for wine. It was a life cycle that did not respond well to rapid changes in demand. For producers in many old world regions, the challenge of responding to shifting demand was difficult. Firstly, there was often no new land available, particularly in controlled regions such as AOC. Equally constraining were the numerous regulations prescribing the grape varieties that had to be used in the region’s wines, offering little flexibility when consumer preferences shifted. One of the biggest victims of the fashion switch from sweeter white wines to drier reds was the industry. Constrained by tight regulations on sugar content, the German winemakers watched their exports drop from

5 over 3 million hectoliters in 1992 to under 2 million just five years later, and its share of the huge U.K. market fell from 17% in 1995 to just 8% in 1997.

Old world countries had high per capita consumption. In the 1960s per capita consumption stood at 60 liters in Spain which was only half of France and Italy with consumption of 110- 120 liters per person annually. However during the last two decades consumption had decreased considerably in old world markets (and also in Chile and ). In France, Italy and Spain per capita consumption halved between the 1960s and the late 1990s, but still a Frenchman drank eight times more wine than his fellow American in the late 1990s.

Typically old world countries had excellent natural advantages related to soil, sun and . Education and research was highly developed with specialized training institutes and sophisticated research around grape growing and wine making. Apprenticeship systems were also highly developed and had a long tradition. Labor costs were almost twice as high in France as compared to the United States.

The industries were highly fragmented. In France alone there were some 180,000 grape growers in the late 1990s, and in Italy there were over 800,000 growers. Clusters were well developed with related and supporting industries being part of regional clusters. The EU was subsidizing wine growers to cut production in order to reduce constant grape surpluses. New vineyard planting of grapes for table wine was prohibited in several European countries.

The New World Although insignificant in both size and reputation, compared to the well established industry in France and Italy, vineyards and wine makers had been set up in many new world countries since the eighteenth century. In Australia, for example, vines were brought over on the of convicts and settlers in 1788; while in the United States, Thomas Jefferson, an enthusiastic oenologist, became a leading voice for establishing vineyards in Virginia in the late 18th century. Nascent wine industries were also developing in Argentina, Chile, and South Africa, usually under the influence of immigrants from the old world countries. The wines produced in the new world were almost wholly consumed in domestic markets, except for some British imports from their colonies.

In 1976, an event occurred that radically affected both the dismissive attitude of some old world producers and the inferiority complex of many new world wineries. In a widely publicized event, a British wine merchant set up a blind tasting panel to rate top wines from France and to determine how far the new world challengers had come to meeting the quality standards set by the old-world. Against all odds — the French had an enormous “home court advantage” of an event held in Paris, with a judging panel of 15 critics — the American entries took top honors in what became known as “The ”. When a similar judging was held thirty years later, the Californian wines again took

6 top honors, with the 1971 Ridge Monte Bello as number one. The famous 1970 Château Mouton-Rothschild came in as the top French wine as number 6 of the 10 tested wines.

Demand While good climate and soil allowed grape growing to flourish in the new environments, the penetration of wine consumption into local markets varied widely. The US and Australia had very low consumption levels, partly restricted by alcohol laws during certain periods. In the late 1990s the average American drank 56 gallons of soft drinks, 23 gallons of beer and two gallons of wine. However, wine drinking had been steadily on the rise, especially in the metropolitan areas, and customers had become increasingly sophisticated. Between 1985 and 1997 jug wine sales in the United States declined from 800 million to 650 million liters, while consumption of premium wines increased from 150 million to 550 million liters.

As demand shifted between different grape varieties and qualities, winemakers tried to respond quickly. For example, Californian acreage planted with grapes had increased 36% in one year (1990) while plantings increased 31%. Demand for red wine in the US began surging in 1991 following the publication of a medical report identifying red wine consumption as the major reason for the so-called “French paradox” — the fact that the French enjoyed very low rates of heart disease, despite their well known love for rich food. The report, widely reported in the press and featured on the television program 60 Minutes in the U.S., gave a huge and immediate boost to red wine sales.

Innovation Typical for new world countries was that suitable land was widely available and less expensive (with the exception of California in later periods), allowing the growth of much more extensive vineyards. In the early 1990s, the average holding for a vineyard among new world wine producers was some 150 hectares compared to less than one hectare in the old world countries. Producers in California and Australia in particular began to experiment with new technology in both grape growing and wine making. In Australia, experiments with controlled drip irrigation not only reduced vintage variability but also allowed expansion into new growing regions. The larger vineyards encouraged the development of specialized equipment, and mechanical harvesters and pruners became the industry standard. Innovative trellis systems developed in Australia permitted vineyard planting at twice the traditional density, while other experiments with everything from fertilizers to pruning increased yield and improved grape flavor. The newer wine makers also developed processes that allowed much of the fermentation and even the aging to occur in huge computer controlled stainless steel tanks rather than in the traditional small barrels.

Beyond their experiments in growing and wine making, new world producers also innovated in the area of packaging and marketing. Although initially following the European tradition of targeting the huge market for basic bulk wines, the Australian and Americans did so in their own way. In the U.S., the half-gallon flagon with a closure replaced the old world standard liter bottle of “vin de table”, while the Australians developed the bag-in-box package. In the 2000s the screw cap closure began to replace the (of natural cork or plastic) throughout Europe, beginning with lower priced wines. New world producers were

7 also active in experimenting with branding and marketing.

International Competition While old world countries were cutting down on wine production, new world countries were growing. In the 1990s a new player entered the scene, China. The emerging middle class had begun to develop a taste for wine.

Table 1 World Production of Wine by Country

Production 1995 2000 2015 position 1 Italy France France 2 France Italy Italy 3 Spain Spain Spain 4 USA USA USA 5 Argentina Argentina Argentina 6 Germany China China 7 South Africa Australia Australia 8 Portugal Chile Chile 9 Romania South Africa South Africa 10 Australia Germany Germany

Source: Own Estimates.

World wine consumption was decreasing overall but in particular markets demand was increasing during the 1990s and 2000s, especially in countries not producing wine, such as in Great Britain, the Scandinavian countries and in many Asian markets. The old world countries, France, Italy and Spain still controlled the major part of world exports. International trade was on the increase and the cost of shipping wine from Australia or South Africa to the U.K. market was equal to that of trucking it from Italy or France.

8 Historically, few European producers had developed international brands. Only a handful of wines that had achieved icon status — Lafite, Margaux, Veuve Cliquot, Chateau d’Yquem — became recognized brands. Compared to soft drinks, beer, and liquor, where top brands dominated market share, no wine brand had even 1% of the global wine market. Although European producers — and more often, their importing agents — had promoted a handful of popular-priced brands that had achieved commercial success in the 1960s and 1970s (e.g. , Mateus, Liebfraumilch), it was the American manufacturers that made branding a routine part of wine marketing. Led by Coca-Cola’s acquisition of Taylor California Cellars in 1977, other experienced consumer goods firms such as Nestlé, Pillsbury, and Seagram’s also entered winemaking, believing the wine business offered a perfect place to apply their branding expertise. But within a few years almost all had sold out, with Coca-Cola’s CEO declaring, “This is a fundamentally bad business to be in.”

E&J Gallo was a Californian winemaker that had introduced advanced marketing techniques and massive advertising and promotional budgets, and had built brands such as Turning Leaf and Gossamer Bay in the 1990s. E&J Gallo was the world´s largest producer of wine. was also created around the mid-1960s. Recently, Robert Mondavi caught attention for an unusual collaboration with Californian sunglasses maker Woodzee. Beringer, established in 1875, claimed to be Napa Valley’s oldest continuously operating . The leading wine companies in the world are shown in the Table below.

Table 2 The World’s Largest Wine Companies (2000 and 2015)

World Leading 2000 2015 Wine Companies 1 E&J Gallo (US) E&J Gallo (US)

2 Fosters (AU) Constellation (US)

3 Seagram (CAN) The Wine Group (US)

4 Constellation (US) Concha y Toro (CHI)

5 Southcorp (AU) Grupo Penaflor (ARG)

6 Castel (FR) Pernod –Richard (FR)

7 Diaego (US) Treasury Wine (AU)

8 Henkell & Son (GER) Castel (FR)

9 Robert Mondavi (US) (AU)

Note: Fosters and Southcorp in Australia merged in 2005, later renamed Treasury Wine.

Source: Business Week, September 3, 2001, and http://www.adbrands.net/sectors/sector_spirits.htm

9 Foster’s had acquired Beringer in California in 2000, and became number two in the world that year. In 2005 Fosters merged with Southcorp and formed Treasury Wine. The Chilean industry was led by Concha y Toro with its flagship brand Casillero del Diablo. This 130 year old company accounted for 34% of Chile’s total wine exports.

The Australian Challenge

Australia had a long tradition in winemaking, with the first vines brought to the country in 1788. The Wark Act of 1858 allowed for the expansion of distilleries in Australia, and the number of vineyards expanded rapidly. The act was repealed in 1877, and with a tightening of distillation licenses many small wineries went under. The industry was divided into two groups: skilled grape growers who only made wine for their own use, and professional wine producers selling wine both on the domestic and export markets. This specialization began in the Barossa Valley. Most of the wine produced was of the fortified type and by the 1880s Australia had become a significant producer of sweet fortified wines such as ‘port’, ‘madeira’, and ‘’. The professional wine producers exported primarily to Britain.

After World War I, Australia had been granted a preferential trade agreement with Great Britain. This led to a surge in exports, with Australian fortified wines gaining ground against the famous wines of Portugal and Spain. Export growth continued until the outbreak of World War II. A Wine Overseas Marketing Board was created in 1929, consisting of representatives from the government, wineries, distilleries and wine growers, to regulate exports between Australia and Britain. A promotional office was opened in London already in 1930.

The old wineries had now become more commercially oriented and old family partnerships were turned into limited liability companies. The major winemaking companies in the 1930s included: Hardy, Penfold, Orlando, Tolley, Angove´s and Seppelt. The management of these companies had typically spent time in Europe to gain viticulture skills and to learn the trade. Skills in winemaking were also brought to the country by immigrants after World War I, especially from the dismantled Austro-Hungarian Empire.

In the 1930s, wine and winemaking began to attract attention in the research community. In 1936, an course was established at the Roseworthy Agricultural College. The 1930s also saw the first production of quality white table wines, such as the Rhine introduced by Vineyard’s Austrian-born winemaker Rudi Kronberger.

Post-World War II Australia had always been considered a beer-drinking country. The hot climate and a dominant British heritage made beer the alcoholic beverage of preference, with wine being consumed mostly by old world immigrants. However, during and after World War II, beer was in short supply (it was rationed until 1953), and table wines became popular in homes and restaurants. Wine consumption moved from fortified wines into white table wines in the

10 1950s, and to red table wines in the 1960s. Demand for table wines increased from less than 2 liters in 1960 to 22 liters by 1986, falling back to 19 liters by 2000.

In the 1950s the industry made a leap with a new technology, the stainless steel tank, first imported by Orlando in 1953. With the tank the fermentation could be controlled and the ’straw oxidation’ bitterness could be taken out. Colin Gramp of Orlando had received the first import licenses for stainless steel pressure tanks after he was convinced of their benefits by visiting German wine producers. In 1955 Colin produced a sweeter style Barossa that caused a sensation at the 1955 Adelaide Wine Show. The Germans had also introduced Colin to the idea of saturating wine with carbon dioxide in the pressure tanks to retain freshness. Other developments in white wine handling such as inert gas cover to avoid oxidation, cold stabilization, control of SO2, filtration and refrigeration, resulted in the industry’s greatest success story, the Barossa Pearl. Orlando’s innovation was soon followed by other wineries. Another change in the after-war years was that most wineries moved away from bulk sales (where the wine was bottled and labeled by traders and exporters) to bottling, labeling and marketing of the wine themselves. In 1955, the government established the Australian Wine Research Institute.

In 1950, the production manager of , , had visited Spain to learn about sherry making, but also visited Bordeaux on his way home. He brought back the concept of French oak maturation of to produce long-living wines, but due to the shortage of both, he ended up making a in American oak. This experimental wine, Grange Hermitage, which at first was deemed undrinkable by the company, has since become one of Australia’s classics. As one industry observer noted: “Undoubtedly our Aussie premier grand cru is Hermitage - a multi region Shiraz blend of the highest quality blocks that the team can identify. First crafted in 1951 by the legendary Max Schubert it is now a global blue chip investment that is traded from New York to Osaka and Tel Aviv. The challenger is 's Hill of Grace.”

In late 2001, a bottle of the 1951 Penfolds Grange Hermitage sold for AUD 52,211 at an in Australia featuring only Grange Hermitage wines.

The 1960s and 1970s The first regular newspaper wine columns in Australia appeared in the early 1960s. About the same time, a number of “wine aficionados” entered the industry. These individuals, often professionals in law or medicine, had made enough money to start or acquire a small vineyard. Many failed, but a few became wine legends. Some Australian wineries began to be acquired by large international companies.

The first wine promotional organization, the Australian Wine Bureau, was established in 1965 with the help of the then-existing Wine and Brandy Producers Association. The 1960s also saw the beginning of a voluntary appellation scheme, guaranteeing the authenticity of local wines.

11 New technologies continued being adopted throughout the industry, including drip irrigation, mechanical harvesting, pressure fermentation tanks, heat exchangers to control fermentation, and refrigeration. The South Australian Department of Agriculture established a wine nursery to create new stock. Australian companies and organizations continued to attract individuals into the industry such as the legendary of Germany, recruited by the South Australian Winegrowers Cooperative Ltd in 1960. He would later win awards for his blending skills and high-quality red wines.

The 1970s was the period when Australian consumers turned to white Chardonnays. At first the wine critics would turn their back to the new tasting ’oaky’ wine, but soon demand picked up. The use of wine spread from immigrant groups with a strong wine tradition to the broader population. White wine was often used as a stand-alone drink. The cheaper types were sold in ’bag-in-the-box’. The quality had improved with fine filtration, refrigeration and stainless- steel tanks. The white wine was also increasingly ’manipulated’ with anti-oxidant gases (nitrogen and carbon dioxide), new yeast cultures were introduced as was enzymes to aid clarification. Ascorbic acid was added to prevent oxidation. Yields were improved with the hermetic centrifuge. The result was good tasting wines produced at reasonable cost. Many new technologies were brought in from abroad, but some were developed within Australia, such as the Potter Fermenter. A second winemaking school at Charles Sturt University was established in the 1970s, led by Brian Croser who had been educated at U.C. Davis in California.

H.J. Heinz, Philip Morris, Reckitt & Colman and other large international corporations acquired Australian wineries. Other large wineries were publicly listed. Many fourth or fifth generation companies were sold out to public companies enjoying a better tax status. By 1980, Hardy and Yalumba were the only large family-owned 19th century winemakers remaining in family hands. On the other hand, the entry of new entrepreneurs continued, setting up ’boutique wineries’, and by the mid-1970s some 150 such wineries existed in Australia. In some cases Robert Mondavi from California acted as consultant. In addition to traditional districts, new terrain was tried out, including the cooler high country.

The 1980s and 1990s In the 1980s, more new wineries were opened; some by skilled winemakers leaving the larger Australian companies and some through management buy outs of the large groups. Quality regulations were tightened. The Australian Wine and Brandy Corporation (AWBC) was established in 1980 as a regulatory body and funded by a statutory levy and fees. It administered export licenses, label integrity, and compliance with other regulations. A number of innovations were introduced in the 1980s and 1990s. Many Australian winemakers now begun to employ reverse osmosis technology to concentrate grape juice, ensuring a deeper-colored, richer-tasting wine. The technique had been developed by a couple of French desalination equipment makers, but the technology was rarely used in France. Innovations in wine growing included: regulated deficit irrigation (RDI, to determine exactly when irrigation should be applied), and partial root zone drying (PRD, using two drippers that sequentially irrigated half the root, thus saving 40% water. Besides wine growing and wine making, Australian firms had by now developed technological leadership

12 throughout a number of agricultural areas through a mix of imported and locally developed technologies.

The 1990s saw a surge in exports going from 10% of sales around 1990 to 40% by the late 1990s. The number of exporting wineries went from 270 (out of a total of 802 Australian wineries) in 1994 to 414 (out of a total of 1,104) in 1998. Australian wine makers began to establish joint ventures abroad, and a few foreign vineyards and wine companies were acquired. The late 1980s and 1990s also saw a number of new institutions emerge, engaging in everything from education and research to policy coordination (see Exhibit 5) and new regulation. The right to use certain regional names had always been a sensitive issue. Many wineries outside of France had used generic labels such as Bordeaux, Chablis or . The EEC had passed regulation already in the 1960s but it was difficult to enforce these rules outside Europe. In 1990 Australia introduced the Label Integrity Program, and an EU/Australia Wine Agreement was signed in 1992. In order to establish the legal rights of using the Australian region as part of the brand, the Australian Wine and Brandy Corporation established the Geographical Indications Committee (GIC) in December 1993, where names of regions were entered into the Register of Protected names.

A much published project was initiated in 1996, the Strategy 2025. The idea behind the Strategy 2025 was to create more coordinated action and establish a common long-term vision for the whole industry with a focus on increased exports and upgrading into premium segments. Active promotion of Australian wine took place across a number of markets. In 1996 a wine promotion bureau was set up in the United States, offering information and special promotion packages for retailers, including brochures, posters, signs, inflatable kangaroos etc. A number of organizations for collaboration around the wine industry was set up in the 1980s and 1990s (Exhibit 5).

Australian Wine in 2015 By 2015 Australia was only the seventh largest producer of wine in the world. However, in terms of exports Australia had taken the number four position since many years. Australian wine had had particular success in the British market, where most of the sales (around 85%), was carried out via supermarkets. Australian wine overtook French and Italian wines in volume in the British market in 2004. Australian producers had a focus on volume segments, but on the shelves you could both find Australian Penfolds´ Grange for 500 Euros and a for 5 Euros.

The Casella family had produced wines in Italy since the early 19th century. In 1957 the family moved to Australia and began to produce bulk wine. In 2000 they launched the highly successful Yellow Tail brand, a low-priced wine than made a big inroad into the U.S. and European markets. In 2003 it became the number one imported brand into the U.S. market (with the Costco Warehouse Club as a major distributor), and in 2005 Yellow Tail sold more wine in the U.S. than the French producers combined. In October 2013 the one-billionth bottle came out of the production line. The bottling line was said to be the fastest in the world, filling 30,000 bottles per hour2.

13 The most prominent wine producing regions were located in (Barossa Valley/Eden Valley, , McLaren Vale, Clare Valley, Coonawarra, Eden Valley and Padthway) and (Cowra, Griffith, Lower Hunter Valley, Upper Hunter Valley, Tumbarumba and Young). Less prominent regions were found in Western Australia and . Australian wines were typically made from Cabernet Sauvignon, Merlot, , Chardonnay, Semillon and Riesling grapes. But most importantly, Australian winemakers had developed a world reputation for their wines made from Shiraz grapes. The Australian and Industry Directory listed 1,431 winemakers, and an additional 4,000 wine-grape growers. In addition an estimated 700 firms were predominantly active within the wine cluster, including specialized suppliers of inputs and machinery, and specialized services (consultants, advertising/marketing etc.). Insurance services, certain plastic products and oak barrels were predominantly imported. More than 200 specialized organizations surrounded the clusters, including organizations for collaboration, education and research. About 1% of industry turnover was used for R&D (20% private and 80% government funded), which was equal to the manufacturing sector, but lower than certain industries such as automotive, scientific equipment, electronics and the wood and paper industry in Australia. One observer noted that Australian researchers accounted for some 20% of all technical papers within oenology and viticulture in the world3.

Four major groups had emerged during the 1990s:

• Southcorp (Lindemans, Penfolds etc.) • BRL-Hardy (Thomas Hardy etc.) • Pernod Richard Wines/Orlando-Wyndham (Jacobs Creek, Montrose etc.) • Fosters/Beringer Blass (Yalamba, Wolf Blass etc.)

In 2001 these four groups accounted for well over half of Australia’s wine production and some 80% of exports. The famous beer company Fosters had entered winemaking by acquiring Mildara Blass in 1995 (a company based on a merger between Mildara and Wolf Blass in 1991). The group also included Yalumba, established in 1849. Yalumba had acquired land in Napa Valley and New Zealand in the 1990s. With the acquisition of Beringer for $ 1.7 billion in California in 2000, the company was renamed Beringer-Blass. Southcorp and Fosters then merged to form , and BRL-Hardy turned into Accolade. Casella with its highly successful brand Yellow Tail was a newcomer.

2 https://wineeconomist.com/2008/02/26/the-yellow-tail-tale/ 3 Jancis Robinson in Financial Times Weekend 15-16 February, 2003.

14 Table 3 The Leading Wine Producers in Australia (2004 – 2012)

2004 2006 2008 2010 2012 Treasury Wine Estates n.a. 1 1 1 1 Casella Wines 4 4 4 2 2 Accolade Wines 2 2 2 3 3 Premium Wine Brands/Pernod Ricard 3 3 3 4 4 Ltd 6 5 5 5 5 McWilliam's Wines 17 15 9 6 6 The Yalumba Wine Company 7 6 6 7 7 13 8 8 8 8 Peter Lehmann Wines 9 7 7 9 9 Kingston Estate Wines 10 9 11 10 10 Andrew Peace Wines 15 13 14 12 11 Warburn Estate 18 20 12 13 12 Nugan Estate n.a. 16 17 12 13 Grant Burge Wines 19 18 20 14 14 Littore Family Wines 30 34 19 17 15 Brown Brothers 14 12 16 20 16 Angove Family Winemakers 11 10 15 15 17 The Group n.a. n.a. n.a. 18 18 Wingara Wine Group 16 14 13 16 19 Berton Vineyards n.a. n.a. n.a. 19 20

Source: The Australian and New Zealand Wine Industry Directory, 2013

Overall, Australian wine makers accounted for less than 5% of world production. However, Australia had experienced rapid success in the international markets, going from a net importer of wine in the mid-1980s to a large exporter in 2015. Compared to other wine- producing nations, Australia’s geography, climate and land were quite ordinary. For example, industry observers would rank the French, South African and Chilean climate much higher. Lately, irrigation costs had increased, and some observers argued that Australian wines had become identified by “one grape and one region”.

Challenges Ahead Australia had become a leading wine exporting nation, but other new world nations, such as Chile, Argentina and South Africa, were also formidable competitors. At the bottom end of the market, some blamed the great success of Yellow Tail — with its distinctive wallaby logo — for giving consumers the impression that Australian wine was a mass-market commodity. Lawrie Stanford, the manager for information and analysis at , the government body that helps to support Australia’s overseas wine marketing, said: “We’ve done the volume growth, and we overdid it a bit — the industry is recognizing that what we’re doing now is pulling back a bit.”

The governmental body Wine Australia said it would shift the marketing focus away from what it called “brand champions” — recognizable labels that sell at rock-bottom

15 prices — toward smaller producers, in order to highlight the differences among regions, such as Barossa Valley, and varieties. According to Mr. Stanford: “There’s always going to be another growth phase. Where is it going to come from? Well, these things are hard to predict, but you can be pretty sure that a strong prospect for a new growth phase is going to come from China.”

Wine consumption in the rapidly growing cities of China weas on the rise, and new consumption patterns, including E-commerce, had emerged. Australia was the second wine importer to China after France in both volume and value terms. Volume wines were retailed at RMB 60 – 100. Finer wines were mostly used in connection with business entertainment and as gifts. U.S. Robert Mondavi had recently opened up a special E-store (Tmall Vineyard direct) through Alibaba.

Figure 2 E-Commerce Site for Australian

Source: file:///Users/iibos/Downloads/ecommerce-in-China-for-wine-exporters-webinar-2015.pdf

The wine market was volatile. For example, in 2007 the Australian wine industry had gone into a dip. Industry observers then remarked that Australian winemakers had increased exports, but prices had dropped by 25% over a decade, and in 2007 export volumes were down 9%. “The industry is in crisis — anything less than that is avoiding reality” said Jeremy Oliver, an Australian winemaker and critic. Competition was increasing and consumer tastes were even more unpredictable.

Phylloxera constituted a latent risk in grape growing and could quickly destroy whole vineyards. In 2002, Australia had phylloxera-infested regions within New South Wales and Victoria. Strict regulations regulated the movements of grapevines, cuttings, rootlings, grapes and also personnel (vineyard workers, regular visitors) between so-called phylloxera infested zones (PIZ), phylloxera risk zones (PRZ) and phylloxera exclusion zones (PEZ). Climate

16 change had led to increasing number of wildfires, which threatened the vineyards. Irrigation was always discussed among the vineyard owners, where water had become very

scarce and costly.

17 Exhibit 1 World Production of Wine (‘000 Liters)

Source: http://www.wineinstitute.org/files/World_Wine_Production_by_Country_2014_cTradeDataAndAnalysis.pdf

20 Exhibit 2 World Wine Exports

Export position 1995 2010 2015

1 France Italy France

2 Italy Spain Italy

3 Spain France Spain

4 Germany Australia Australia

5 Portugal Chile Chile

6 Australia USA USA

7 USA South Africa South Africa

8 Chile Germany Germany

9 South Africa Argentina Argentina

10 Argentina Portugal Portugal

Source:http://topics.nytimes.com/top/reference/timestopics/subjects/w/wines/australia/index.html

21 Exhibit 3 World Leading Brands (2013)

Brand Brand Owner Home base Million 9 liter cases

1 Barefoot E&J Gallo U.S. 16.9 Winery

2 Gallo E&J Gallo U.S. 15.0 Winery

3 Concha y Toro Concha y Toro Chile 13.6

4 Hardys Accolade Australia 12.9 Wines/

Champ PE

5 Yellowtail Casella Wines Australia 12.5

6 Robert Constellation U.S. 11.9 Mondavi Brands

7 Sutter Home Trinchero U.S. 11.2 Family Estates

8 Lindeman´s Treasury Wine Australia 7.2 Estates

9 Beringer Treasury Wine U.S. 7.1 Estates

10 Jacob´s Creek Pernod Ricard Australia 6.6 Winemakers

Source: http://www.thedrinksbusiness.com/2014/07/top-10-wine-brands-2014/3

22 Exhibit 4 Exchange Rates AUD – GBP (2005 – 2014)

AUD per 1 GBP

23 Exhibit 5 Australian National Wine Organizations

Australian Wine Foundation (AWF) Cooperative Research Centre for Viticulture Established: 1988 (CRCV) Focus: wine-health education; programs to Established: 1991 promote moderation Focus: coordination of research and education Funding: donations policy in viticulture Funding: member organizations

Australian Society of Wine Education Australian Wine Export Council (AWEC) (ASWE) Established: 1992 Established: 1990 Focus: wine export promotion, with office in Focus: wine education and training London and San Francisco, later Stockholm and Funding: membership; dissemination of Tokyo information to educators Funding: industry contributions; government grants

Winemakers' (WFA) Wine Industry National Education and Established: 1990 Training Council (WINETAC) Focus: government policy representation Established: 1995 Funding: voluntary levies Focus: coordination, integration and standards maintenance for vocational education and training Funding: GWRDC; government

Grape and Wine Research and Development Wine Industry Information Service (WIIS) Corporation (GWRDC) Established: 1998 Established: 1991 Focus: information collection, organization and Focus: research and development funding dissemination to the wine industry, media, Funding: statutory levy and matching government and the wider community government funds Funding: AWBC, GWRDC

Wine Grape Growers Australia (WGGA) Established: 2006 Australian Grape and Wine Authority Focus: lobbying, research “Wine Australia” (AGWA) Funding: voluntary levies Established: 2013 (merger of CRCV and AWEC) Focus: Strategic plan, regulation, research Funding: Government

Sources: Australia’s Wine Industry: Collaboration and Learning as Causes of Competitive Success. : Australian Business Foundation. May 2000. https://www.wineaustralia.com/en/About%20Us/corporate-documents.aspx

24 Exhibit 6 Establishment of Wine Companies in Australia (2013)

# Firms % total Established 2000 or after 770 29.9% Between 1990 and 1999 1040 40.4% Between 1980 and 1989 370 14.4% Between 1970 and 1979 195 7.6% Between 1950 and 1969 57 2.2% Between 1920 and 1949 27 1.0% Between 1900 and 1919 5 0.2% Between 1880 and 1899 21 0.8% Between 1860 and 1879 18 0.7% Before 1860 23 0.9% Unknown or not provided 46 1.8%

Source: The Australian and New Zealand Wine Industry Directory, 2013

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