Case Australian (B) The Barossa Cluster

Dr Göran Lindqvist at the Stockholm School of Economics, Center for Strategy and Competitiveness, prepared this case based on public sources and interviews with actors in the Barossa Region. 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 and transmitted in all forms: electronic, mechanical, photocopying, recording, or other. The case may be lent, resold, or hired out without the publisher’s consent.

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=

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“The BGWA is a highly effective agent and catalyst for positive change in the region.”

James March, CEO of Barossa and Wine Association (BGWA)

The

The Barossa valley was located some 30 kilometers from the coast in the state of South , the fourth largest state of Australia. The valley derived its name from a mountain range. It was named Barossa Ranges in 1837 when it was considered to have similarities to the Barrosa Ridge in Spain. (However, due to a clerical error when the name was registered it was incorrectly transcribed as “Barossa”.) The valley had an overall Mediterranean climate, although both climate and soil conditions varied considerably across the valley. In 2016, it had a population of about 20,000 people. About 11% of employment was in the “agriculture, forestry and fishing” sector. (See Exhibit 1.)

The original population was aboriginal. The area was on the border between the traditional lands of the Kaurna and the Peramangk people. Their numbers began decreasing after Europeans came to the region in 1836. Over the next few decades, large groups of settlers arrived. European settlers predominantly came from Britain and Germany, notably Lutheran farmers form Prussian Silesia seeking to avoid religious persecution. Of the three largest modern-day towns, Tanunda was German in character, Angaston was British, while Nuriootpa had a mix of German and British heritage.

Wine in Barossa

Early surveyors had noted that the area was suitable for agriculture in general and wine growing in particular, and wine growing immediately became widespread among the settlers. The first were established higher up in the Barossa Ranges by British settlers. All of these early cool-climate vineyards died out in the 1880s.

The vineyards down in the Valley had a different history. German settlers were the first to establish wineries here, and they were considerably more successful along with the British winemakers who soon followed suit. Several of the wineries established in the early decades had survived, including well-known brands such as , Orlando, and .

Winemakers in Barossa specialized in fortified (ports, and ) for which they had preferential access to the British market. By 1929, 25% of Australia’s wine production came from Barossa.

The Depression in the 1930s and World War II meant that demand for wine declined dramatically. While relationships between British and German settlers had traditionally been

2 good, World War II also brought social tension among neighbors. In order to bring the community back together after the War, the first annual Barossa Valley Vintage Festival was held to celebrate the end of vintage in 1947.

Starting from 1947, wine making in Barossa began to modernize. A series of new wine types were introduced using new grape combinations, and major technical innovations were gradually introduced, such as use of steel containers. In the 1960s, qualities began to improve and new high-altitude vineyards were planted. Quality controls and advanced new technologies were introduced although not uniformly adopted.

Demand expanded quickly in the 1970’s, and much of the wine making was carried out by large international food companies, purchasing ever-increasing quantities of . However, a shift in consumer demand from red wines to white, meant that demand from the large international companies for grapes from the region was slashed. In the 1980s, as a reaction to the local over-supply, many Barossa families therefore took up independent wine making and also local wine sales through small wine shops, called “cellar doors”, located near the winery. This sparked new interest and demand for quality wines and also became the basis for wine tourism in the Valley.

In the 1990s, Barossa had returned to traditional wine making, with an advanced and more confident emphasis on the unique properties of the region. This included a more European understanding of the influence of soil type, geology and micro-climate and a renewed appreciation of the pioneering introduction of innovations in the 1940s and 1950s. More sophisticated wines meant that higher grape prices were paid to growers, who in turn introduced more advanced techniques producing smaller but more high-quality yields produced with more carefully controlled irrigation.

Australian wine districts were geographically determined by the Geographical Indications Committee, a regulatory service run by the Australian Grape and Wine Authority (AGWA). It identified – and hence protected the use of the name of – the . In 2015, it had a total of about 14,000 hectares under wine, or 8.8% of Australia’s total planting. The zone was divided in the lower Barossa Valley region located to the west of the mountain ridge and the higher Eden Valley region to the east. Eden Valley, in turn, had one sub-region identified as .

Winemakers

A large cluster of wine-related companies developed in the Barossa Valley. These included winemakers (or wineries, or vintners), grape growers (or vignerons), and a range of wine- related product and service providers.

There were more than 150 wineries active in Barossa varying greatly in age, size and ownership. Some were owned by large multinational firms. Smaller wineries were often owned by groups of a few locals along with some partner who provided the capital. Some were Europeans who moved to Barossa for the lifestyle; others were professionals from or out-of-state with capital to invest and often a family history in wine making.

3 Penfolds. Penfolds was established in Barossa in 1844 by Christopher and Mary Penfold. Christopher was a physician and initially they produced fortified wines for medical purposes to be sold at his practice in Adelaide. Mary Penfold soon took over management of the winery. Production was extended to red and white table wines, as well as wine retail. At Mary Penfold’s retirement in 1884, Penfold’s winery was said to own a third of all wine stores in . Penfolds also acquired vineyards outside of Barossa, in McLaren Vale and in . After World War II, Penfolds’ chief winemaker, , visited to learn more about production, but got inspired to produce more advanced red table wines. As a result, Penfolds launched what would become one of the most famous Australian wines, , and Penfold shifted it focus to table wines. The Penfold family retained a controlling interest in the winery until 1976, when it was sold to the brewing company Tooth & Co. After a series of mergers and acquisition, Penfolds along with other major brands was owned by the large Australian wine-making group Southcorp. Southcorp in turn was acquired in 2005 by the Australian beer giant Foster’s Group. In 2011, Foster’s wine operations were spun off as , TWE. In 2016, TWE owned vineyards in Australia, New Zealand, California and Tuscany. They also owned and marketed 45 brands of wine, including Penfold’s, which then produced a large number of up-market wines. They had also invested in equipment for small-batch production, in order to better utilize their high-quality produce.

Yalumba. Yalumba was the oldest Australian family-owned winery. Samuel Smith, from Dorset, England, arrived in Barossa in 1848 and purchased some land near Angaston, naming it Yalumba, an indigenous word for “all the land around”. In 1849 he planted the first grapes and in 1853 the first wine was released. For a long period, port was the main product. In the 1960’s Yalumba began refocusing from port to table wines, and in 1962 they released their signature wine, aptly named Signature. In 2009, Yalumba was one of two wineries in Barossa (the other being ) who joined Australia’s First Families of Wine, a new group of twelve old family-owned wineries. In 2016, Yalumba was still owned by the same family, now named Hill-Smith, although in 2015 first non-family member ever became Managing Director of Yalumba. They still made their own barrels, the only privately-owned winery in the Southern hemisphere to have their own cooperage.

Orlando Wines. In 1847, from Bavaria, planted the first wines around the river Jacob’s Creek in Barossa. The first vintage of white wine was released in 1850. His son, Gustav, received from his father some land, which he called Orlando and to where he transferred his father’s wine business in 1877. In 1912, Orlando was converted into a limited company called G. Gramp & Sons. It was the first commercial winery in Barossa and later became . In 1973, the Jacob’s Creek brand was launched and in 1984, Jacob’s Creek wines were exported for the first time. In 1989, Orlando was acquired by the large French beverage group Pernod . When the following year acquired the wine company in New South Wales, it was merged with Orlando to form Orlando Wyndham. Pernod Ricard then changed the name back and forth a few times, until settling in 2013 for the name . The decision was not generally popular in Barossa. “With around 2,000 employees spanning five continents and six priority brands, we wanted a name that would encompass the nuances of all our wine business and

4 simplify our employer brand”, explained Pernod Ricard’s CEO. Both Orlando and Wyndham had pursued ambitious export strategies. In many international markets, Jacob’s Creek was one of the best-known Australian wine brands. In 1994, Jacob’s Creek brand was awarded the Maurice O’Shea Award for Outstanding Contributions to the Australian Wine Industry, an award previously only given to individuals. Jacob’s Creek also operated a large, modern visitors center built in 2002 oriented towards international tourists. The center, which overlooked the vineyards, presented the history of Jacob’s Creek, sold wines, included a restaurant, and offered workshops, cooking classes, and vineyard tours. In 2010 Jacob’s Creek signed a deal in the U.K. making it the Official Wine of Wimbledon, an event with 600 million viewers in 200 countries. By 2016, some 80% of Orlando sales were exported to more than 50 countries.

Basedow Wines. The Basedow family in Barossa traces its history back to 1849, when Martin Basedow arrived to Barossa from . His brother Johannes soon followed, and established in 1890 a large Bavarian-style mansion, called Chateau Tanunda. In 1896, they added a winery to the Chateau. For several generations, the Basedow family then continued making wines. In 1970, then owner John Basedow won the Jimmy Watson Trophy, Australia’s most prestigious wine award. However in 1975, John Basedow died and private and corporate shareholders stepped in to manage the winery. The winery and the brand then changed corporate hands several times through a series of divestments and company failures. In 2005, however, the three sons of John Basedow decided to re-start the family’s wine tradition, and launched a new winery using the temporary brand B3. In 2014 the Basedow brand came on the market and was acquired by the brothers, and from that point they operated under the traditional Basedow Wines brand.

Fernfield Wines. In 1856, William Lillecrapp was the first to build a dwelling in the Eden Valley area. His great-great grandson, Bryce Lillecrapp had been active as a grape grower for a couple of decades, when in 2001 he gave his wife Bronwyn, a former nurse, a wine-making course as a birthday present. In 2003, they started a winery, with Bryce managing the vineyard and Bronwyn the wine making under the name Fernfield Wines. Their son Shannon assisted with the wine making, and their daughter Rebecca managed the cellar door. At their retirement in 2013, the Lillecrapps sold Fernfield to Rebecca and Scott Barr. Rebecca and Scott were both engineers, and had both been working in the Australian outback, Rebecca in the mining industry and Scott in agriculture. During the first year they were mentored by the Lillecrapps on how to manage Fernfield. They produced small batches of wine sold through the cellar door and their own website. They used grapes from their own vineyards as well as grapes sourced from the Adelaide Hills region. They also offered a wide range of services such as personalised gift labeling and packaging of wine bottles, bespoke wine blends, wine barrel tasting, and Barossan coffee tasting.

Distillers

There used to be six distilleries owned by the large winemakers in Barossa. However, they had all closed due to the reduced demand for spirits. One independent distiller, Tarac Technologies, remained however, and produced grape alcohol sold to producers. Since

5 they received and processed solid and liquid winery waste, they played an important role in helping winemakers achieve sustainable operations.

Grape growers

There were also about 550 grape growers in Barossa. While many combined wine-growing with wine making and local wine sale, and some produced wine on contract license from larger winemakers, many had no wine production of their own.

Being selected to supply grapes for the most exclusive wines, such as Penfolds Grange, was considered highly prestigious among local grape growers. Although such contracts offered exceptionally high prices from the winemakers, the extraordinary efforts and costs involved in achieving the quality required often meant that the economic profitability was modest or negligible.

Grape growers in Barossa faced increasing difficulties with draught and heat waves. Since 1996, there had been repeated draughts, which created problems with irrigation as well as repeated wild fires. Bush fires frequently threatened to destroy vineyards. Even when fires did not reach the vineyards, smoke could taint the taste of the .

Fromm Vineyard. The Fromm property was first settled in 1895 by Charlie Fromm. In 1919, the first grapes were planted. The vineyard remained in the family, and in 2016 it had grown to 140 acres. It was then run by Trevor Fromm and his son Ryan, who had taken an advanced course in . They supplied eight different wineries with ten different varieties of grapes. For example, Fromm had been one of a small number of vineyards selected by Yalumba for a series of “single site” wines, made from grapes from a single vineyard. While adopting modern sub-surface irrigation methods and other innovations, Fromm also aimed to employ sustainable practices.

Various services and suppliers

A wide range of service providers and suppliers operated in the wine industry in Barossa. This included vineyard consultants, wine bottlers, vine rippers, grape harvesters, vineyard maintenance contractors, independent cellar doors, winery engineering firms, coopers, cork suppliers, and winery waste removal services.

Barossa Trading and Bottling Company was established in 2014. They operated a 3000 bph bottling line that could cater for bottle sizes from 375 ml to 1500 ml, and could apply either screw caps or corks, add capsules and finally pack the wine in cartons. All wines were bottled under the brands of the buyers. Services also included storage of bulk wine, laboratory services, labeling and warehousing. They also offered an export service, which included container packaging and loading and well as export documentation handling. The company had customers from Barossa as well as from many other Australian wine regions.

A.P John Coopers produced barrels and casks from French and American of various sizes. The John family arrived in Barossa in the 1840s, and had been coopers since 1889. They considered themselves “Australia’s premier cooper” and sold barrels to winemakers throughout Australia, New Zealand, South Africa, California and Spain.

6 Food and tourism

A large number of small guesthouses and bed & breakfast establishments operated in Barossa. There were also a few hotels. There were traditionally not many high-end restaurants in Barossa, but their numbers were slowly increasing.

Barossa was only a one-hour drive from Adelaide, the state capital with an international airport, and a large number of tour operators in Adelaide offered bus tours to Barossa. Making a half-day or full-day bus tour to Barossa was a popular among Adelaide visitors, but few stayed overnight in the region.

The State government had adopted special legislation, the Barossa Valley Character Preservation Act, that was intended to protect the rural character of the Barossa Valley. Especially, it was intended to prevent urban sprawl of Adelaide from transforming Barossa to a suburb of Adelaide. The act imposed restrictions on residential and commercial building in the region, with the exception of certain designated as living areas.

Research institutions

Some of Australia’s leading wine research organizations were located in the Adelaide region. Many were co-located at the Waite campus in Adelaide.

The University of Adelaide is the Southern Hemisphere's leading wine research and teaching university. It had a School of Agriculture, Food and Wine, and the Business School had a Wine Economics Research Center. The University also operated the National Wine Center, an event location and exhibition hall with its own small on-site vineyard at the Waite campus.

The Commonwealth Scientific and Industrial Research Organisation (CSIRO) was the Australia’s federal government agency for scientific research. It had a research unit at the Waite campus focusing on agriculture and wine grapes.

The South Australian Research and Development Institute (SARDI) was the State’s principal research institute. Among other things, they conducted research on the use of irrigation in viticulture at the Waite campus.

The Australian Wine Research Institute (AWRI) was the research institute of the Australian grape and wine industry was located at the Waite campus.

The Cooperative Research Centre for Viticulture (CRCV) was a joint venture between Australia's viticulture industry and research and education organizations located at the Waite campus.

Education institutions

A wide range of education on different levels was available in Barossa and Adelaide.

Both high schools in the Barossa Valley offered wine programs. At Nuriootpa High School all students studied agriculture in year 8, and in year 9-12 they could elect a focus on Vineyard Management and . They had a vineyard, and in 1992 Nuriootpa High

7 School became the first school in Australia to legally operate a commercial winery. Each year year-10 students produced four wines, including one port under the brand Nurihannam. At Faith Lutheran College in Tanunda agriculture was elective in year 8-9, and in year 10-12 they could focus on wine making and vineyard management. Their year-10 students also produced and sold wine under their own brand, Mengler View Wines. Year-11 arts and design students designed the labels each year.

TAFE South Australia (Technical and Further Education) was an independent statutory corporation of the Government of South Australia providing vocational education and training. They had a large campus in Barossa, providing training for all sectors and industries. This included seven courses in wine and viticulture and a short course in wine and spirits knowledge.

The University of Adelaide offered a four-year Bachelor of Viticulture and Oenology, one- year Graduate Diplomas in Viticulture and Oenology, and a two-year Master of Viticulture and Oenology, all given at the Waite campus. The Executive Education at the University operated a special Wine Business Series, offering courses on wine marketing, in particular for the Asian markets.

Government

The South Australian state government had a Department of Primary Industries and Regions (PIRSA) which, among other things, worked with agriculture, food and wine (see Exhibit 2). The Department of State Development was responsible for job creation and economic growth, and supported six cluster programs (see Exhibit 3).

The Australian Grape and Wine Authority (AGWA, or ) was the Australian Government statutory service body for the Australian grape and wine community. Located in Adelaide, it coordinated, funded and disseminated grape and wine research, controlled wine exports and promoted Australian wine sales domestically and internationally. It was funded by a combination of levies and charges from the industry and government funding.

The regional development authority (RDA) of Australia had a unit in Tanunda, RDA Barossa. RDA Barossa was a partnership between Australian, South Australian and local governments to strengthen the Barossa regional community. The overall objective of the organization was to facilitate collaboration between private sector actors, the community and different public organizations. RDA Barossa engaged in a range of activities, including investment attraction, regional information, investor assistance, skills training, workforce planning and development, and community consultation and facilitation.

Industry organizations

Winemakers Federation of Australia was the peak national body for the Australian wine industry, and had its headquarters in Adelaide. So was the national body for grape growers, Wine Grape Growers Australia, as well as Wine Industry Suppliers Australia, who represented suppliers to the wine industry.

8 Cluster initiatives

Actors in the grape and wine industry were brought together through a wide range of organizations. A study noted that winemakers in South Australia tended to collaboration within other winemakers in their cluster more frequently (64%) than winemakers in other parts of Australia (44%).

Barossa Grapegrowers’ Vine Selection Society was a non-profit organization promoting research on grape growing. It was formed in 1968 by local growers and viticultural researchers with a focus on developing new clones and high quality vines in the Barossa.

The most important organization for collaboration was the Barossa Grape and Wine Association (BGWA), set up to promote the region and to help wine growers and winemakers collaborate on projects related to business development and to technical development.

There was also an organization to promote the food in the region, called Barossa Food, and one for tourism, called Tourism Barossa.

The Barossa Grape and Wine Association

The Barossa Grape and Wine Association (BGWA) was established in 2008. It represented grape growers and winemakers in the Barossa region. Within BGWA, grape growers formed the Grape Barossa Committee, while winemakers formed the Wine Barossa Committee. Some activities included both grape growers and winemakers, but most activities were directed at either group.

BGWA was active in three main areas: promotion, best practices, and policy development.

Promotion. BGWA owned and developed the Barossa brand (see figure) and they operated the Barossa.com website. Barossa’s brand development included defining the value proposition and formulating the story behind the brand. This was done through the so called Barossa Chapters, which were a collection of ideas and concepts used to focus the message about the Barossa brand. For example, the expression “Rare and Distinguished” was used to express a unique commitment to wine culture, and the expression “Generations” highlighted how the past, present and future were connected. The Barossa Chapters were conveyed through the website as well as through printed materials.

9 BGWA, together with Tourism Barossa, had also launched the Barossa Trust Mark (see above), a quality certification for the food, wine and tourism industries.

A large number of events and activities supported the brand promotion and networking. The annual Generations Lunch brought together grape growers and winemakers. The Barossa Wine Show was another annual event, which included a trophy award ceremony and exhibitor tasting. The more frequent Winegrowers Breakfast was open also for winemakers and was an opportunity for networking between grape growers and winemakers.

The Barossa Wine School provided education for local actors on how to export to Hong Kong and mainland China, which also included instructions on how to align the story of their products. (11:50) The School provides three levels of training: the introductory course which was a 2-hour seminar covering six Barossa wines; the advanced level which was a full-day class covering 24 wines, and the Barossa Master level which was a six-day training for fee- paying students followed by a qualifying examination. BGWA also organized several export promotion missions to China.

Best practices. BWGA organized various educational services, through workshops, information sessions, surveys. For example, they initiated a leadership program for young grape growers and viticulturists called Next Crop. They also organized “best practice trials” among growers, to show how new practices improve performance compared to current practices. They helped organize an exercise that simulated an outbreak of . (South Australia is one of the regions in the world that are free from the microscopic insect that devastated most of Europe’s vineyards in the 19th century.) The China Ready program prepared Barossa winemakers for entering the Chinese wine market.

Policy development. BGWA represented grape growers and winemakers in lobbying activates towards various external parties. Important counterparts included the State government (Department of Primary Industries and Regions), State government agencies (the Tourism Commission), local councils, the Regional Development Agency, state level industry organizations ( Industry Association, Wine Grape Council of South Australia), national level statutory authorities

The 2015 strategy document from RDA Barossa highlighted some of the strengths of the cluster:

• Australia´s most-recognized wine region • Existing advanced manufacturing capacity and workforce with transferable skills • High-performing agriculture, tourism, education and logistics industries • Access to Adelaide´s port, airport and interstate markets • A growth plan proposing exponential increase in regional population • Climate-change resilience • Historically and culturally significant landscape • Engaged and collaborating communities

10 An example of results of BGWA’s lobbying efforts was the Be Consumed campaign carried out by the State government, where Barossa wine and food was highlighted for domestic tourists leveraging BGWA’s work on brand development.

BGWA had also secured grant funding from State government to establish the Barossa Trust Mark, a consumer-facing seal of quality. Any paying member of BGWA or Tourism Barossa or Barossa Food could apply for the license, which requires an evaluation panel. It was the first such accreditation in Australia that was regional and cross-industry.

BGWA also led lobbying for so called “character preserve” legislation for the Barossa Valley and the Eden Valley. Such state legislation fixated town boundaries and prioritized the use of rural areas for agriculture and certain tourism purposes. The effect was that rural areas were largely protected from residential and commercial development, for which there had been great interest.

A key role for BGWA was to serve as a contact point for legislative processes as well as media enquiries. In the past, media would turn to a random individual grower or winemaker would make a more or less well-founded suggestion for what should be done. These comments would be conveyed through with no mechanism to assess how the proposal would affect the region as a whole. One actor would get a voice and if the proposal was detrimental for others it would be a matter of damage control for the rest of the industry. In contrast, after BGWA was established, it could serve as a contact point for media, and the industry got a collective voice and could provide a more balanced input.

For the 2014/2016 period the organization put focus on the following areas:

• Water for the future • Digital connectivity • Premium food and wine profitability • Economic diversity • Tourism growth • Innovation and entrepreneurship • Transport and infrastructure (people and goods) • Health and wellbeing

Governance. The BGWA was led by a Board. It comprised four winemakers (representing different production sizes), four grape growers, an independent director, and an independent chairperson. The director had a legal background and worked at law firm and the chairperson had a background in the South Australian Wine Industry Association as well as in state government.

Funding. The Association had an unusual financial arrangement. The funding for the Association was not provided through annual membership fees (which was a common solution for cluster organizations world-wide, and was the case for Tourism Barossa and Barossa Food). Instead, under a so called “primary industry funding scheme”, grape growers and winemakers within the official Barossa Zone, contributed a levy to the Barossa Wine

11 Industry Fund. It was a mandatory charge placed on grape growers and winemakers, who would pay an annual levy based on the volume of grapes, to the State government fund, which then paid a contribution to the BGWA. This constituted about 80% of income.

Only grape growers and winemakers paid the levy to the industry fund, and hence only they could be members. Other types of firms, for example coopers and printers, could get involved as sponsors. Since contributions to BGWA were based on actual production volumes, which were impossible to predict, the contributions could be adjusted during the year, making it more difficult to budget for BGWA’s operations.

A grant program for viticulture from AGWA provided another 10-15%, and remaining 5-10% came from participation fees for marketing activities, sponsorships, and wine show sponsors.

12 Exhibit 1. Map of Adelaide and the Barossa region

University ofAdelaide, Waite Campus

10 km

13 Exhibit 2. Organizational chart of the Department of Primary Industries and Regions

Chief Executive

Executive Director, Deputy Chief Executive Deputy Chief Executive Strategy and Engagement

Executive Director, Director, Corporate Services Agriculture Food & Wine

Executive Director, Chief Financial Officer Biosecurity SA

Director, Executive Director, Fisheries & Aquaculture Regions SA Operations

Executive Director, Director, Rural Solutions SA Fisheries & Aquaculture Policy

Director, Forestry

Executive Director, SARDI

14 Exhibit 3. From the website of Department of State Development

http://www.statedevelopment.sa.gov.au/industry/innovation/clusters

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