Case Australian Wine (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= 1 “The BGWA is a highly effective agent and catalyst for positive change in the region.” James March, CEO of Barossa Grape and Wine Association (BGWA) The Barossa Valley The Barossa valley was located some 30 kilometers from the coast in the state of South Australia, 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 vineyards 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 Penfolds, Orlando, Seppeltsfield and Yalumba. Winemakers in Barossa specialized in fortified wines (ports, sherries and brandies) 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 grapes. 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 Barossa zone. In 2015, it had a total of about 14,000 hectares under wine, or 8.8% of Australia’s total vineyard 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 High Eden. 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 Adelaide 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 South Australia. Penfolds also acquired vineyards outside of Barossa, in McLaren Vale and in New South Wales. After World War II, Penfolds’ chief winemaker, Max Schubert, visited Europe to learn more about sherry 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, Penfolds Grange, 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 Australian wine 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 Treasury Wine Estates, 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 Henschke) 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, Johann Gramp 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 Orlando Wines. 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 Ricard. When Pernod Ricard the following year acquired the wine company Wyndham Estate in New South Wales, it was merged with Orlando to form Orlando Wyndham.