Sometimes I feel like a broken record when I write about the Australian wine industry: bad news, bad news, bad news.
Most recently the bad news was the Dutch Disease. Australia’s mineral export success has driven up the foreign exchange value of the Australian dollar, making imports cheaper and exports (including wine exports) more expensive abroad.
That’s just what the shell-shocked Australian wine industry needs — higher prices or slimmer margins in key export markets! But now the bad news is even worse — the strong Aussie dollar is driving down wine prices in Australia’s domestic market and slashing producer margins there, too. How? Through “parallel import” programs that crafty retailers have put into effect. An article from the Sydney Morning Herald explains the situation.
Caution: Economics Content
Parallel imports are a consequence of a very common practice called international price discrimination. Price discrimination is the business strategy of charging different prices to different customers for similar or even identical products. Different buyers have different ability to pay and price sensitivity and it is sometimes possible to charge some customers a high price and others a low price in an attempt to extract all possible revenue from the market demand curve.
Classic examples of price discrimination include the highly complex pricing system that airlines typically employ with some seats being sold for four or five times the cheapest fare depending on when and how the ticket is purchased. Student and senior citizen discounts are relatively benign and generally accepted price discrimination examples.
International price discrimination is the practice of selling similar goods at different prices in different countries based on local demand conditions. In the case of Australian wine, for example, it appears that local wine market conditions in Brazil or Malaysia might cause winemakers to want to sell products there at lower prices than in the more mature domestic market. If the prices are set correctly, the combination of lower prices in some markets and higher prices in others can maximize the winemaker’s profit.
The Key to Price Discrimination
The key to price discrimination, according to your Econ 101 professor, is to prevent resale. The whole strategy backfires if someone finds a way to buy your products in the low price market and resell them (undercutting your sales) in the high price market. This fact limits price discrimination to situations where resale is costly, difficult or just plain impossible.
If someone finds a way to sell your discounted product back to the home market, the logic of price discrimination explodes.
Now the “parallel import” problem in Australia is that some large retailers there have discovered stocks of lower-priced Australian wines in other countries and are importing them back into Australia to sell for less. The strength of the Australian dollar (Dutch Disease again) makes this even more profitable. The Herald reports that
Parallel importing is … hurting business as supermarket chains and some of the bigger independent bottleshop chains bypass Australian brand licensees and import from third parties in countries including Brazil, Malaysia and the US.
Parallel importing hit record levels in the past year as the dollar continued to strengthen and retailers, looking for ways to drive prices down and exert control over their suppliers, became more aggressive in importing.
Some Australian producers are thus getting a double squeeze in their home market. They are exporting wine at the slimmest of margins (because of lower foreign market prices and the strong Australian dollar’s impact) only to see the wine shipped right back and sold by local retailers, undercutting their plans for higher margin home market sales.
Why do they call these “parallel imports?” I imagine it is because the imports and exports form two parallel lines, with cargo ships full of outbound and inbound wine containers crossing mid-ocean. Australian wine producers need to cross their fingers that even more bad news is not in the cards.
Special thanks to my Australian informant “Crocodile Chuck” for tipping me off to this situation.