“The Wizards of Oz” (see below) appeared on The Wine Economist a dozen years ago in February 2008. It looked to Australia for insights about what might be ahead for the wine industry. I’d forgotten all about this old column until it started getting “hits” recently, which caused to me give in another look.
The basic idea was that what’s happening in the global wine market sometimes happens in Australia first or most clearly. I think this might have been one inspiration for my book Extreme Wine, which argues that the best place to see the future of wine is at the edges, where change is happening fast, not in the more stable center.
Re-reading this column makes me think how quickly things change (Fosters?) and how much some things persist. Do you think the argument stands the test of time? I am not sure how far I would push it now and maybe I pushed it too far then, too, but the climate change and ecological limits analysis still seems timely.
Let me know what you think in the comments section below (or tell me in person if you are attending the Unified Wine & Grape Symposium in Sacramento). Here’s the 2008 column as it appeared then.
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The Wizards of Oz (February 19, 2008)
When I think about the future of the global wine market, my thoughts frequently stray to Australia because that’s where I see so many current trends originating or being most effectively exploited.
Export driven marketing strategy? That’s Australia. Branded varietal wines? Everyone talks about Gallo and Constellation brands, but who has done it better than [Yellow Tail]? Foreign market penetration? The Aussies again, replacing the French as the strongest competitor in the British market and a strong presence in the United States.
Australia even wins the prize for the most sophisticated national wine strategy. Click on the image above to see a representation of the latest Australia wine strategy, which divides the market into twenty (20!) key segments where Aussie wines can compete.
Australia’s Boom and Bust
No doubt about it, if you want to learn about wine economics and integrated wine business, you should look to Australia. But that doesn’t mean that all is well down under. As I have written in previous posts, Australia has experienced a roller-coaster of wine market problems. First it was the problem of over-supply, which pushed prices down to unsustainable levels. And then, just when it seemed like things couldn’t get worse, they did and the early signs of wine shortages began to appear, which caused me to declare that the era of cheap wine was coming to an end. In each of these cases, trends that I see in many places now were first apparent in Oz. No wonder that I’m starting to view Australia as my leading indicator of global wine market trends.
This makes the news in Jancis Robinson’s column in Saturday’s Financial Times particularly sobering (not a good word for wine lovers). Robinson’s article suggests that Australia has hit ecological limits to the production of cheap wine. Water is scarce and expensive and this means that the cost (and therefore price) of bulk wines like [Yellow Tail] must rise — from A$0.40 in 2006 to A$1 in 2007 according to the article. That’s not quite a leap from unsustainable to unaffordable (the A$ is about 91 US cents today), but it presents a completely different business model. More to the point, however, the price rises exist because costs are high and the product is in short supply. Robinson is optimistic that Australian winemakers can compete and even thrive in the new market environment, but adjustment won’t be easy.
Robinson reports that Fosters has started sourcing some of its Lindeman’s brand from its vineyards in Chile (for the British market) and South Africa (in the U.S.). This continues the practice we have seen in the U.S. for some time for short-supply Pinot Noir. U.S. brands like Pepperwood Grove and Redwood Creek frequently contain Chilean and French wines respectively. Now, Robinson reports
There is much talk, though not much evidence, of basic bulk wine being imported into Australia from southern Europe, South Africa and South America to fill the so-called “casks” (boxed wine) and the cheapest bottles and flagons for the bottom end of the domestic market, prioritising export markets for such inexpensive Australian wine as the brand owners can afford. Australia has swung from famine to feast and back to famine in terms of its wine supply recently and bulk wine imports are nothing new. I remember encountering a director of one of Australia’s largest wine companies looking very shifty round the back of some fermentation vats at Concha y Toro outside Santiago de Chile in the mid-1990s.
Ecological Limits?
Now the problem here is not that the Australians are passing off foreign wines as their own. The wines I have seen have been clearly labeled and the few cases I know about where winemakers have tried to fool the public (some years ago in New Zealand, as I recall) ended badly for the dishonest producers. They were punished pretty severely in the marketplace when their tricks were revealed.
No, my concern goes more to the heart of the problem. Maybe Australia’s ecological constraints are a short term problem that will disappear. Maybe it is an Australian problem with no implications beyond the land of Oz. Maybe ready supply from Australia wannabe producers in South America, South Africa and Europe will always be there to fill the gap.
But that’s a lot of maybes and economists are trained to get nervous when it’s maybe this and maybe that. We know that the effect of climate change on the wine industry is real. And we know — or at least I think I know — that Australia has often been a good indicator of emerging trends in global wine. If this is the case, then we are indeed about to enter a new wine world, one where the natural constraints on wine production may be about to become as important as marketing strategies.
My sense on this Mike is that everyone is starting to think more about the wine purchases they make. This can break down into many subtle elements but clearly some obvious considerations are around how it is produced and what is involved in its delivery to market . In the area of production , irrigated grape growing loses out to non irrigated if sustainability is a consideration . Similarly products shipped long distances and still appearing at competitive price raise the question : where and how is some of that ” cost ” being incurred elsewhere ( carbon miles ?)
We have long been spoilt with access to wines from all over the world . Is it still an indulgence we need – as other considerations start to refine our choice .
Mike – it was nice to chat with you at Unified. This post strikes at the chord I deal with while working across categories outside of the wine industry. All categories are at various stages of digital transformation, dealing with changing buyer habits and sustainability shifts brought on by macro social beliefs across generational lines.
Peter Drucker always spoke about change happens at the edge, never from the center – as you cited in your 2008 piece. I see that axiom play out over and over. Innovation labs are generally not located at HQ. That is especially true in the Automotive industry. There are 17 auto innovation labs in Silicon Valley (now affectionally know as Detroit West).
As an industry outsider, with enough wine knowledge to be dangerous, I sense that the wine industry needs a new S curve. Incrementality is not going to shift fast enough to stay in front of the macro waves that are now washing ashore in the wine category.
I see 110,000 or so labels all saying the same thing. One shouting louder than the next to stand out. But, effectively still in the same swim lanes the industry has always held since the beginning. I call that noise. The goal is to become signal. And, that is where a new S curve or what I call a Spatial Shift will need to occur. It will take a bold soul to leap onto a new curve. Akin to catching the next wave is surfing.