An industry in crisis: why is it so?

When WBM editor Anthony Madigan asked me to comment on the crisis in the Riverland winegrowing industry, I agreed but later thought that publishing another tale of woe was pointless when it is obvious that what the Riverland is experiencing is a national experience – the entire Australian wine industry has reached a crisis point.

It is more worthwhile to ask, “How did we get here?” and “What should be done to address the growing problems bedevilling the industry?”

Clearly, numerous factors are collectively impacting growers and winemakers and the secondary industries dependent on a buoyant wine industry as well as the many regional economies and communities.

Everyone is hurting.

Regrettably, the industry must accept that many of its problems are self-inflicted.

A grape oversupply commenced in around 1996, initially generated by tax incentives for investors, but encouraged by industry leadership which was reluctant to put up the stop lights soon enough, has resulted in a grape – and therefore wine – oversupply of as much as 25 percent.

I recall at the time when the vineyard planting frenzy peaked, one senior industry leader said, “Don’t worry, when the investors go broke, the vineyards will remain in the ground for the benefit of the industry.”

A senior executive officer of a large wine company who has long gone was overheard saying, “This oversupply should be encouraged – it will bring grape prices down.”

And a common response from the then Winemakers Federation was that “market forces” would eventually level out the oversupply.

That kind of disingenuous leadership at that time and its failed assumptions created the elephant of massive over-supply which is at the core of the growing industry crisis.

The industry – growers and winemakers – in fact, does best when there is a small undersupply of grapes.

It ensures fair market value to the grower for grapes and indicates that the winemakers are selling all their wine.

Never Waste a Good Crisis

In comparison to other industries that have hit crisis points in the past 20 years, the wine industry has been glacial in its response to its problems, which have manifested today on a slow burn since 2000.

The Australian Dairy Industry, Sugar Industry, Fishing, Forest and Citrus industries have all addressed critical issues that were causing serious problems for their participants, with difficult restructures and resets, often with the aid of Federal funding but also from their members – some at great personal cost when reality was accepted, and industry exits were required.

The wine industry has seemed reluctant to do much more than conduct “reviews” and “consultations” rather than accept that without a comprehensive restructure – at the producer and grower levels AND the organisational/representational level – it will continue to dog paddle its way through a crisis with a high risk of drowning.

It seems to me it is past time the wine industry stopped fiddling, stopped blaming others, stopped thinking the oversupply problem is an inland one, stopped the regional parochialism and took the long overdue action to root out its entrenched weaknesses – which includes ineffective leadership and representation and widespread apathy – and grasped the nettle as other industries have done, some with remarkable success.

I understand that currently Martin Cole, CEO of Wine Australia, has the vision to start on the development of an inclusive One Sector Plan with all producers being reassured their input is heard and understood.

That’s a good start, and hopefully, it is a sign of a stirring to life of the realisation for the whole of industry to connect and be collegiately involved in restructuring rather than review.

Fair, equitable and inclusive representation is a key to commencing what must be addressed.

Martin Cole’s initiative ought to be the catalyst for the industry to accept that the Premium and the Commercial sectors are equally valid and must have fair and just input in policy setting and strategic planning.

The terms Premium and Commercial for the two distinct wine industry sectors are more appropriate than the historic Cool Climate and Warm Climate (or inland) titles – which, with enthusiastic embrace by wine writers, wine snobs and parochial regional voices, has not served the industry well.

It’s time to recognise that the Commercial sector is the largest and most critical part of the wine industry – producing around 60 percent of the nation’s grapes and wine and 80 percent of its exports.

The Commercial sector must be afforded a rightful place at the centre of wine industry policy and strategy making.

The Premium sector must respect the Commercial sector for what it is – the engine room of the Australian industry which meets the vast international wine market price points and provides beachheads into the much smaller premium wine markets for the Premium sector.

It’s not unfair to contend that many participants in the wine industry are disengaged from the big picture.

An unpacking of the status quo in an industry reset and restructure will require all participants to have input.

On numerous occasions, in conversations with wine industry players, it has become obvious that there is ignorance of policy and strategy beyond the local and regional level, where parochialism clouds reality.

Growers and winemakers need to understand organisational responsibilities.

Wine Australia (WA) is different from Australian Grape and Wine (AGW) and the roles of both must be understood.

Wine Australia is a research and development corporation with regulatory/compliance responsibilities, while Australian Grape and Wine is the peak industry body that advocates policy to the government and works closely with WA to provide industry practitioners’ advice.

Some Points to Consider If a Crisis is Not to Be Wasted

1. A whole of industry unpack of the status quo and a restructure built on its findings is the only option for an industry in crisis.

2. A thorough audit of the factors that have brought the industry to this point will not be comfortable for some, and inconvenient truths may cause some wincing. However, to shy away from the task would be to endorse the failed leadership and statesmanship of the past. Seeking blame and excuses should not be the motivation, however. Seeking reasons and solutions in a collegiate manner while acknowledging the differences between regions and between the two sectors – Premium and Commercial – would seem to be the only way forward.

3. The industry representative structure must be overhauled. There must be a clear definition of the roles of regional bodies, State associations, Federal bodies and related institutions.

4. Acknowledgement that despite most of the commentary about the state of the industry being directed towards desperate circumstances across the inland “commercial” regions, the reality is that growers and producers in every region are under huge financial pressures with very few having a positive balance sheet, and the culprit is the oversupply which did not need to occur.

5. The industry still does not have a national vineyard register. You cannot properly manage that which you cannot measure. A national vineyard register, called for regularly by leaders of the Riverland and national grape grower representative bodies, would assist growers and wine producers in managing the risk around planting more vines or changing the variety balance. That 25-year call can no longer be put in a too-hard basket. South Australia has an excellent register, but without a national register, the industry is not even in a position to self-regulate. Surely, such a register should be an outcome of this crisis.

6. Back to the oversupply. There needs to be a forensic investigation into the tax/investor-generated oversupply and its influence on the crisis. Measures must be taken to prevent that from happening again. A national vineyard register will, no doubt, reveal a lot of myths and untruths about the oversupply. Many believe that the oversupply is the fault of the inland regions when, in fact, the Riverland, for instance, swelled by 17 percent, and the Barossa vineyard area grew by 50 percent with similar growth in McLaren Vale and the Adelaide Hills. There is not only an oversupply of grapes from the commercial inland regions but also an oversupply of fruit in the premium regions. It’s a whole of industry crisis.

7. The oversupply is not the only cause of the crisis. Market vagaries are also impacting hard. There is a world oversupply of wine; there has been a worldwide slump in wine consumption, particularly at the premium end, all contributing to the Australian industry’s pain. So, many factors must be considered when addressing the downturn in fortunes. For instance, a marketing campaign supporting primarily premium wine ignores the obvious – if commercial wine makes up 80 percent of the exports, some resources need to be dedicated to increasing and maintaining Australia’s position in the commercial wine markets of the world because that’s where it is competitive. Our super-efficient, broad-acre growers in the inland regions can produce grapes at comparatively low prices to maintain wine supply to the market price points that make up most of the world’s wine consumption. This is a critical reality which the whole industry must embrace. The premium sector’s task is much more difficult without a buoyant commercial wine export sector. The commercial sector cannot wither – as much as that may be to the chagrin of some industry leaders who want Australia to be only a premium wine producer.

8. This country’s almost duopoly of wine retail is another difficult impediment to prosperity for all wine producers. How can that be addressed?

9. Another factor in the over-production of grapes are the Accolade/CCW type grower contracts which have the perverse effect of stimulating growers to deliver more tonnes as the per-tonne price drops like a stone. Growers naturally compensate for lower prices by delivering more fruit. These contracts have contributed tens of thousands of tonnes of surplus grapes. How can that be addressed?

10. At the same time the industry was advocating an expansion of plantings to service projected export growth (Strategy 2025), the industry leadership gained a concession on the domestic wholesale tax regime (WET) which provided a 29 percent domestic sales subsidy for the numerical majority of premium producers. While this has benefited tourism, hospitality and regional diversity, it has created perverse outcomes by encouraging most producers to focus on the domestic market and has created a hurdle and disincentive to most small to medium producers to allocating sales resources and effort to export markets. The domestic market, though, is declining as imports account for 29 percent of the local market by value and 18 percent by volume (largely Champagne and NZ Sauvignon Blanc). The outcome of this 20 year concession is that only 38 exporters account for 91 percent of all export sales. This is a major factor in the crisis as total plantings and production capacity means that we need to export  60 percent of total production. This burden is left to only a few large producers. Without a rethink of this policy setting the industry is unlikely to ever regain a sustainable supply and demand balance without catastrophic loss of industry balance sheet value, shared equally by all existing vineyard operators and wineries.

These are the opinions of an individual and may not fit comfortably with the official industry position on some of the points put forward – or all of them.

However, it is time to accept the industry’s failures.

I accept that some will not welcome my view, but I hope it may stimulate some thinking and, better still, some comments – through these pages.

It’s time for more than that, though – it’s time for action. Apathy cannot continue to prevail.

The whole industry should accept that a nationwide, all-region effort must be made to use this crisis for a long overdue reset and restructure.

The industry should seek out a fresh approach and find new people from within its ranks to provide leadership and statesmanship.

The industry could harness some of the experience and intellectual thinking from among the many graduates of its Future Leaders programs of the past.

Never waste a good crisis.

It’s time to examine how we got here, make the difficult changes and agree to new directions.

Otherwise the crisis will continue to rapidly become a catastrophe.