Australian wine makers battle as UK shipments rise - Mon May 15, 2006 10:54 AM BST - Source: Reuters

MELBOURNE - Australia ships over a third of its wine exports to Britain and has a dominant share of supermarket sales, but producers are struggling as a wine flood cuts prices.

Another bumper Australian grape harvest will add to a surplus of wine that has already caused suppliers to discount prices to wine orders, playing into the hands of dominant UK retail chains who can choose wine from France to Chile.

Australia sent 267 million litres of wine, about 37 percent of exports, to Britain in the year to April 30. Volume has risen 21 percent over the past two years, but value per litre has fallen 6 percent to A$3.60.

"The unit price is falling, which is no good to anyone," said Ivan Limb, managing director of small wine company Cockatoo Ridge Wines.

"We have another near record crop this year, so we have another 300 million litres of wine on top of what we had that we don't need. It is crazy."

Strength in the Australian dollar is adding to exporters' pain as the industry completes its 2006 grape harvest, estimated at 1.9 million tonnes, the third-largest ever. Record crops were harvested in the two previous years.

A trend to ship wine in bulk to be bottled and labelled in Britain, often for supermarkets who have developed their own brands, is also a factor in the falling price.

Australia had the largest share of the UK retail store wine market by volume at 21 percent, based on AC Nielsen data last September, while France has a 17 percent share, but it dominates the restaurant market

The United States held 14 percent of the retailing market, followed by Italy with 11 percent, South Africa with 10 percent, Spain with 7 percent and Chile with close to 7 percent.

Popular Australian wines include Jacob's Creek, owned by Pernod Ricard, Lindemans, Penfolds and Wolf Blass produced by Foster's Group, Hardys Stamp and Banrock Station, owned by Constellation Brands and supermarket exclusive brands such as Tesco Finest.

"It is actually a very good market. It is growing. There is a tremendous amount of opportunity in terms of volume. The problem is it's extraordinarily competitive," said Martin Johnson, who took over last year as chief executive of wine maker Evans & Tate, whose brands include Barramundi and its Margaret River range.

"Those conditions, in my mind, are not going to change in the next couple of years."

In February, the company said it had suffered "significant losses" in its UK business during the first half.

The majority of Australian wine is sold through supermarkets owned by Tesco, Sainsbury, Asda and Wm Morrison.

Their dominance puts companies under pressure to meet their terms or lose out to competitors who will.

"They set their margins and work backwards," Cockatoo Ridge Wines's Limb said. "People are so desperate they will do the deal to get in front of someone else."

Wine companies say the 4.99 pound retail price is particularly sensitive for retailers and increased costs, such as excise rises, tend to be largely absorbed by suppliers.

"The good news is that Australian wine is still flavour of the month, as it continues to be year after year," McGuigan Simeon Wines Chief Executive Dane Hudson said.

"The Australian share of the wine sold is very strong. We remain a very dominant part of the shelf space."

SIZE DOESN'T MATTER

Even Foster, Australia's largest wine company and second only to U.S.-based Constellation in global terms, finds it tough in Britain.

"An extremely competitive UK retail market is pushing extensive discounting and large volumes of wine at low prices," said Chief Executive Trevor O'Hoy earlier this year. "Neither retailers nor producers are winners in this environment."

The Australian Wine and Brandy Corp. (AWBC), a government body that promotes and regulates the industry, wants to see more Australian wines in UK bars and restaurants, where wine lists are dominated by French and Italian wines, which consumers associate with quality and special occasions.

"It has been shown in blind tastings that we can deliver, so we just need to start educating consumers as to what we offer in the way of regional styles and regional diversity," AWBC UK & Ireland regional Manager Kirsten Moore said.

But Australia, with its laidback image, faces a challenge to convince consumers that it is a producer of sophisticated wines.

"Because of the financial and the social risks involved, it is something that is going to take time in terms of changing people's mindsets," KPMG Wine Group Associate Director Alexandra McPhee said.