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International Strategy: Wine Market in Australia

INTRODUCTION

The wine industry has dramatically changed in recent few years. Reduction in logistics cost, decrease in tariffs and removal of certain barriers to global trade have provided wine producers an opportunity to expand their business and sell their products beyond the limited region (Coplan, 2010). Furthermore, several New World wine companies from United States, Australia, South Africa, Chile and Argentina entered into the market and thereby challenged Old wine producers by introducing innovative practices at every stage of value chain (The Global Wine Industry I: An Overview, 2012).

Originally, the art of wine making was entirely dominated by many European nations, competing with one another for superior quality wines. Many Old wine producers companies from Germany, France, Spain and Italy found themselves constrained by restrictive industry rules and regulations, traditional methods and practices, and complex European Community legislation. This in turn benefitted New World wine companies to enter the market and joining the competition in order to appeal their consumers. As the market for New World began increasing, a rivalry arose between Old and New World wine producers (Barlett, 2009). On one hand, Old World traditionally set their ways, from the technique of planting, harvesting and marketing which had been in practice for centuries, whereas New World focuses more on maximizing crops as well as harvesting, and also adapt marketing as per changing expectations and preferences of consumers.

Following paper attempts to analyze the article “Global Wine War: New World Challenge Old”. The report critically assesses the dynamics shaping the wine market of Australia, a new world producer. Ongoing and emerging trends and their impact on wine market will also be studied in the present report. In addition to this, recommendations will also be provided to French Federation of Exporters of Wine and Spirits for maximizing the production and thereby improving the market position.

DYNAMICS SHAPING THE WINE MARKET IN AUSTRALIA

The wine industry of Australia is significant contributor to national economy. The country has become the world leader in terms of both quality and quantity of wines it produces. However at certain times, it has also faced challenges from its own production. Australian wine market is presently dominated by many small numbers of wine firms. There are varied internal and external factors that shaped the wine market and revolutionized it to great extent (Veseth, 2011). Below mentioned are few important factors that drive wine market:

Production norms: As compared with most of European counterparts, New world wine companies developed in certainly different business environment. Firstly, the suitable land for planting and harvesting was widely available and less costly that allowed producers to develop much extensive vineyards and thereby allowed maximum wine production. Companies within New World such as Australia have started experimented with new and advanced technology for growing grape and producing wine (Roland, 2013). Additionally, specialized equipments such as mechanical harvesters and pruners were widely used by wine producers in order to increase yield and enhance grape flavour. On-sites labs were also developed by large producers test product and provide data useful in planting and harvest decisions. Australia has more than 2000 wine producing companies, most of which are engaged in small-scale winery operations (A case study: Australian Wine Industry Can it maintain momentum, n.d).

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Regulatory factors: Government policies and regulation have profound influences on wine markets over centuries. A major barrier to entry of new companies in wine market of Australia is tariffs that are placed on imports of country wine to other nations. Some of countries have levied substantial taxes on imports of all foreign wine. This further has increased the total costs for small firms and thus discouraged them to sell products abroad. Additionally, wine labels are strictly regulated. Companies are required to label their product wit right information. Misleading and false data about the type of grape is strictly prohibited (Australia’s Wine industry, 2007).

Factor conditions: This category includes any factors that aid the production function within industry. It refers to basic inputs in production process and allows competition to take place. These factors may include tangible things such as natural resources, physical infrastructure to intangible factors such as legal system, information, skills and knowledge etc. Factors conditions within wine market consists material resources including raw material and space available for wineries. In addition, specialized labour force, their skills and competencies and cost of labour also comprises of factor condition (Robinson, 2006). New World wine producers including Australia are making attempt to improve factor conditions. In order to create efficient human capital, these producers have created training and development programs. Professional associations, for example, Australian Society of Viticulture and Oenology, are conducting programs to drive technical and operational improvements (Australia’s Wine industry, 2007). Major improvement among these is the use of irrigation strategies such as drip irrigation system that enable producers to have optimal control over fruits.

Demand condition: According to Porter (2011), sophisticated market is a key element to attain competitiveness. Those industries and companies that have sophisticated home market are able to provide quality products as they are efficient enough in understanding the needs and desires of consumers (Porters, 2011). This category explains the level of wine demand. If there is an increase in demand conditions, there will be increase in market share of company that further lead to innovation as well as product development. New World producers such as Australian companies are well positioned to reap benefit of shifts in international demand. Rate of domestic wine consumption is picking up significantly in these countries. Per capita consumption increased by 9.6 percent in Australian between 2007 and 2010 (Lopez-Claros and Yasmina, 2010). In addition, Australia firms are also extending their reach to emerging markets such as India, China and Brazil. They are also taking varied initiatives to enhance the quality of demand.

Wine Wholesalers: The wholesale industry of Australia operates on relatively low gross profits margins, depending on type of product. These low margins as well as rapid changes in wine consumption have led to consolidation among wine wholesalers. There is high level of consolidation within industry, with top 4 wholesalers having around 70 percent share of total revenue. At present, wholesale wine distribution industry is dominated by Pty Ltd, which is owned by Metcash Limited (World Wine production by country, 2010).

Wine retailers: Historically, retailers have been categorized as off premise such as specialist wine retailers, supermarkets, liquor stores etc and on premise which include licensed restaurants, bars and hotels where customers but wine so as to consumer on the premises. The nature and operation of wine retailing has changed dramatically over the previous decade. This change is being driven by changing lifestyle and attitude of consumers and increased sophistication, as well as rapidly growing dominance of consolidated pub, hotel and restaurant chains in on trade, and grocery channel in off trade (A case study: Australian Wine Industry Can it maintain momentum, n.d). Greater shopping convenience and lower prices has provided supermarket chains with an advantage of enormous buying volume and thus purchasing power. This concept of wine retailing has become global phenomenon. In 2004, the leading player in wine retailing in Australia were Woolworths limited, Coles Myer limited, and Australian Liquor and Hospitality Group Limited, that together have approximately 45 percent of total industry sale.

Consumer demographics: Regardless of demographic group, average wine consumers in Australia are seeking for fresh and fruit driven wines. A certain study revealed that aging of wine does not play an important part in Australian wine industry. There are varied ways to segment the wine consumer market. First segment include individual or household consumers that account for 80 percent of total liquor revenue. Remaining 20 percent of revenue is contributed by corporate or business purchase (Coplan, 2010). The purchasing criteria as well as volume of liquor purchased by these two groups would be probably different.

Competitors: Australian wine companies are, however, the leading producer all over the world, but it still faces tough competition. Wine industry faces stiff competition from global players including large winemakers, retail consolidation etc (Barlett, 2009).

ONGOING & EMERGNG TRENDS AND THEIR IMPACT ON WINE MARKET

All the industries are characterized by new developments and trends that speedily or gradually engender changes in operations of players and require them to respond strategically to these changes in order to survive and sustain in industry. Without comprehending the forces that drive the change within industry and their impact on industry environment, it is relatively difficult to create an appropriate strategy that respond effectively to emerging market conditions. Below discussed are some of the current and emerging trends in the industry:

Increasing Globalization in industry: Earlier Western Europe was the chief consumer of wine. Nowadays ‘THE NEW WORLD PRODUCER’ has shown a big hike in production and consumption of wine. France, Italy, Portugal, Spain were considered as old wine producers. Argentina, U.S, Chile, South Africa, Australia and New Zealand are known as new world wine producers. Some current key characteristics of wine industry:

  •          Transfer of important equipments, machinery and technical knowledge to the area of production.
  •          Mergers and acquisitions leads to structural changes in wine market.
  •          Reunion of wine industry.     

Beginning of 21st century witnessed rapid changes in international wine market. Over this time wine industry has taken a new level in the market. The free entry and exit of players in wine market leads to high competition in market. Hence, companies face emerging need to rethink on their production, variety, innovation, pricing in order to compete with the competitors. Globalization holds a great importance in wine trade. Due to globalization only, countries are interlinked with each other which offers a huge and open market to all consumers. People now have more choices and comparison in the market (Robinson, 2006). It has also proved beneficiary in terms of reduction in trade obstacles, cost effectiveness, promoting countries towards international marketing. Globalization has made it possible to trade around the world as it was never before and also created a new approach to business and making business more export oriented.

Technological advancements: Development of new technologies like Internet has revolutionized the wine market dramatically. It has emerged as new channel of distribution, allowing wine producers to directly access customers rather than exclusively distributing via wholesale and retail channels. As well, Internet has also empowered wine companies to extend their geographic reach in new areas. According to report published by Federal Trade Commission (2003), Internet enables the buyers from different region to access small wineries both global and local. Depending on the quantity purchased, price and delivery mode, wineries as well as consumers both can save a lot of money (Heijibrock, 2011). On one hand, purchase through online medium offers consumers huge variety and price comparison, but on other hand, transactions over internet are difficult to control for government and also hard to collect taxes.

Distribution and Marketing: Earlier in France, wine was sold to merchant traders in bulk quantity who then blend and bottle the product prior to distributing it. As traders started shipping the product overseas, they found it difficult and expensive to transport products because of poor roads and high toll taxes. Moreover, due to long distant much of it get spoiled during journey which in turn make it difficult for traders to handle the exports. As a result, only the most sophisticated wine traders could manage to maintain product quality and only affluent could afford such imported treat (Wine industry Outlook: Consumption demographics, Market segmentation, trends and opportunities,  2004).

In Old World companies, the process of wine production, distribution and marketing were managed by different entities (multi-level value chain), of which some lack expertise or adequate knowledge to operate effectively. On contrary, the big wine producers from New World tend to control full value chain, managing all functions from production to marketing on their own. This further aids companies to have greater control over every operation and thus enable them to retain bargaining power with concentrated retailers.

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In the beginning of 19th century, technological developments and innovations such as mass production of glass bottles with cork stopper, as well as introduction of pasteurization have enhanced wine longevity and stability, which further made it possible for traders to distribute wine to more distant markets (Barlett, 2009). In addition, bottle aging of best vintage wines has become common practice. These factors together have led to increase in wine production and expansion of wine market.

Consolidations of producers, distributors and retailers: Major consolidation is emerging among wineries through mergers and acquisitions worldwide. Companies attempt to maximize their profits by consolidating to become big players and thus creating competitive edge with economies of scale and scope. Moreover, consolidation also allows companies to geographically diversify risk more efficiently than firms operating in limited area. Wholesale consolidation has posed serious challenge for smaller producers to sustain in the market. Wholesalers prefer to trade with leading brands in lieu of new and small labels (Veseth, 2011).

A survey conducted at Wine Symposium 2003 revealed that it has become imperative for distributors to make wine more accessible and approachable to buyers. Producers also require to design and label the products in a manner that consumers can better understand. Another popular design attribute that is used by most of Americans and Australian producers is Twist top closures, which are cheaper than traditional cork and also prevent cork taint (Lopez-Claros and Yasmina, 2010).

Growth rate changes in long term industry: The certain study showed rapid growth in export of wine in last a few years. There is 5.3 percent rise in global wine trade. Earlier, countries who produce wine consume most of the wine within their countries only but now they have started to export internationally. Now around one-quarter of wine are exported worldwide. Chief exporter of wine is U.S, New Zealand and Australia. Recent study has shown many changes in global wine industry like climatic conditions, demand and supply, price changes, cultivation of grapes and number of consumers (Coplan, 2010).

Changes in buyer’s preferences: Consumers are the ultimate driving force for any industry. Companies spend a great deal of money to attract consumers and influence their consumption patterns with a view to increase market share. The Old World companies have had benefit of tradition behind them in their domestic markets. In European culture, Wine was considered as necessary part of an individual’s diet and standard accompaniment. However, most European countries are encountering decline in wine consumption rate, as social campaigns against drunk driving and alcoholism came into action (Rachman, 1999).

Globalization has not only brought changes in wine market and producers but also in type n breed of grape, there taste and aroma and wine flavours. Now buyers pay much attention on varieties of grape before buying it. The most preferred variety is merlot, cabernet and chardonnay. These varieties have dynamism in production. According to Labys and Cohen (2004), these three varieties of wine have a very specific flavour and aroma which is very popular in consumers. After the success of these varieties producers started to plant other varieties like riesling, blanc, pinot, shiraz and many more. A survey has shown 91 percent of consumer buy wine of their own country and only 9 percent of consumers stick to a particular wine and country (Labys and Cohen, 2004). Wine producing companies mainly face problem of oversupply of wine and among so many different varieties how to make their wine distinct. Study has shown with rise in per capita income, consumers are preferring quality wine. Trend shows that female and young customers are increasing (Robinson, 2006).

Internationally exchange of technical knowledge: In a decade, there is rapid globalization in wine industry and exchange in technical knowledge across different countries of world which is also a very chief characteristic of wine industry. With emergence of multinational companies and entry of big exporters of wine there is much hike in exchange of technical know- how. Many consultancy companies promote ideas to other countries and exchange technical development with them. The diffusion of technical know-how has proved beneficial to both producer and consumer. In this process they share their experiences about business, scales of production, techniques, dynamic market conditions which bring advantages to both domestic and overseas nations (Rachman, 1999).

Risk and uncertainty in wine market: Prime uncertainty of wine industry is climatic condition as a bad weather can damage a whole plantation of grapes. It occurs as a natural calamity which cannot be regulated by human force. Another major issue is the branding of wine as distinct wine and multiple choices are available. Wine makers need to catch buyers through adequate branding variety n packaging of wine. In order to regulate such risk consumer option and feedback is taken very much in consideration before buying or selling of wine (Heijibrock, 2007).  Intervention of government regulatory and changing government policies also plays vital role in controlling business risk in wine industry.

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Changing lifestyle and attitude: Traditionally wine was popular for its medicinal properties. People do not use to take wine as toxicant drink but with emerging trends people started enjoying wine over dinner and parties. People now love to have fun and entertainment lifestyle, travelling and tasting wine worldwide. There are many people who like to show their knowledge about wine in public discussions.

With phase of time, the trend in wine industry has undergone several changes in term of production, technical assistance, export, import, consumption. Today, United States is the largest wine consuming nation in term of revenue. Of the total wine produce U.S alone import 30 percent of wine. U.S is well-known for its highest per capita wine consumption, retail wine stores, online sale of wine and use of wine in medicine and drugs (Robinson, 2006). The most popular wine variety in U.S is sweet red blend, malbec, moscato. With time, companies are paying much attention on new branding and packaging of wine like tetra packs. Also consumers cater to buy wine of superior quality now. Companies are raising price of wine due to shortage of quality grapes in market. America mainly import wine from Spain, New Zealand, Argentina. Beer is also taking place of wine for some consumers. Female consumers of wine in even more than men in U.S. Due to craze of social networking sites people like to talk and post about wine on them like sharing on Facebook and twitter (Roland, 2013).

RECOMMENDATIONS TO FRENCH FEDERATION OF EXPORTERS OF WINES & SPIRITS

France has dominated the wine market all over the world for centuries and is still considered as leading wine producer country in terms of sales; however the small firms and family owned vineyards are struggle to maintain their position in market. Big conglomerates from United State, Australia and elsewhere have entered the market and giving tough competition to traditional French wine companies. They are investing large sum of money in order to create consistent brand popular around the world (The Global Wine Industry I: An Overview, 2012). Many large producers from New World are adopting celebrity endorsement marketing technique in order to entice new wine tasters.

As described in the article “Global Wine Wars: New challenges Old”, production and marketing style, innovation and developments, as well as business models of New World companies are effective enough in gaining the large market share. With a view to regain the competitive position in market, Old World wine firms need to cooperate and coordinate on various levels.

The drastic change in demand of wine proved extremely challenging to traditional wine producers. One of the key challenges experienced by France companies is shifting global demand. Besides this, there is no often suitable land available to plant and harvest, particularly in AOC controlled areas. Moreover, there are tight regulations prescribing wine technique and permitted grape varieties (Coplan, 2010).

It has become relatively difficult for France to meet the demands of global market with traditional wine making practices. Distributors are now working with big supermarket chains and thus are intending to have reliable producers who can adequately supply them. Liquors and brewer companies are buying wine makers in order to extend their market reach. Within past few years, series of mergers, acquisitions and takeover by big industry players, from Australia and other countries, have been accounted. These new wine producers enjoy several advantages over French Producers (French Wine in crises, n.d). For instance, American, Chilean and Australian companies work in steady, hot climatic conditions that are suitable for harvesting and producing consistent wines. While on the other hand, French producers are required to deal with unpredictable weather conditions which in turn results in variable vintages. They also require heavy handed regulators that can effectively control the type and amount of wines they produce. Furthermore, strict regulations also prove to be one of the major constraints in innovation. French firms are required to internationalize by leveraging export promotion activities to gather information on consumer preferences in overseas market (Roland, 2013). As well, French wineries should also make effort to encourage more sophisticated wine demand at home.

The second key challenge faced by France producers is tight regulation and lack of support from government. In many Old World countries, there is greater legal supervision over production and processing techniques in the wine industry. French wine firms are regulated by AOC (Appellation d’Origin Controllee), that defines regional boundaries and set of winemaking standards for producers and vineyards. AOC restrict wine makers from using drip irrigation (a method used to make soil more arable, thereby creating prospects to expand land holdings). In addition to it, AOC also restricts on use of reverse osmosis, which is considered as an essential technology to produce quality wine (Barlett, 2009). These regulations hinder French producers to innovate and create new developments in products and thus compel them to use traditional practices for wine making. In order to maximize the volume of production and enhance the quality of wine produced, deregulation of certain laws that act as competitive barriers is imperative. Although AOC has been successful in preserving twine diversity to great extent, but it has failed in ensuring the wine quality. In most of French regions, branding is entirely done by AOC, producers have, therefore, less incentive to optimally market and promote their product in present highly competitive market. A solution for this may be found in repurposing and reinvigorating these bodies in order to make French wine industry more competitive (Veseth, 2011). Ease in access to new markets and increase transparency would also make the wine market successful in global market.

Apart from the legal regulations and restrictions, factors such as culture, tradition and local pride have played a critical role in spurning wine innovations in France. French companies should employ new methods and technologies that are used by New World producers to maximize yield. Several large wine producers from Australia and America are employing new trellis systems that allow wines to be produced at twice the density; pruning methods and fertilizers to improve production process (Wine wars, 2001).

Many New World companies have started using oak chips in wines, that is, cheaper way of enhancing the wine taste without making huge expense of aging wine in barrels. While in France, this method is considered illegal, as well as irrigation is also banned in most of countries. Considering this challenges, French producers are required to take initiatives in order to sustain in market. They can create varied offerings at different prices and could expand their brand to reasonably priced but superior quality vintages. Labelling the product by type of grape used rather than geographic origin will also prove to be effective in creating the brand image (French Wine in crises, n.d).

Attributing to above facts, it can be inferred that customs, norms, laws and underlying production factors of Old World have led the production costs much higher. Restriction to innovation, use of certain techniques, fluctuating climatic conditions, traditional process of wine making, lack of commercial drive and reticence of authorities to embrace market forces have constrained the French producers to maximize their production and further to expand their market. Therefore, companies are required to focus more on modern production and marketing practices in order to gain the lost market share.

 

This essay is an example of a student's work

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This essay has been submitted to us by a student in order to help you with your studies. This is not an example of the work written by our professional essay writers.

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