Analysis of the Australian Wine Industry

The Australian wine industry has experienced a significant drop in prices of wine grapes, with an average price decline to $441 by 2014. Production remains high in hot regions, while big retailers can contract grape farmers and negotiate prices. The demand for wine grapes is generally lower than the supply, giving downstream buyers an advantage. Wine producers tend to keep prices low, which may not lead to a price increase in the future. Additionally, Australian wine faces competition from international markets, and taxation on wine also affects the industry.

An Five Forces Analysis of
Australian Wine Industry
September 19
2017
Australia has been producing wine for over 150 years but it has been
only in the last 15 years that the country has become a significant
producer of wine. Australia is, what some people might call , a new
wine producing country. Wine is a source of export income and
employment generation in Australia. This paper is an analysis of
Australian Wine Industry using Porters Five Factors Model

Contents
1. Introduction.........................................................................................................................................2
2. Internal Rivalry....................................................................................................................................3
3. Threat of Entry....................................................................................................................................5
3.1 Barriers of Entry to the Australian Market.........................................................................................5
3.2 Barriers of Entry to the International Market for Australian Producers.............................................5
4. Substitutes and Complements..............................................................................................................6
5. Bargaining Power of Suppliers............................................................................................................6
6. Bargaining Power of Buyers................................................................................................................7
7. Conclusion...........................................................................................................................................8
Figure 1 Some Products of the Wine Industry in Australia (IBIS World, 2017) 4
Figure 2 Supply Side of Wine Industry in Australia. Source (Winemakers' Federation of Australia, 2014)5
Figure 3 Demand Side of Wine Industry in Australia. Source (Winemakers' Federation of Australia, 2014)
.................................................................................................................................................................... 5

1. Introduction
The Australian Wine industry is comprised of around 2,620 registered wineries (Wine Australia,
2016) and several resellers. The wine industry is an important industry from the point of view of
export and employment generation for Australia. The industry provides direct employment to
16,122 people and mostly in semi urban and rural areas. (Poddar, 2015) Wine is produced in all
states of the country and sold in the domestic and international market (Wine Australia, 2017).
Hence, the demand for the wine industry is not just the domestic consumer but the international
wine consumers as well.
Wine is produced in all states of Australia with South Australia is the largest wine producing
state in Australia.
On the production side, the wine industry is dominated by large wine brewing companies like
Accolade Wines, like multinational companies like Pernot Ricard as well as by large
supermarket chains like Coles. (Wine Australia, 2016)
The vast expanse of the country and its various climatic zones makes it possible to produce all
kinds of wine in Australia with wine being produced in the hotter climatic zones as well as the
cooler climatic zones. (Anderson, 2015)
The wine produced is exported globally and is a source of foreign trade. One of the biggest
markets for Australian wine is the UK. (Winemakers' Federation of Australia, 2014) An
emerging market for the Australian Wine is the Asian market, most notably China. The
consumption of wine in the Asian market is increasing in leaps and bound. Additionally,
consumer spending in these markets is expected to pick given an increase in the per capita
income of these countries. (Wine Australia, 2017)
The domestic consumption of alcoholic beverages, in general is declining in Australia. (Hoyer,
2017) However, the millennial generation is driving the growth of wine consumption in the rest
of the world, especially the consumption of premium wine.

Figure 1 Some Products of the Wine Industry in Australia (IBIS World, 2017)
2. Internal Rivalry
The wine industry in Australia has plenty of small and big wine producing groups. There are
over 2500 wine produces with over 4000 wineries in Australia that brew wine. (Poddar, 2015)
(Wine Australia, 2016). A distinction between these wineries could be made in terms of whether
they sell wine on premises (i.e. selling wine on the location of its productions) or sell wine off
premises (i.e. sell wine as production at other distribution locations such as supermarkets,
restaurants, mom-and-pop shops etc. Major wine producing and retail companies like Coles
account for over 77% of wine sold off premises (Poddar, 2015)

Figure 2 Supply Side of Wine Industry in Australia. Source (Winemakers' Federation of
Australia, 2014)
Figure 3 Demand Side of Wine Industry in Australia. Source (Winemakers' Federation of
Australia, 2014)

Over 30,000 types of wine or Stock Keeping Units are produced by wineries in Australia. The
revenues of the wine industry are highly unevenly distributed with the top four producers
commanding over 40% of the revenue (Poddar, 2015)
The Australian Wine industry is fragmented in several ways. There are a large number of
producers and their market share ranges from miniscule to very large. There is a fragmentation in
products with a very high number of SKUs. (Poddar, 2015). According to Poddar, (2015) , big
retailers in the industry tend to have an advantage simply because of their vertically integrated
supply chains, right from supply of grapes to distribution systems to marketing channels. This
makes it difficult for small and medium producers. Additionally, there is a constant threat of new
retailers entering the market, making the territory more difficult.
(Poddar, 2015)
3. Threat of Entry
3.1 Barriers of Entry to the Australian Market
In the recent times, the Australian Government has increased the import tariffs for
imported wine in the country. Hence, there is a slight threat in terms of entry barriers.
3.2 Barriers of Entry to the International Market for Australian Producers
 Health and other regulations The European Union requires wine producers to maintain
strict health codes and rejects wine that is not produced using approved processes. This is
a barrier. The Australian wine market is highly fragmented and many wineries are not
able to recover even their basic variable costs. In such a situation, such regulations can
price several wine producers out of the market. (Foster & Spencer, 2002). Similar barriers
also exist towards packaging, labeling and handling of wine and may inhibit exports.
 Tariff Barriers: Several countries such as Scandinavian countries have state owned wine
products and discourage imports in order to maintain monopoly as well as to discourage
wine consumption. (Foster & Spencer, 2002) These act as barriers.
 Non Tariff Barriers: There are several brands that already national and international
brands that produce and sell wine in Australia.
 Competition from big retailers largely remains one of the biggest threats of entry,
especially to small firms. In addition, big retailers already have established brands as well

as the ability to influence consumer choice by highlighting their own wine or a wine of
their partnership. (Bagwell, 2015) International players like Pernod Ricard already have
globally established brands and thus, may be favoured by consumer to a brand of wine
that they may not have heard of. This vastly increases the need for advertising and
promotion for a new player.
4. Substitutes and Complements
 Foreign Wine as a Substitute: The wine industry is a highly globalized industry and all
markets and Australian wine experiences competition from other wine all over the world,
in the domestic as well as international market. In China, Australian wine owns 21% of
the share of wine market while French Wine nearly own double i.e. 41% share of the
market. (Volkofsky, 2017 )
(Anderson, 2015)In the recent times there has been a fashion swing in the Australian
domestic market as consumer are leaning towards imported wine from countries such as
New Zealand. Wine imports in the country increased by 6.4 % from 2014 to 2015 while
wine exports out of Australia increased only marginally (less that 0.5 %) during the same
period. (Winetitles Media, 2017)
 Other Spirits as Substitutes: Wine, also , faces competition from other alcoholic
beverages such as beer, vodka etc. (Hoyer, 2017)
 Agro – Tourism as a complement to Wine Production: Agro- Tourism can be a
wonderful complemt to the wine industry, especially the small wine producers. Vineyards
can be opened for tourist activity providing consumers with a unique experience by
involving them in the farming and wine production activities. This may help small
producers stay afloat. (Wine Intelligence; Intellima, 2013)
5. Bargaining Power of Suppliers
As discussed above, the upstream market of the wine industry is very competitive and thus, the
prices of the input (mostly grapes) are determined by supply and demand. Procurement of
Winegrapes amount for the largest input costs in the process of production of wine. Winegrapes,
or grapes meant to make wine are easily available in Australia as grow in different regions of the
country. In fact, the supply of wine grapes has persistently remained higher than the demand. In

2008, two-thirds of all winegrapes were sold in the $400 to $650 per tonne range, but by this
declined to an average of $441 for a tone by 2014. (Anderson, 2015)
The prices for winegrapes averaged at $540 for red wine grapes and $340 for white wine grapes.
There has been a significant drop in the price of wine grapes. Production in hot regions remains
considerably high and remains high. (Anderson, 2015)
Additionally, big retailers can contract grape farmers and negotiate prices. However, given that
the demand for wine grapes, is generally, lower than the supply, downstream buyers will have an
advantage. (Anderson, 2015)
The, general, tendency of wine producers would be to keep process low and this will keep
pushing the prices of grapes downwards. In spite of the low prices of wine grapes, supply of
wine grapes has not decreased. (Poddar, 2015) . Hence, it is easy to conclude that the prices of
wine grapes may not increase in the visible future.
Big retailers have a lager bargaining power. This has prompted several super market chain like
Coles and Woolsworth to produce and sell their own wine. (Bagwell, 2015)
6. Bargaining Power of Buyers
Australian wine receives competition from wine all over the world, in the domestic and
international market. Poddar (2015) described the Australian wine market as an Oligopsony i.e
there are a large number of sellers and fewer buyers. Oligopsony, buyers have a large bargaining
power. According to Poddar, (2015), the store brought category of wine sales are increasing as
consumers simply seek less expensive wine. This gives an edge to big retailers as they can , with
their vertically integrated supply chain make possible distribution of wine at low prices across
the country.
An increase in the inventory build due to low domestic demand, the balance will shift in favour
of buyers (both retail customers as well as bulk importers and resellers) and increase their
bargaining power since wine producers would be looking to off load some inventory.

7. Conclusion
The above mentioned analysis describes the Australian wine industry from the Porter’s Model.
However, there are some other factors that affect the wine industry of Australia such as exchange
rates and taxes. (Wine Australia, 2016)
A problem for Australian wine is the taxation of wine in the country. Australia ranks very high
among OECD countries in terms of taxation on wine. (Anderson, 2015)
Other factors that greatly affect the wine market are the exchange rates for Australian dollar
Depreciation in the Australian Dollar would imply lower prices of Australian Wine in the
international market. (Wine Australia, 2016)
Consumption of Wine is another factor that affects the industry. The consumption of wine is
static in the Europe and is showing a downward trend in South America while the consumption
is increasing in China (Wine Australia, 2016)
The production of wine grapes in Australia continues to exceed demand. (Anderson, 2015) This
implies that the Australian wine producers need to establish bigger markets or through
advertising and research lead the consumers to consume more wine.
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