Australian winemakers prayed for a weaker exchange rate as a record-high currency made their bottles less profitable overseas. Now they have a new problem: getting what they wished for.
While a drop in the Australian dollar means they can sell better wine for the same cost, a bumper grape crop threatens a glut that could encourage price-cutting and lower quality instead. That may not be good news for companies such as Treasury Wine Estates Ltd. (TWE), which hope to lift prices and goose profits by shaking off the country’s low-cost reputation.
“I’m genuinely fearful what will happen,” said Jeremy Oliver, a Melbourne-based wine critic and author of the Australian Wine Annual guide. “There is a double whammy of a change in the dollar and a large vintage that could do a lot of damage to our export reputation.”
Australia’s wine industry soared in international markets as the local currency fell to a decade low of 60.09 cents in October 2008. At the same time, oversupply of wine grapes drove down prices for local bottles, causing quality and profitability to slump, according to a 2009 report by Deloitte.
An 84 percent gain in the Aussie from that low point to its 2011 peak made things worse, as increased global competition left local producers with little leeway to raise prices and squeezed profit margins, according to Wine Australia, a government-backed industry body.
The Aussie traded at 89.77 U.S. cents yesterday, 14 percent below its $1.0394 level at the start of the year. With currency pressure easing, businesses are looking at winning a bigger share of U.S. and European store shelves by dropping prices.
Yalumba, a family-owned winery founded in South Australia’s Barossa Valley in 1849, is studying whether it can move greater volumes of labels such as the Y Series, which typically sells for just over $10 in U.S. stores.
“We’ve found about a 300 percent lift in sales if you can get from $12 a bottle to under $10,” Brenton Fry, the winery’s export director, said by phone. “There’s something very psychological about being able to get under the $10 level.”
Critter labels, inexpensive wines featuring animals on the bottle in the style of Casella Wines Pty’s Yellow Tail, will be among the main beneficiaries of the weaker Australian dollar, Oliver said.
“It’s been very nice for us in recent payments,” said Ross Sheppard, export manager at HR Wine Distributors Pty, which bills in U.S. dollars for the 80,000 to 100,000 cases of Lil’ Koala shiraz and chardonnay it sells through U.S. Aldi Group stores. The company’s profit margins are about 10 percent higher on each bottle averaging $6, he said by phone.
High-volume producers will be aided by a grape harvest that has climbed for two years running, gaining 10 percent from 2012 to 1.8 million metric tons in 2013, according to Rabobank Group.
Bruce Tyrrell, whose great-grandfather pressed his first vintage in 1864 on a 320-acre farm north of Sydney, said he has already seen the extra supply reduce costs for the bulk wine that vineyards sell to winemakers to mix into their blends.
An 800,000-liter batch of chardonnay was recently offered at 69 Australian cents (62 cents) a liter, the Tyrrell’s Wines chief executive officer said.
“Two years ago that would have been A$1.30,” he said.
Australian vineyards overtook France to become the biggest exporters to the U.K. in 2005, according to International Wine and Spirit Research in London. Australia trailed only Italy in exports to the U.S. by 2009, according to Wine Australia.
The Australian dollar’s advance to a 28-year high of A$1.10 in 2011 helped erase that lead, as cheaper peers in Europe, South Africa and the Americas dominated the market.
After peaking at A$2.99 billion in 2007, wine exports fell 39 percent to a 12-year low in the year ended June, according to Wine Australia. Chile became the biggest exporter outside of Europe during 2012, knocking Australia from a position it had held since 2000.
Winemakers responded by working to produce less wine and at higher prices, “showing more willingness to sacrifice volumes to support margins,” Rabobank analysts led by Stephen Rannekleiv wrote in a note in October.
Penfolds owner Treasury Wine, the world’s largest listed wine company after Victor, New York-based Constellation Brands Inc. (STZ:US), cut sales volumes in Europe by 31 percent over the two years to December 2012. During that time, it also turned a loss of one cent per bottle in the region into a profit of 15 cents, according to a calculation based on company presentations.
The company has focused on its mid-market and premium ranges -- such as Penfolds Grange, whose 2008 vintage sells for A$785 a bottle -- as the strong local dollar made it “hard to compete” at lower prices, Chief Executive Officer David Dearie said in February.
Rebecca Smith, a Treasury Wine spokeswoman, declined to comment for this article.
Its operating margin improved to 9.5 in the 12 months ended June 2012, from 1.3 a year earlier. That still lags behind the 23 percent at Constellation’s wine division last fiscal year, according to data compiled by Bloomberg.
In Griffith, a town of 24,000 north of New South Wales’s Murrumbidgee River, John Casella has no plans to cut the price of a product the company says accounts for more than one in four wine bottles exported from Australia. Yellow Tail built its early success offering better value at lower prices than U.S. peers and inspired critter label imitators.
Casella Wines’ new label, to be released this year, will take the opposite tack. The winery plans to price it at about $10, 25 percent more than the $8 for Yellow Tail.
“Australia’s not in any position to start dropping prices now,” the managing director said. “If anything, we should be moving up.”
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