The global wine market is under pressure due to increased competition and declining demand, but Australia is well-positioned relative to other wine producers in its four largest markets, according to Wine Australia’s latest State of Play report.
Global market conditions
The global wine market is under pressure. Global alcohol consumption generally has been declining since 2014 despite population growth, and competition for ‘share of throat’ from other alcoholic products is increasing, exacerbated by the changing preferences of younger generations.
Wine consumption declined by around 500 million cases (2 per cent) in 2018, which is more than three times Australia’s total annual production.
On the positive side, Gross Domestic Product (GDP) and GDP per capita are increasing across most major economies and are expected to continue to grow over the medium term. GDP per capita in China is forecast to grow by 57 per cent from 2018–24, while the USA is forecast to grow by 21 per cent (a similar dollar amount) over the same timeframe (Figure 1). This means consumers in these markets are expected to have additional discretionary spending capacity. Figure 1: GDP per capita in key markets 2008–24
Source: IMF World Economic Outlook Database April 2019
Another positive trend affecting global market conditions is premiumisation, which refers to a consumer tendency to ‘trade up’ to higher value products – often in conjunction with reductions in quantity. Euromonitor International’s Top 10 Global Consumer Trends 2019 report indicates that consumers in developed economies are re-evaluating their spending habits, moving away from overt materialism to authentic, differentiated products and experiences. Wine is ideally suited to take advantage of these trends, allowing producers to build sustainable margins and long-term brand loyalty.
Australia is well-positioned to take advantage of these growth opportunities. It has a number of free trade agreements in place in key markets; it has a history of consistent harvests and is therefore a reliable source of supply; and it has had favourable exchange rates over the past two years that have increased the relative competitiveness of our exports. Since the beginning of 2018, the AUD/USD exchange rate has declined from over 80 cents to below 70 cents (Figure 2). This means a wine at $10 per litre free on board (FOB) can land in market at US$7 FOB equivalent instead of US$8, making it more cost-competitive. Figure 2: Exchange rates for AUD against major currencies over the past three years
Source: Reserve Bank of Australia
Export market analysis
Australia’s top three export markets are China, the United States of America (USA) and the United Kingdom (UK), while its largest market overall is the domestic market, which accounts for 37 per cent of total Australian wine sales. Analysis presented in the State of Play report shows that Australia has a strong competitive position in each of these markets. The latest export figures are positive, particularly for Australia’s premium wines.
In China, Australia is now the number one country of origin for imported wine by value and average value. This has been as a result of declines in overall wine imports to China that have particularly affected France. By volume, the largest country of origin for imported wine in China is Chile, but most of its imports have been in bulk and its overall average value (US$2.19) is very much lower than Australia’s (US$5.54). China’s preference for premium red wines, its relative proximity to and strong economic and tourism links with Australia makes our wine sector ideally positioned to continue to strengthen its competitive position in this market.
In the USA, the world’s largest wine market, wine consumption continues to grow although per capita consumption has stagnated. Premiumisation is evident in the market, with sales at all retail price points above US$8 per bottle growing while sales below US$8 declined in the year ended March 2019. Australian wine sales in the US$8–14.99 retail price segment grew by 29 per cent in the same time period, outperforming the market as a whole. Different consumer preferences in this market mean that there are opportunities for other varieties such as Cabernet Sauvignon, Pinot Noir and Chardonnay where Australia has a significant premium offering.
The UK is Australia’s largest export market by volume, and Australia has more than double the market share of its nearest rival in the off-trade retail channel. While Australia’s exports to the UK declined by 3 per cent in value in 2018–19, there was growth in the higher price segments, with exports at $5–7.49 per litre FOB increasing by 6 per cent in the year ended June 2019. The uncertainty surrounding Brexit has dampened economic growth generally, but Australia’s strong position in the market, long-term relationship and cultural ties will give it an advantage in post-Brexit trade negotiations.
The domestic market for Australian wine
Australia is ranked as the world’s eighth most attractive wine market, according to Wine Intelligence. In this market, Australian wine producers have an 86 per cent market share as well as the unique advantage of a direct-to-consumer channel that is high value and growing at a faster rate than the overall market. However, the State of Play report notes that this market is experiencing challenges in line with other mature markets in terms of declining consumption and increased competition both from imported wines and from other alcoholic and non-alcoholic products.
The State of Play report is available on the Wine Australia website (access restricted to Australian wine levy-payers and exporters).
International Wine and Spirit Record (IWSR) September 2019