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Sunday, February 21, 2010

Australia is Getting it's (Yellow) tail kicked by the recession

The story is simple.
The boom days of the 2000's world economy were a boon for the wine industry, and no country relished in the success more than Australia, who took the concept of mass production and applied it to an industry that had historically ignored the average consumer in favor of vino savants.

But then the recession hit, and just like everything else, the wine industry came crashing down. And, according to a report by the Winemakers' Federation of Australia, and highlighted in the recent edition of "Wine Spectator" Magazine, due to reduced demand from the recession, there is now a huge excess of wines worldwide, and in Australia this excess is extravagant: the quantity supply of Australian wines now exceed quantity demand by 20%. There is a surplus of wine inventories equivalent to Australia's entire sales to the UK (100 million cases). The surplus is pushing wine prices lower - lower than even the Australians think is sustainable in terms of brand value.

Unless the Australians are willing to let prices plunge even further (which it doesn't seem like they do), the solution, from an economics viewpoint is to either put the grape-resources toward more efficient production (ie. cut the supply of wine), or they need to stimulate untapped demand. I personally don't see the demand solution as being workable - Australian wines are already heavily marketed. The supply solution is workable but would be a painful and messy transition. I think the Australians need to accept the factual irony that the value of their brand IS that it is low-value. They should embrace price reductions even further and allow the market to work itself out. They cannot sustain these unprofitable relative high price-points.

7 comments:

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