subscribe: Posts | Comments      Facebook      Email Steve

California is not the next Australia

25 comments

Lots of talk over the last 48 hours about that new report out of Australia predicting a disastrous tipping point for the country’s wine industry.

Winebiz.com, an Aussie online publication, wrote about the report on Nov. 10. Among other things, the report stated bluntly that 20% of existing grapevines Down Under are “surplus,” “bailouts are not an option,” the country is producing “20–40 million cases a year more than it is selling,” and the actual “viability” of the industry is at stake. What is needed, the report concluded, is an “adjustment process” of undefined dimensions.

The next day, Paul Gregutt blogged apocalyptically about the report and, with his title “Fair Warning!”, cautioned the American wine industry that we might become “the next Australia” if we — the 50 States — refuse to “consort as a national wine industry” as opposed to acting “regionally and locally” (i.e. as individual States and regions within States).

Also yesterday, the economist Mike Veseth — whose infrequently updated blog always is worth a read — weighed in, taking a more wait-and-see attitude. “It will be interesting to see,” he wrote, “if the Australian producers are more decisive and if they can find a way to pull themselves back from the tipping point.”

The question, as I see it is, where is the American wine industry heading? Is that light up ahead the end of the tunnel, or, as in Australia, an oncoming train? To begin with, while Australia has an actual national wine industry, the U.S. does not. We have 50 statewide wine industries, and even within States, regions (i.e. AVAs) compete against one another, sub-AVAs (St. Helena, Oakville) go toe-to-toe, and then, of course, individual wineries do battle on the playing fields of the competitive market. So Paul is correct when he notes that the thousands of wineries in America do not “consort as a national wine industry.” Nor are they going to.

What might a united wine industry do anyway, even if it could figure out a way to associate? Not much more, in my view, than the fractured industry we have now. And when you think about it, that sundry wine industry hasn’t done too badly. Without focused leadership, we’ve made America a wine drinking country in a relatively short time, and made wine the alcoholic beverage of choice for aspirational adults. That’s a pretty good accomplishment.

Here in California, I’m pretty optimistic that things aren’t heading into the dumpster. I can’t prove it, but I don’t think we’re in the same dismal boat as Australia. Part of Australia’s problem was that they presented themselves to the world as cheap Shiraz, an image that worked for a time but has now come back to haunt them. And, to the extent the Aussies believe that China and other Asian markets will be their salvation, I say, Asians are as aspirational as Americans and want to be perceived as drinking good wine, not plonk. California has the advantage that — whatever you may think of its wines — the state manufactured for itself the image of prestige and high quality (thanks, in large part, to Robert Mondavi). Therefore, California wines will remain viable and, even more, desirable, both in this country and overseas, as long as individual wineries don’t price themselves out of the market. And that will not happen, I firmly predict. Prices already have fallen and are continuing to fall. The market is adjusting to new realities. I don’t know about the wine industries of Wisconsin, Alabama or Nevada, but the California wine industry — battered and weary — will emerge from this nightmare in solid shape.

  1. I was pleased to see the comment on Mondavi’s influence here, Steve, and I agree with it. I was trying to explain Mondavi’s importance to my class. They watched Mondovino and had a pretty low opinion of him from what they saw in the film. So I ended up comparing him to Julia Child — he tried to do for American wine what she tried to do for our cooking. I think they both succeeded in important ways.

    The market will adjust to the new realities, as you say, but unevenly. It will be interesting to see what happens.

  2. Darn, I was kind of hoping for a winery bailout, and the appointment of the Federal Wine Czar…

  3. “Cheap Shiraz” has not only cast a shadow on Australia. Some in the CA wine industry would blame the slump in CA Syrah on that very image. There are some ideas being floated around to help CA Syrah get out from under the shadow of Shiraz’s stigma. That indicates to me that the US is not insulated from the the effects of Australian troubles.

    As for a national wine consortium: every AVA wants a piece of the Pinot pie or the Chardonnay pie or the Riesling pie or the Merlot pie, etc. The fact is that, for this consortium to be viable, some AVAs would need to let go of some of their pieces of ie and concentrate on those varieties that do best in their region while displaying a distinct regional character.

  4. Steve

    Spend some time at Unified this year, first and foremost cover the State of the Industry General Session on Wed and then revisit this issue. It has been a very difficult period of oversupply in the vineyard for years. That has a way of impacting the rest of the chain in less than positive ways.

  5. Mike, I hope you told your class that Mondovino was one of the most dishonest and reprehensible “documentaries” ever made.

  6. More than a decade ago, or more, the Aussie’s published a much ballyhooed industry created plan called Vision 2020 which had all the California Wine powers shaking in their respective rubber boots. I find it interesting that no one has dusted that ‘relevant’, ‘dynamic’ plan out to find out what went wrong?

  7. I totally agree with Steve’s assessment about Australia. I think it’s precisely because the image of Australian wine became homogenized under the cheap Shiraz monolith that it’s suffering so badly today. Brand Australia never emphasized the diversity of regions, varieties, styles, and (importantly) price-points that it’s able to deliver, and that became a self-fulfilling prophecy.. a race to the bottom

    I’m obviously generalizing here, but consumers ready to move on from Yellowtail look outside Australia because that’s where they assume the better wines are made and there’s more variety to choose from. Thankfully our domestic industry has no shortage of “aspirational” wine choices on offer, which in my opinion, makes for a healthier industry overall.

    The politics of a national wine organization would quickly get out of hand, IMHO.

  8. Aside from whatever comparisons may be made between the quality of the wines from Australia and California or issues that the Aussie low-end might have caused to the overall perceptions of that country’s wine, there is a fundamental economic difference between their wine industry as it currently exists and that of California.

    The “new” Australian wine industry was built on export, specifically vast quantities of “value” wine to the U.S. and the UK. Australia is not populous enough to support anything close to their recent levels of production with substantially domestic consumption.

    In contrast, the vast majority of California wine is consumed domestically. A lot of that is in California itself. There will always be threats from inexpensive imports, such as those from Australia or South America. But, it is much easier for an industry to fight competition from abroad than to maintain share for exports against other exports and/or domestic producers.

    There are plenty of problems in the California wine business right now. But I don’t believe that the threat of becoming another Australia is high on the list.

  9. Fred: Excellent points. Thanks.

  10. I suspect that this conversation is even more of an “inside baseball” topic than usual, and that is why there are so few comments.

    If one puts John Skupny’s very pregnant observation together with Fred Swan’s, you come out with a clear understanding of why CA is not today on the path that the Aussies took. To be sure, we are not immune to fluctuations in demand, fluctuations in production levels and an interest on the parts of lots and lots of folks to participate in the wine biz.

    But, the Aussies, in 2000 were clear in their own minds that they were going to be able to become major exporters. They are a country of only 25 million people, and despite their prodigious appetites for all kinds of things, including alcohol, they never had a chance of absorbing the massive amounts of wine that were coming on line.

    I happen to travel down there in 2000, and one simply could not miss that point. Nor did they try to hide it. Funny thing is that when I went to Chile not long after that, the Chileans were saying the same thing.

    And the object of these export dreams was none other than the good old US of A. It had to be if you think about it. The Aussies had already made major strides in Europe, especially the UK and Scandinavia, but here was this giant country, with its 300 million people, and it has never really been able to produce inexpensive wine that could compete with comparably priced imports.

    Now, I cut my wine-teeth on Gallo Hearty Burgundy in college, but it was not long before I discovered that Beaujolais was only a bit more expensive and it was a whole lot better than inexpensive fifth bottles (yes, I am old enough to have purchased wine in fifths) from CA. It was not until I came out to CA for grad school that I discovered how good CA wine could be. But, that good wine came at a price that made Chianti and cheap Beaujolais look like bargains.

    The same is true today. Despite the gallons of inexpensive wine we make here, we have never made the equivalent of a “good five-cent cigar” relative to the rest of the world. As the old European equivalents priced upwards, we discovered the wines of Spain, and then Chile and Australia. And those places discovered us. Aha, they said to themselves. There is a big untapped markiet out there just waiting for us. And all of those inexpensive wine producing places all said it at the same time. To a lesser extent, one sees the same thing with the on-going investment in Argentina. That country once drank up most of what it produces. No longer. Now it needs increasing exports to be able to sell what it produces.

    When the world oversupply finally hit, it was not the domestic US producers that suffered in nearly the same proportion as the imports. That is because CA wine still enjoys enough of a reputation that it has not been overtaken by imports.

    Could that happen here at some point? Quite possibly, but wine is not like cars and TVs. Its relatively low value makes transporting it and establishing it here both expensive and difficult. And, rather than a few competitors trying to make names for themselves, in wine, it is thousands. And they have names that folk don’t know and will not ever know because the brands are too small.

    Certainly, the US has lost its dominant place in autos and other products. We still have a big place in agricultural products, but one can never say never. And if Paul Gregutt is seeing ghosts that do not presently exist for the very reasons that Fred Swan so aptly pointed out, he is also seeing past patterns with other products.

    His solution, and one that has not been discussed, and may or may not ever be viable, is some form of national wine industry. He may be right in the long run. In the short run, and given the fact that CA produces so much of the US grown wine that sells beyond its own front door, there do exist national forces in wine. They may be based here, but they necessarily have a national focus, and, if Mr. Gregutt is right that such bodies can stave off the possibility of a total loss of market share, then we can actually take heart in the existence of organizations like the Wine Institute.

    A question I would have for industry insiders is “how much cooperation/interaction” already exists among the state and sub-state organizations at this point.

    Yes, it is all inside basebal stuff, this topic. The economist in me cannot resist enjoying the conversation.

  11. Comparing apples and oranges is as likely as comparing Australian wine problems and the US wine problems…in short the Australian built their industry primarily with the idea of a cash crop to export…there is absolutely no way their population can ever consume all the wine they produce…in our case, a true wine culture only exists among a small percentage of adult Americans (6%)…yes there will be a surplus in covering the next few years (primarily among the mid-quality wines) but with price adjustments and even a small increase of a percent or two that surplus would disappear quickly…could imagine if Americans saw even a 1/4 of the number of beer TV commercials promoting wine? Now if we can just find the right people to pay for them???

    I feel sorry for the Australian men and women who have tried to build a business on a faulty idea / concept…they worked as hard as any of our winery people…and they basically have no choice but to ripe of vines…but we need to focus on our own issues which are very different!

  12. Hmm. Couple of points here. First of all we have a much bigger home population to absorb our products. When I lived there, Oz had the same population as Texas…that is a country that relies on exports. We do not.

    But from there comparisons do get interesting. Yes, Oz did position itself as a reliable producer of inexpensive shiraz but the high end market performed very well for them too. I remember the flush years of Two Hands and many other expensive Aussie reds that sold like hotcakes.
    So Barossa shiraz did get quite a bit of cachet, if not quite that of a Napa cab.

    But I am with those that also believe that Aussie clinging to one varietal and one region approach has backfired. Which is a shame because it is a big and beautiful land that produces widely varying wine styles and varietals.
    But trends and tastes change.
    Just ask anyone who actually sells wine right now. They all say high end wine is barely limping along but many trade buyers won’t even look at high end wine from Napa.
    Yes, this is partly a temporary effect of the economy. But if I was a winemaker in Napa today, I would at least open my eyes and make sure my head is not in the sand.
    We still have much to learn about which CA regions and which varietals will perform best.
    And there is a growing legion of consumers and trade out there, who want more diversity, want more than big, oaky Napa cabs and chards.
    CA is not a one trick pony.
    Cheers,
    Amy Atwood

  13. Chris Cameron says:

    I am an Australian winemaker living and working in Paso Robles. This is my 3rd harvest here and my 33rd overall. I have worked in many countries and have been involved in exporting to many more.
    A number of issues are absent:
    - the dramatic increase in the value of the Australian dollar has been a major factor in the reduction of exports.
    - a lot of the oversupply issues in the Australian industry are a result of the major international players (Fosters, Constellation etc) committing to grape supply contracts and encouraging plantings but not continuing them long term.
    - many world class Australian wines are not exported to the US due to the “adjustments” required to things like packaging/labelling, regulations, the cumbersome 3 tier distribution system and wine style (higher residual sugars, softer acids.
    The US will not have the impact on the world’s export stage with the success Australia has had until it becomes a more cohesive industry and learns to address the needs of the overseas consumers. High alcohols and residual sugar levels are common in US wines and that is in conflict with the current global marketplace.

    ….and finally, when is the US media going to recognise the contribution the likes of YellowTail has made to developing a wine drinking market here. Please give credit where credit is due.

  14. Chris, thank you for bringing your valuable perspective to this conversation.

  15. No mention of Fred Franzia – is he the Savior of Australia buying up millions of liters of their wine to sell here in the US with the “Down Under” label?

    I understand Shiraz is on the way to go with the Chardonnay already blowing out at Trader Joe’s. Must be a great value at $2.99.

  16. Charlie, I also cut my teeth on Gallo Hearty Burgundy, then Beaujolais, and once moved to California, discovered how good CA wine can be. True, also, that good wine did make that Beaujolais look cheap. Again true that we have never made a good 5 cent cigar. But maybe we can’t make a great 5 cent cigar, precisely because great wines need the ideal terroir, and the necessary 1-2 Kg/vine crop load (ahh, okay,5 lbs will work, too)…but those two things ain’t cheap. Hence, we will NOT make a 5 cent cigar, and great wines from CA by necessity cannot sell for $15-$20/bottle.

    As a grower and small producer, a great wine from superb terroir requires small croploads incompatible with inexpensive wines. Costs of growing low yields/vine are not coming down. Also, there is only a finite amount of people who wish to pay for this high end (low yield) grape production. That said, I am oh-so-glad Cerro Prieto Vineyard & Cellars is not selling 250 Thousand cases, but rather, a mere 250 cases. (90% of our grapes we sell.)

    Yes the market is tough and worse, it is downright unprofitable for many growers/ vintners. But having a national, or even state association that dictates who, what, how many, and how much …well, I just don’t see that working any better than our government building cars, running banks, or taking over health care. The best bet for all 3 of those industries is market based…supply and demand. Obviously, medicine is a lot more involved than that, and there are many overdue changes that need to be made. As a retired physician, however, I can guarantee you a government controlled health care system is the path to third world (say Mexico) style medicine…but I digress.

    And the same goes for the vine/wine industry…very little demand increases supply, prices fall, and producers either produce less at cheaper prices or they fold. (Albertson’s, yesterday, was selling some marvelous $120 wine for $35. As Steve has blogged long ago, it is a great time for wine drinkers). Wineries in it for the long haul, who, as noted above, are struggling to get rid of 350,00 cases, is nothing compared to wineries trying to sell 3.5 million cases.

    The astute observation that we in CA generally do NOT grow/produce for foreign export, puts us in a whole different league than the Aussies, the Argentines, the Chileanos, etc. With us it is watch and wait. Anyone over-extended can be crushed, just like grapes. Those with their horns pulled in will probably just ride this recession out. Later they can gear up again.

    But as for a national “governing combine”…nah.

  17. A sad byproduct of Australia’s reputation (and a reflection of my own biases): I would have naively assumed an Aussie winemaker in Paso Robles is making 17% alcohol abominations. Clearly not the case.

    An even bigger issue than YellowTail are the high scoring mid-priced imports. Certain critics have a penchant for high ratings and enthusiastic notes with respect to every $10 or $20 Shiraz that’s imported. But many of these wines are outright offensive to anyone with taste buds. These are even more damaging to Australia’s reputation.

    No one would use Gallo or Mouton Cadet to judge CA or Bdx, and probably the same applies for critter labels. If your mid range is deplorable plonk made solely for export, however, people catch on pretty quickly. I am certain there are excellent cool climate wines made in Australia, but I have no interest in wading through the junk to find them. Greed of the big producers has ruined it for everyone (which you could say of Napa or Bordeaux as well, I suppose).

    One parting thought: maybe the weak dollar will strengthen US exports. Value and heavy-handed oak stand in the way, but perhaps a European import could do for CA what Kermit Lynch does for France here.

    A second parting thought: Malbec is the new Shiraz. I hope Argentina is learning from this. If they keep diluting the product, eventually people will catch on. Then they’ll move on.

  18. IF you look at acreage and planting patterns, to some extent California already “did our Australia” from 1995-2002, when the acreage supplying less expensive wines got far out ahead of demand, followed by the crash in grape and bulk wine markets in 2001-2. Currently (Pinot Noir and Pinot Grigio excepted) there has been little net new acreage planted for several years in most regions for most varieties, while demand for the wine has continued moderate growth.

    I agree with mydailywine’s point on the fact that our huge home market makes our situation quite different from the Australians, who have to “export or die” with most of the agricultural products.

    To me, the most fascinating point about the Aussie’s troubles in the U.S. market is that they are happening at a time when the market trends are extremely favorable to their former strong point – red wine priced $5-10. (Thank you John Skupny for reminding us how so many people were predicting they were going to take over the market, just a few years ago.)

  19. We recently started a blog at Accru Wine which we haven’t pushed public yet and I posted an article on this as well. The thing that nobody is paying attention to is the fact that from a macro economic perspective, Australia has gone through the burst of a bubble (comodities) which has likely had a bigger effect on their prospects than ours.

  20. Steve, regarding Mondovino — no need. They figured it out.

  21. Hi
    Fascinating to see a US view of the apparent downward spiral of the Australia wine industry, from when it seems only yesterday it was embraced by world markets, as flavor of month.
    What the world probably doesnt read, is that huge tax incentive schemes were built around the wine industry in Australia, especially in Western Australia where I am based in the mid 90′s. These schemes put huge on volumes of wine availible and brought a flood of brands that were marketing driven. As Robert Mondavi discovered,Margaret River and indentified the region as being as close to Bordeaux as anywhere in the world, and the emerging cooler regions of Pemberton and the Great Southern are now coming into their own with small family wineries “growing their domestic and international sales base”.

    As Australia emerges from this process of natural selection and survival of the fittest in this industry, one must remember for a country of just over 20 million people, it punches so well above its weight and its people have a passion and loyalty to its allies throughout time. Having coordinated a Second Generation Winemakers tasting in Perth Thursday night, well over 1200 people turned up for lightly marketed event, where each of the wineries shared they have been in the best in years, due to the customer seeking quality and value for money, as well as that personality and character that comes through! Exiciting times to witness when you can say – its not how you go down, its how you came back!

  22. i don’t agree… i think USA has big consumption of wine.. thus their home market will protect them from crises..

  23. Note to Mat Lewis–

    Whatever troubles are affecting the mass market brands in Australia are almost totally unrelated to the expensive wines coming out of Western Australia with its brilliant array of growing areas from Pemberton to the Swan Valley and everywhere in between.

    Issues like wine quality relative to the price point competition affect folks like Leeuwin and Capel Vale and all the rest of the producers out there. The change in the value of the US dollar affects everyone, not just the folks in Oz.

  24. It is interesting the Fred Franzia, is now shipping the Crane Lake “Down Under” label Chardonnay, which is selling all over the country for less than $4.00 a bottle. Which is not helping their overall image.
    I work the Eastern Washington Market as a supplier and as a sales representive for a major wholesaler, and consumers are not longer looking for any wines from Austrialian wines that is over $8.00..and demand pricing to be around $7.00 for a 1.5 liter.

    The Northwest wines are still strong, but the California Wines still have about a 35% market share and growing…

    Maybe things will turn around in 2010…but ever consumer that I talk to, is looking for great tasting wines, for a great value, and they are not afraid to purchase cases if there is some great ratings, and recommendation.

    We have a completely new consumer who is more knowledabel was every. I see only growth in the next two or three years with US wines…

    At least that is my view!

    Keep enjoying wines and food pairings, which will say our industry from going South…

Trackbacks/Pingbacks

  1. Latest top gear australia Auctions | Black Stig is Back - [...] for a Cure Hosts Pre-Party; Events & Auctions Draw Big …Related Blogs on AustraliaSTEVE HEIMOFF| WINE BLOG » Blog …
  2. Good Reads Wednesday « Artisan Family of Wines - [...] http://www.steveheimoff.com/index.php/2009/11/12/california-is-not-the-next-australia/ [...]
  3. Why Americans Don’t Drink More South African Wines | GrapeSmart.net - […] been taught that Southern Hemisphere Wine = Cheap Wine Unfortunately, the Australians are learning this the hard way, but …

Leave a Reply

*

Recent Comments

Recent Posts

Categories

Archives