Late last week, the nation’s peak industry body for winemakers, the Winemakers’ Federation of Australia (WFA), released a series of points it had designed to promote growth both at home and abroad.
These 43 specific “actions” centre on key issue like international growth opportunities, health, and working with wine retailers to grow consumption locally.
However, the hardest hitting points in the report were reserved for the country’s dominant supermarkets.
My enemy, my friend
The report pointed out that Coles and Woolworths together distribute and sell up to 77% of all wine sold off-premises¾a figure that is up from around 60% in 2007. The private, exclusive and controlled labels of both major retailers are estimated to account for at least 16% of domestic sales.
The report used financial data for nine wine companies to show that in the four years between 2005 and 2008, their combined profitability and margins grew—peaking at A$162m and 10.2% at the end of the period.
“But the aggregate profit of the nine companies fell by 82% [the following year] and into loss last year,” the report said. “Eight of the 10 companies have experienced sustained reductions in margins and profit. In 2007 the average profit margin across these companies was 9.6%, in FY09 it averaged 2.4%; and in FY12, it was 5.9%.”
A number of the winemakers interviewed noted that the retailers’ are both their biggest customer and competitor and this is a major issue affecting profitability.
“The Australian wine industry is highly fragmented with 2,400 producers and 30,000 retail SKUs. The 38 largest producers account for 88% of total production… already a large number of alternate suppliers for retailers to leverage,” the report said.
It added that the “retailers have numerous sourcing options to leverage due to: this fragmentation, the excess supply of grapes and wine, and the ability to sell imported wine at attractive margins.”
Winemakers are affected directly and indirectly by the ability of retailers to significantly influence a wine company’s sales and brand strength by controlling access to shelf space, promotional activity, pricing volume for exclusivity, and de-listing, the report said.
“The risk of these behaviours to winemakers is extensive as they make production decisions far in advance of sale, have expensive inventories, and have extremely limited alternate distribution options,” it said.
Many wine producers also reported a significant increase in discounts and rebates. “Average discount levels being achieved by the major retailers are estimated to be about 30% and as high as 40%—up from 10-15% five years ago.”
The report added that between 2007 and 2012, retailers captured a significant portion of these winemakers’ profit margins, but the majority of the margin was not transferred to consumers.
“The change in consumer price varied across different product lines—with certain lines decreasing in price and some increasing. However, when adjusted for volume, the total amount paid by consumers on these products increased compared to what they would have paid in 2007,” it said.