1. Wine Grape Growers Australia Page 1 2 October 2014 Wine Grape Growers Australia Page 1 2014 Wine Industry Outlook Conference Post Vintage 2014 implications Speaker: Lawrie Stanford, Executive Director, WGGA

2. Wine Grape Growers Australia Page 2 2 October 2014 The Agenda 1.Demand issues 2.Supply issues 3.Business models?

3. Wine Grape Growers Australia Page 3 2 October 2014 Wine sales in Australia – history Flattening in domestic sales volumes Relatively constant prices AUD strengthened – imports less expensive volumes commence rise – the continued price rise reflects strong demand AUD weakened – i mports more expensive, volumes decline AUD continued to strengthen – volumes commence rapid rise and prices fell AUD weakens – imports more expensive volumes steady DOMESTIC FRONT >>> IMPORTS >>> Steady volume growth as local interest rises helped by overseas success and supply coming on-stream

4. Wine Grape Growers Australia Page 4 2 October 2014 Sales of Australian wine - history THE EVENTS >>> PRICE RESPONSES >>> The thoughtful see an impending surge in supply Everybody agrees the industry is structurally oversupplied A downward volume path Early parity with returns from domestic sales Export returns wilt under declining demand and a strong AUD – export returns significantly under-rate domestic returns The GFC AUD strengthened, more expensive, demand falls

5. Wine Grape Growers Australia Page 5 2 October 2014 Prices and production ‘False’ start to launch into overseas markets Inability to supply and the recession ‘ C atch-up’ complete Three successive above-average yields – despite drought Seasonally influenced -‘catch-up’ in prices from 2011 The thoughtful saw the supply surge coming We all knew oversupply was here Area reduction commences GFC hits (UK and US in particular) Season (annis fungeal horribilis) Three years of lower harvests - reduced area or seasons?? … again Evidence.. reduced production will improve prices?

6. Wine Grape Growers Australia Page 6 2 October 2014 Areas and net removals (13% of peak removed?)

7. Wine Grape Growers Australia Page 7 2 October 2014 A view of ‘balance’ – inventory just ‘better’ or ‘balanced’ Stocks-to-sales (raw) is stocks measured against all sales, Stocks-to-sales (adj.) is stocks measured against ‘profitable’ sales (using as an indicator, all sales net of export sales at <$1/litre) Repre- sents wine sales at <$1/L FOB

8. Wine Grape Growers Australia Page 8 2 October 2014 Why a $1/Litre fob cut-off for sustainable exports?

9. Wine Grape Growers Australia Page 9 2 October 2014 International situation Wine consumption Wine production Growing affluence and demand for wine in emerging markets like Nth America and Asia Coincides with Australia realizing it’s production had outstripped demand for Australian wine GFC dents, but doesn’t eliminate, the growth Could this level rise again to 2007 peak? Consumption steadies at lower than peak but an elevated level The case is weak for this decline to be structural adjustment in supply. Dimension and timing of EU grubbing, entry of new world producers Seasonal factors far more influential on production outcomes? Series of low season due to seasons. More influential seasonal factors 1: global ‘annis fungeal horribilis’ More influential seasonal factors 2: 2013 bounce-back Global inventory is better but is it in balance?

10. Wine Grape Growers Australia Page 10 2 October 2014 International situation – bottled and bulk

11. Wine Grape Growers Australia Page 11 2 October 2014 What happens if there’s profit at $0.50/litre? Stocks-to-sales (raw) is stocks measured against all sales, Stocks-to-sales (adj.) is stocks measured against ‘profitable’ sales (using as an indicator, all sales net of either export sales at <$1/litre or export sales at <$0.50/litre)

12. Wine Grape Growers Australia Page 12 2 October 2014 Profitable exports at $0.50-$1/litre (bulk wine)? …

13. Wine Grape Growers Australia Page 13 2 October 2014 Domestic outlets for cooler-temperate wine in under-demand?

14. Wine Grape Growers Australia Page 14 2 October 2014 The story summarized … (1) Supply adjustment has occurred – but not to the commonly accepted and required level of 20% of the national vineyard at it’s peak, for supply to equal demand. Production and inventory are declining from the peak, but … at 1.7 mt in 2014, production is still high – but, at least … inventory is declining – so - do we have ‘S&D balance’ or are things just ‘better’? Australian wine sales are declining - driven by a decline in exports. Stocks-to-sales ratio tells us that current production is still too high for ‘balance’. But does ‘balance’ imply for proprietary brands – what about profitable options for ‘the rest’?

15. Wine Grape Growers Australia Page 15 2 October 2014 The story summarized … (2) Nuh … but some? (all?) Two points (i) price is key and (ii) it is a different business model. There’s a place for under-demanded cooler-temperate wine in retailer generic and buyer-own-brands There appears to be a ‘world’ of opportunity in global bulk wine trade. What’s the alternative to proprietary brands? Profitability of global bulk wine trade at $0.50/litre would see us ‘in balance’.

16. Wine Grape Growers Australia Page 16 2 October 2014 Questioning traditional/common beliefs … “The industry is over-supplied” Yes, for proprietary brands - how about dealing with the rest through alternative business models? “The industry needs to get smaller” This is reducing the industry to solely proprietary brands. But won’t wine company costs increase? “The solution is growing demand” Yes, it’s essential, but not sufficient – will definitely fix the symptoms, but not the causes, the market is not working. ‘Let the market sort it?’ “Marketing will fix it” ‘Marketing’ is different from ‘improving market prospects’. ‘Market’ the top-end, ‘improve market prospects’ for the lower. “Restructuring is occurring ” Both global and Australian production levels demonstrate a worrying susceptibility to seasonal influences and the impact of structural adjustment is unconvincing. There are two markets (broadly) business models need to adjust to suit

17. Wine Grape Growers Australia Page 17 2 October 2014 Where will the solution to supply-demand imbalance come from? 1.Reducing supply? Yes, but is not sufficient 2.Increase demand? Essential, but it is not sufficent 3.Reduce supply and increase demand? Yes 4.Innovation? Definitely – technical, packaging, market intelligence, economic, commercial ….? 5.Serendipity? (eg ERs)