Why the American Wine Industry is Doomed to be Aussie Road Kill

Proof that bigger isn't always better.
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The outback of Australia is home to a lot of strange Darwinian creatures, but none quite as dangerous as the road train: immensely powerful

Road Warrior

-type tractor trucks pulling four, five, six or more trailers at a time, and driving at speeds approaching 100 miles per hour. Once they get up to speed, they're an awesome force that will flatten most anything that gets in the way.

And just what might that be? The American wine industry, for one. For while the Yanks are busy crowing about how they exported some $537 million worth of wine last year, and how that represents an increase of 26% over last year, the Australians are way ahead.

To understand how, realize that the Australian wine industry is just a fraction of the size of the Americans -- producing some $2.5 billion of wine in 1998 vs. $18 billion in the U.S. Nevertheless, the Aussies exported almost as much as the entire U.S. industry: $515.6 million, according to the Australian Wine Foundation and the U.S. Department of Commerce.

Not only that, but according to beverage analyst Alexandra McPhee of

Salomon Smith Barney

in Sydney, the Aussies are getting a much higher price for their exported wine. While the Americans sell plonk at $1.97 per liter, the Aussies get around $2.65 per liter. To match the Americans, the Aussies got away with shipping a lot less wine to make those numbers -- 194 million vs. 272 million liters, all of which made for pretty good Australian winery margins. And that's how Australia exported some 27% of its entire production in 1998 -- about three times that of the proportion in the U.S.

"The higher prices of Australian exports clearly reflect higher quality wines," says Robert Nicholson, principal of

International Wine Associates

, a Healdsburg, Calif., wine consulting and M&A firm. Nicholson said that U.S. exports are mostly cheap jug wines or even bulk wines transported in tankers intended for bottling at their destinations.

Indeed, American visitors to Canada, Japan and the U.K. are usually struck by the overwhelming displays there of jug-type wines -- Gallo, Blossom Hill (


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International Distillers and Vintners) and Inglenook (



) -- and a relative scarcity of premium brands.


, for example, exports only about 1.3 million liters representing just 3% of revenues. Even with its relatively high ranking,



exports represent only 8% of sales.

This prevalence of cheap American wine has hurt the overall perception of American wine in overseas markets and put wine makers at a relative disadvantage -- especially when they go head-to-head with the Aussies. "The Australians have done a phenomenal job of positioning their wines as high quality and affordable," Nicholson says, "while California wines are most often compared with those from Chile."

For example, the Lindeman's Bin 65 Chardonnay from Australia's largest wine company,


, sells for about $4.99 per 750ml bottle in the San Francisco Bay area, while California Chardonnays of comparable quality (such as

Golden State Vintners'


Summerfield brand or Beringer's Napa Ridge line) sell for $6.99 and up. Nicholson and other experts say this price/quality positioning should help the Aussies maintain global market share even in coming years when oversupply will force prices to grow more competitive.

The Australian success comes by design in a manner that the American wine industry could learn from. Under the leadership of the

Australian Wine Foundation

, the country's wine industry has

cooperated in a long-range plan to grow more and better wines, to double wine production, to concentrate on higher margin wines and exporting to countries where they build and maintain market share.

Ironically, much of their wine-making success grew out of experience in -- guess where? -- California. In the mid-1980s through early 1990s, California cellars and vineyards were packed with Australian interns eager to work for little or nothing as they absorbed the vintners' techniques. Their subsequent success reflects how well they learned. Indeed, industry sources tell D&D that groups of American vintners are now making pilgrimages to Australia to learn how the Aussies have refined their American ways.

The American wine industry, unfortunately, has no leadership organization analogous to the Australian Wine Foundation -- making it far more difficult to mount coherent programs to become more competitive -- either abroad or at home.

The consequences of not having a coordinated strategy can be inferred from the latest


data from

Information Resources Inc.


for the 52-week period ended Feb. 28. While domestic wine sales volume increased by 4.4%, import dollar sales expanded 14.7%. Australian imports, by contrast, grew 40% by dollar sales.

How are American wineries responding to the Australian threat? In the worst way -- by pushing up their own prices --thus keeping the door open for competitively priced imports. The Feb. 28 IRI figures give imports a 16.7% market share (by dollar sales), up from 15.5% during the same period in 1997.

It's only likely to get worse: Larger wine-grape harvests and relatively stagnant consumption worldwide mean that the export market will get more and more competitive -- and nobody's more competitive than the Aussies.

And because the American wine industry has failed to boost overall consumption -- which rose just 1% in 1998 over 1997, according to

Gomberg, Fredrikson & Associates

-- exports have been cited by several

experts as the industry's last hope for substantive growth. Meanwhile, overplanting of new vineyards has occurred to such an extent that normal weather conditions in California this year could produce a glut of near-Biblical proportions.

With marketing savvy like this, is it any wonder that the American wine companies are finding themselves outgunned and outnumbered by the road warriors down under? It's clear that despite the rosy pockets of news hyped by the industry and its cheerleaders, American vintners will need to start emulating their cohorts down under or risk finding themselves outgunned and outnumbered in the Thunder Dome of wine.

Lewis Perdue is editor and publisher of

Wine Investment News. While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at