2014 Wine Industry Outlook Conference

1. 2014 Wine Industry Outlook Conference Post Vintage 2014 implications Speaker: Lawrie Stanford, Executive Director, WGGA

2. The Agenda • Demand issues • Supply issues • Business models?

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

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

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

6. Areas and net removals (13% of peak removed?)

7. A view of ‘balance’ – inventory just ‘better’ or ‘balanced’ Repre- sents wine sales at <$1/L FOB 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)

8. Why a $1/Litre fob cut-off for sustainable exports?

9. International situation 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. Coincides with Australia realizing it’s production had outstripped demand for Australian wine Growing affluence and demand for wine in emerging markets like Nth America and Asia Wine consumption Wine production Consumption steadies at lower than peak but an elevated level More influential seasonal factors 2: 2013 bounce-back Could this level rise again to 2007 peak? GFC dents, but doesn’t eliminate, the growth More influential seasonal factors 1: global ‘annisfungealhorribilis’ Global inventory is better but is it in balance?

10. International situation – bottled and bulk

11. 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. Profitable exports at $0.50-$1/litre (bulk wine)? …

13. Domestic outlets for cooler-temperate wine in under-demand?

14. The story summarized … (1) Australian wine sales are declining - driven by a decline in exports. 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’? 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. The story summarized … (2) What’s the alternative to proprietary brands? • Nuh • … but some? (all?) There appears to be a ‘world’ of opportunity in global bulk wine trade. Two points (i) price is key and (ii) it is a different business model. Profitability of global bulk wine trade at $0.50/litre would see us ‘in balance’. There’s a place for under-demanded cooler-temperate wine in retailer generic and buyer-own-brands

16. 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. Where will the solution to supply-demand imbalance come from? • Reducing supply? Yes, but is not sufficient • Increase demand? Essential, but it is not sufficent • Reduce supply and increase demand? Yes • Innovation? Definitely – technical, packaging, market intelligence, economic, commercial ….? • Serendipity? (eg ERs)