Australia’s wine sector suffers as drinkers shun lower-end brands

A vineyard in New South Wales' Hunter Valley, one of Australia's oldest wine regions. Photo / Penelope Beveridge

Things got so bad in the Australian wine industry in the 1980s that to stay afloat the Calabria family of winemakers had to put its main business on hold and focus on washing bottles for reuse by bigger producers.

But with global consumers turning away from the lower-priced “commercial” brands that later drove Australia’s emergence as a wine powerhouse, things are even tougher now, according to Andrew Calabria, head of sales at Calabria Family Wines.

“Three years ago the industry was in the best position it has been in. Now it’s the worst it’s been,” he said.

The woes of the sector, which employs more than 160,000 full and part-time workers, have prompted an exodus of established players.

Treasury Wine Estates, Australia’s largest wine producer and the maker of some of the best-known labels on UK supermarket shelves, including Wolf Blass and Blossom Hill, announced this week it would sell its commercial wines division with a A$290 million (NZ$317m) writedown.

It was the latest in a series of deals involving Australian wine.

A consortium led by private equity group Bain Capital in February took control of Australia’s second-largest wine producer, Accolade Wines — owner of brands including Hardys and Banrock Station — after the Carlyle-owned company struggled to pay down debt.

In July, Bain also led the acquisition of French group Pernod Ricard’s Australian wine portfolio in order to merge it with Accolade.

Many producers’ woes began when China put punitive tariffs on Australian fine wine in 2020, causing the collapse of what had been the country’s most lucrative export market.

Sales to China surged since the tariffs were lifted in March, but few in the industry expect them to recover to the previous A$1.2 billion (NZ$1.31b) a year — a level more than double the value of exports to the US or UK, the next biggest markets for Australian wine.

Globally, wine consumption has also been declining. UK per capita wine consumption peaked in 2009, except for a temporary boost during the coronavirus pandemic, with British drinkers now consuming 14% less than they did in 2000.

Some of the world’s largest alcohol companies are shifting from the “commercial” end of the wine market — brands that retail for less than $10 (NZ$16) a bottle — towards higher-margin and faster-growing segments, such as spirits and premium wine.

For many producers in Australia, the exodus has echoes of the 1980s.

Vineyards have been dug up to make way for planting almonds, table grapes and other crops. Industry bodies are in talks with the government to help more cash-strapped growers convert their vineyards.

In some of Australia’s biggest markets, consumers are focusing more on health and well-being, while demand for the cheaper “big reds” that commercial growers produce is declining.

‘Oversupply situation’

“People are drinking less but buying a better bottle,” said Lee McLean, chief executive of the Australian Grape and Wine trade body. “The reality is biting in Australia. We are in a global oversupply situation. This is a crucible moment in the industry.”

Trevor Stirling, an analyst at Bernstein, said winemakers globally had been forced to cut prices to remain competitive. “Wines that were once upon a time considered premium are now seen as mainstream,” he said. “The only bit of the wine industry in the world making money is rosé and upmarket wines.”

Despite selling off the bulk of its wine brands, Pernod Ricard held on to its Château Sainte Marguerite en Provence rosé, which it acquired in 2022. Luxury group LVMH has also doubled down on rosé with the acquisition of Château Minuty in 2023 after buying Château Galoupet in 2019.

Other large producers are concentrating on premium and luxury wines with TWE focusing on its successful Penfolds brand and buying high-end US names.

“There is an inherent contradiction in the wine industry,” said Bernstein’s Stirling.

“The sweet spot is if you can create scale with a premium business. But that is difficult, particularly in a world where being knowledgeable and a connoisseur means you reject big brands.”

Andrew Caillard, a wine auctioneer and author of a history of Australian wine, welcomed the shift from high volume and commercial brands that had been “sold down every rabbit hole”.

He said a 1980s sketch by comedy group Monty Python that described the unpleasant features of fictitious Australian wines such as “Hobart Muddy” and “Château Chunder” was the “worst thing to happen” to the country’s viticulture because it made many Europeans look down on its premium wines.

Australia’s 1990s commercial wine boom had changed the industry for the worse and emulating successful premium brands such as Penfolds was a better strategy, Caillard said. “The Australian industry is shrinking to glory,” he said.

But Calabria said his family business would continue its strategy of owning both commercial and premium brands, believing it was important not to second-guess the market.

‘Goon bags’ more popular

Industry-wide sales of boxed wine — known as goon bags in Australia — had risen in recent months as drinkers tightened their belts during a cost of living crisis, he said, citing this as evidence that commercial wine had a long-term future.

“We see value in all of it. The market moves very quickly,” Calabria said.

Written by: Nic Fildes in Sydney and Madeleine Speed in London

© Financial Times