China's removal of tariffs from Australian wine is a relief, but it isn't enough to save the industry.
In 2020, a cataclysmic event happened that sent the stock price of Australia-based Treasury Wine Estates plummeting 26 percent in a week, and 46 percent in less than two months. Can anyone tell me what it was?
I see you in the front: the pandemic. No. In the week in March 2020 that a human bio-security emergency was declared in Oz and Qantas cancelled all its international flights, Treasury's stock went up 1.4 percent; a month later it was up 9.5 percent. Next?
The Chinese tariffs? Good answer, but no. China announced crippling tariffs on Australian wine of up to 212 percent in late November 2020 and Treasury stock dropped 7 percent the first day. But within two weeks the stock was actually 2 percent higher than pre-tariffs, and it has not dropped below that level since, in nearly three-and-a-half years.
Give up? Here's a hint: the answer will tell you something about how helpful China dropping those punitive tariffs last week – which set off cork- (but mostly screwcap)-popping across Australia – is actually going to be for the Aussie wine industry. Unfortunately, not as helpful as they hope.
Because the true 2020 cataclysm for Treasury came just before the pandemic lockdown. In late January it had to lower its fiscal expectations for 2020 and 2021 based on poor sales in the world's most important wine market – the United States. You can look it up. Treasury's stock took a beating and the pandemic actually helped the company recover.
Now to be fair, when China announced in August 2020 that it was going to probe Australian wineries "dumping" wine in the country (i.e., selling below the cost of production), that sent Treasury's stock down 23 percent in a week. But, unlike the bad news from the US market, Treasury stock eventually recovered to the level it was at before that announcement. It has never, still, recovered to the level it was before the January 2020 news that Americans just aren't that into Treasury wine.
Australian wineries think their problem is China. It's not. It's the United States.
"Australia's suffering in the US," said wine consultant Chuck Hayward, probably the foremost American expert on Australian wine. "Australian wines aren't cool. They're not the hipster wines."
Moreover, Hayward expects China's lifting of tariffs to make Australia's American problem even bigger.
"Australia has always had this history of focusing on one country," said Hayward, who sold Australian wines in San Francisco for decades. "This is the second time China has had this wave. 'We're going to send all our wines over there and they'll save the industry.' They stand on one leg. They won't go to the UK or the US. Then when that market collapses, they have to look for something else. When China went down recently a lot of people said the next country is going to be India. 'We're going to focus on selling our wines in India. We'll do wine education in India.' But that never came together. And everybody wanted China to come back, especially in South Australia. South Australia really drives the export markets."
Statistics from NielsenIQ show that in the 52 weeks ending January 27, Australian wine sales in food and drug stores in the US dropped 6.3 percent, which was worse than the 4.8 percent overall drop for wine sales. These Aussie wines tend to be cheap wines of the kind they hope to sell in China, averaging just USD 5.37 per 750ml (some are sold in boxes or large bottles.) Only wines from Chile are cheaper; perhaps not coincidentally, Chilean wine sales rose over the same period. The average price of every other country's wines is at least 47 percent higher. Supermarket wines from Spain, New Zealand and France sell for more than twice as much as Australian supermarket wines. Yet still Americans are buying less Aussie wine.
A hard row to hoe
Unfortunately, Australian wineries aren't doing much better in US high-end shops. Hayward said that 20 years ago, the US had about 10 import companies that took Australian wine seriously, which meant they had sales reps visiting restaurants and retail stores and making Australian wine visible. Now there's a vicious cycle: fewer sales means fewer sales people, which means fewer interactions with wine buyers.
"The hardest thing right now for an Australian winery is to get an appointment, just to taste the wines," Hayward said. "People say Aussie wines don't sell. You've got wine lists that say 'Wines of the World', but they don't have anything from the Southern Hemisphere."
Gavin Speight is vice-president of marketing for Napa-based Old Bridge Cellars, which has probably the best portfolio of Australian wines in the US, though it had to branch out to French wines as Aussie wine sales dropped.
I called Speight wondering if he will still be able to get some of the jewels of Old Bridge's portfolio, like Leeuwin Estate and d'Arenberg, now that China is open for business. He says yes, because outside of Treasury's top-end Penfolds wines, China doesn't really buy the high end.
"The wineries I work with, China was just a part of the overall mix," Speight said. "But Treasury had to do a lot of moving around. They had wines in the US that were never meant to be in the US. Whereas Leeuwin Estate had a lot of breathing space."
Indeed, Treasury began producing Penfolds-branded wines in California, probably as an attempt at getting around China's tariffs. Now they can go back in the country, though Speight cautions: "It's not like they can turn the spigot back on and instantly send a billion dollars of wine back into China."
Treasury, which has more than 3400 employees, could not make one available to speak to me for this article, but I did get the press release, which sounds very gung-ho:
"Effective immediately, TWE will commence partnering with its customers in China to implement the detailed plan outlined as part of its F24 interim results announcement in February, which includes:
- Re-establishing distribution for Penfolds entry-level Australian COO portfolio, including Penfold's Max's, Koonunga Hill and One by Penfolds;
- Re-allocating a portion of Penfolds Bin and Icon tiers from other global markets in order to progressively re-build distribution to China, while maintaining the strong momentum in those other markets where Penfolds has successfully grown in recent years;
- Re-establishing distribution for the Treasury Premium Brands Australian sourced priority portfolio in China, including Rawson’s Retreat; and
- Expanding sales and marketing resources, and brand investment, in China."
But Treasury will go back into a Chinese wine market that is much slower than it remembers. We've all read about slowing wine consumption in the US, like the 4.8 percent drop mentioned above. That's nothing. In China, wine consumption dropped in half between 2018 and 2022, according to the OIV.
The US is still the world's largest wine market; Americans buy 34 percent more wine overall than France, which is second (these are total numbers, not per capita). In 2018, China was the world's fifth-largest wine market and was gaining on fourth-placed Germany. But in 2022, China had dropped to eighth, and only Argentina's economic troubles are keeping it out of ninnth. China has more than 32 times the population, but Argentina has a centuries-long tradition of drinking wine and may soon pass China, which does not.
Hayward thinks part of the reason that New Zealand wines have outperformed Australian wines in the US, even though the New Zealand industry is much smaller, is the nature of American Antipodean tourism. He says American tourists to New Zealand tend to be older and wealthier, spending good money for accommodations and looking to spend good money on wine when they get home. When Americans go to Australia, they tend to be backpackers and earlier on in their wine experience. (May I interject that this is exactly how I fell in love with Australian wine, but I was a backpacker willing to spend as much on a bottle as on a night in a hostel.)
I agree with Hayward and Speight that Australian high-end wine is still an incredible value. The Cabernets you can get for less than $50 are often better than what you find here for four times the price.
"We only see a sliver of what Australia makes," Hayward says. "Importers are too small and too reluctant to take a chance on the American market. You've got wineries with own-rooted vines being worked on by sixth-generation owners, and those wines are like USD 50. It's crazy. If it was Côte-Rôtie it would be six times the price."
How much is that in yuan? If you're reading this in Shanghai, I guess you'll soon find out. Enjoy.
Source: Wine-Searcher