Australian Wine Industry ANALYSIS 2500 words 1st class degree level

An Analysis:

The Australian Wine Industry


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1.0 Introduction

In preparing this project there are some basic assumptions that must be made.  The assignment is based on the statement, “You need to explain what your organisation should take into consideration prior to developing operations in Australian wine industry.”  It further states that, “You are employed by a medium-size private European company with a diverse set of products and services related to the Wine Industry, which are offered around the world.” There are three basic ways in which a company can participate in the wine industry:

Ø  Wine producer—a vineyard and bottler

Ø  A wine importer/exporter—an international dealer in wines

Ø  A manufacturer or supplier to the wine producer—labels, bottles etc.

For the purposes of this project it is assumed that the company in question is an importer/exporter of wines that purchases wine from producing vineyards and markets it globally by providing it to retailers.  As such, it effectively acts as a sales agent or distributor for the wine producers. It is further assumed the company is operated from the United Kingdom.

Part of the assignment is to perform a “contextual analysis” using Porter’s National Diamond Model.  A contextual analysis is generally considered to be, “A phase of natural language processing, following semantic analysis, whose purpose is to elaborate the semantic representation of what has been made explicit in the utterance with what is implicit from context.” (, 2011) The term is ordinarily used in vocabulary studies and is defined by the University of Oregon as, “A strategy readers use to infer or predict a word from the context in which it appears.” (University of Oregon, no date)  It is assumed for the purposes of this project that what is sought is a conventional economic and investment analysis using the Porter model.

2.0 The Porter Diamond Model (PDM)

The Porter Diamond Model is actually an adaptation of his classic five factors model for individual firms (Porter, 1980 p. 4) where a national economy is substituted for the individual firm. In the five forces model the variables are evaluated for a specific firm as supplier power, buyer poser, barriers to entry and threat of substitutes as the impact the rivalry between firms.  In the PDM they are presented as firm strategy, structure and rivalry, factor conditions, related and supporting industry and demand conditions.  There are two external factors, chance and government.  (Porter, 1990 p. 71)

Traditional economic theory relates regional or national competitive advantages to land, location, labour and population and national resources such a mineral deposits and energy availability.  (Samuelson, 1948 p. 541)Porter points out that these elements cannot be influenced in any important manner and thus become passive of inherited element in the national economy.  There are variations over time such as the recent discover of huge oil fields off Brazil that can be very significant in terms of a national economy’s competitive position, but at a given point most of these are fixed.  National efforts such as education and infrastructure development in Australia can influence them if national priorities are managed, but the ability of efforts of this sort require a long term commitment before they become truly effective.

2.1 The Australian economy regarding the Porter Diamond

Factor conditions are such elements as the national infrastructure and the availability of skilled labour. In this respect Australia ranks high with 99% of its population literate and most of the population going to school to the age of 20 or 21. (CIA, 2011) Porter argues that the individual company to a great extent creates factor conditions.  Factors such as unskilled labour and access to raw material are available to all.  Specialized factors such as efficient infrastructure and higher education for the workforce require significant on-going investment.  New government programs do not easily duplicate these, but do create a competitive advantage for the economy where they are present.  Australia has both of these and has transformed itself into an internationally competitive, advanced market economy. (CIA, 2011)

In regard to the attractiveness of a commitment to Australia for a company involved in the international trading of wines the attractiveness of Argentina as a market would be one of the considerations involved in the evaluation of the decision.  The other side of the equation is the attractiveness of Australia as a source of quality vintages for other markets.  The first part of the question is the firms underlying strategy.  In this case it is assumed that the “Medium European Wine Company, (MEWC) is both looking at sources for new products to offer to their existing distribution channels and for potential new markets for their existing products.

It should be noted that wine could broadly be divided into two categories, table wines, or wines to be consumed primarily with food and what are referred to as fine wines.  This can vary considerably in quality from what the French refer to as “plonk” or “gros rouge,” relatively ordinary wines that are often of rather low quality except in terms of alcohol content to fine vintage wines of outstanding quality.  The primary market for Australian wines is the table market category, which in terms of volume is far larger than the fine wine category.  This does not imply that Australia does not lay claim to producing some fine vintages.  Most of the branded products are so called “Brand Champions”, defined as the engine room of Australian wine offerings and often are of the “screw cap” variety as opposed to corked bottles. (Wine Australia, 2011)

2.1.1 Australia as a source

As a source of product Australia is not an attractive market.  For twenty of more years in the late twentieth century Australia and Australian wines enjoyed a dynamic market globally.  Since about 2005-6 this situation has changed dramatically as the industry has undergone an almost perfect storm of both supply and demand side shocks.  Recession in key export markets such as Europe and the United states that resulted from the economic and financial crisis reduced demand.  At the same time the Australian dollar increased in value relative to the Euro and the US dollar effectively raising the prices of the product in the most attractive export markets.  The competitive position of the Australian product was further eroded by the emergence of new low cost wine producers.  This has resulted in a degradation of the competitive position of Australian producers with the major supermarket chains.  The situation was compounded by changing consumer preferences in wines which contributed to a vast oversupply of wine and wine grapes which further forced down prices and squeezed margins globally which in turn has forced producers both in Australia and elsewhere to go out of business. (IBIS World, 2010)

The micro-economic situation for entering the Australian market for an exporter is not attractive as this is written.  Australia annually produces between 20 million and 40 million more cases of wine than it can sell.  The two largest factors in the market, Constellation Brands and Foster’s, have both been trying to sell their Australian assets and unwind their commitment to the Australia market for some time.  This is a stark contrast to the situation only a few years ago when Australia was viewed as bottling…” visions of the future.”  The viewpoint of an industry analyst is that, “Whoever comes in for Constellation and Foster’s wine assets will have an uphill challenge.” (Mercer, 2010)

In terms of specialised factors, a study of SME innovation in terms of asset clusters in the Australian wine industry is an indication that innovation and activity levels intensify as clusters develop.  The study contrasts clusters in the wine industry as innovative or highly developed and organised or less developed cluster formations.  The study cites the Porter model describing clusters as, “…networks of companies, suppliers, service firms, academic institutions and organizations in related industries that, together, bring new products or services to market.”  (Aylward & Glynn, 2006)  The article, which is very positive in its viewpoint, was written immediately prior to the onset of the problems referred to above. It would be interesting to have a current follow-on of the article.

In terms of factors of production Australia would seem to be well positioned in terms of satisfactory agriculture and with its proximity to Asia would probably have access to incremental low cost vineyard labour sources if required.

2.1.2 Australia as a market

In terms of the Diamond Model the question of industry and demand conditions is important.  Australia is a nation of 21.5 million or the 54th largest country by population in the world.  Almost 90% of the population is urbanized and 99% are either white or Asian and most of these have no prohibitions concerning the consumption of alcohol.  The economy has almost US$890 billion of GDO (PPP) or the 18th largest in the world. Per capita GDP in 2010 is estimated at US$41,300 or again 18th in the world. (CIA, 2010) This would appear to make Australia an excellent potential market for wines, but the vast domestic oversupply would make it difficult to build significant volumes for imported wines except perhaps in the fine wines category.


2.2 Strategic considerations

There must be foundations on which to build a strategy in terms of a new market or source of product.  At the present time it is difficult to find any elements on which to build a strategic approach to entrance into the Australian wine market.  As an exporter of Australian wines the company would have what Porter in his 5 Forces model would be equivalent to strong bargaining power of customers.  With the chronic overproduction of wine it would be possible to purchase or sell on commission wine at discounted prices.  The offset of the strength of the Australian dollar at the present time offsets this price leverage to a large extent.  The problem is exacerbated by the global over production of wines and the resulting of low prices for competitors to Australian wines that offer landed costs as low or lower than can be claimed by Australian product, and at the same time offer product more in line with current consumer preferences.  In Europe for example, there is also overproduction of wine in major producers like France, Italy, Spain and Portugal. French government figures have indicated that AOC Muscadet prices for example have fallen by 50% in 2010(Todd & Mercer, 2010)

As an importer the company would have to compete with large domestic Australian producers that have both low costs and established brands and identities.  For commodity wines there is no real basis on which the product can be differentiated.  A well-developed, extensive and expensive advertising campaign would be necessary to develop acceptance for imported products in the general consumer wine categories.  The exception would be fine wines, which are essentially “luxury goods.”  These are for a certain class of consumers much as Rolex watches do not compete on functionality or price, but on image and quality.  These justify the purchase in spite of price in the mind of the consumer.

3.0 Conclusion concerning entrance into the Australian wine market

As this report is prepared it is not possible to recommend a strategy to enter the Australian consumer wine market either as an importer or exporter.  The price and condition of the wine market at the present time preclude the development of an effective strategy built on a basis that would produce a satisfactory return on required investment.  As the global economy hopefully recovers, and the wine market adjusts output to reflect effective demand, revisiting the possibility of entering the Australian market either as an importer and or an exporter could produce different results in even a year or two.

4.0 A critical evaluation of the Porter National Diamond Model

The application of the PDM or any other purely academic model to actual business decisions is a difficult task.  The purpose of any academic model such as the PND is to draw broad generalities from which the working analyst must select the elements relative to the specific situation under analysis.  In the case of the Australian wine market, the same analysis using the same PDM tool produced six or seven years ago would have produced an entirely different outcome.  At that time Australian wines were well received as something new and different in the wine market.  A wine bottle with a picture of a kangaroo was not a common site.  The wine market was only beginning to become over saturated with product.

In this case, firm strategy is not particularly important to the analysis.  Presumably the firm has a well established and successful strategy that it is employing in the markets and with the sources it already serves.  A strategic revamping to serve a new market is a possibility, but raises the question as to why go into a market where the firms proven and effective strategies are unlikely to work?  There are well established modus operandi for the wine import and export business and while marketing approaches such as branding are a possibility, this is probably not appropriate for a medium sized European company in this case.

Structure and rivalry considerations are clearly relevant.  If two of the largest and most successful alcoholic beverage producers in the world are looking to sell off their Australia operations it indicates that the industry structure is very difficult and rivalry cut-throat.  The alternative to this would be examine the operations of Constellation Brands and Foster’s carefully, and there might be opportunities to purchase portions of their operations at very advantageous prices that could offer unusual opportunities for entering a market that is in chaos, but in an economy that is demonstrating considerable strength.

Factor conditions according to Porter are created and not inherited.  In the proposed scenario above the purchase of existing operations might provide factors such as skilled labour, channels of distribution and logistics and supply chains that would otherwise be difficult, expensive and time consuming to develop.  The other inherent factors, such as production of wine and wine grapes, are already over developed and it will probably take years to absorb existing capacity.

The concept of factors in the Porter model specifically excludes most government activities.  While it is true that government can have a short-term effect such as the government subsidy of wine production in France, there is little government can do to attack the underlying problems such as those of the wine industry in Australia.

Like all such academic tools, the Porter Diamond Model provides a useful framework for analysis, but all of the considerations are not equally important in every situation.  What it does provide is a good tool to make sure that all the relevant elements are considered and addressed in the analysis.  It is a tool like a carpenter’s hammer.  The best hammer in the world in the hands of an unskilled worker will produce a swollen thumb or worse.  The Diamond Model is a good tool but does not substitute for skilled analysts.








References (2011) “contextual analysis.” Based on McGraw Hill Science & Technology Dictionary. Recovered 20/01/2011 from:

Aylward, D. K. Glynn, J. (2006) SME Innovation within the Australian Wine Industry: A Cluster Analysis.” Research Online University of Wollongong. Recovered 21/01/2011 from:

CIA (Central Intelligence Agency USA) (2011) “The World Factbook” Washington, US Government. Recovered 20/01/2011 from:

IBIS World (2010) “Wine Manufacturing in Australia”

Mercer, C, (2010) “Comment—Australian wine industry faces new Constellation.” Just Drinks. Recovered 21/01/2011 from:

Porter, M. (1990) “The Competitive Advantage of Nations.” New York, Free Press.

Porter, M. (1980) “Competitive Strategy: techniques for analysingindustries and competitors” New York, Free Press.

Samuelson, P. (1948) “Economics” New York City, McGraw-Hill

Todd, S Mercer, C. (2010) “FRANCE: Muscadet wine crisis descends into Vandalism” Just Drinks. Recovered 21/01/2011 from:

University of Oregon (no date) “Big Ideas: Vocabulary” Centre on Teaching and learning. Recovered 20/01/2011 from:

Wine Australia (2011) “Welcome to” Recovered 21/01/2011 from: