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Rural and Regional Affairs and Transport References Committee - 24/09/2015 - Australian grape and wine industry

DUTHY, Mr Warrick, Committee Member, Clare Valley Winemakers Inc.

LEWIS, Prof. Geoffrey, Committee Member, Clare Region Winegrape Growers Association


CHAIR: Welcome. The committee has received your submission as submission No. 16. Would you like to make any amendments or additions to your submission?

Mr Duthy : No.

CHAIR: Would you like to make a brief opening statement before we go to questions?

Mr Duthy : Sure. Our view is that the key to improvement of the Australian wine industry, and certainly to our industry in Clare, is to earn higher price points. Higher price points for a wine can all roll through to better value, and better returns for the growers. The way in which this can be done is by building the Wine Australia brand and the Clare brand by increasing the demand to exceed supply; there is no doubt that that has a pretty major impact on price points. We also believe that there is a major factor in terms of tourism—the more wine tourism, the more people who are exposed to our brands and our wines, the more that demand is created.

We believe that margins can be improved through more direct-to-consumer sales, so cellar door sales and wine club sales, as a way of improving our margins—improving the customer mix, if you like, which also helps us to grow reserve wines. With respect to the WET rebate, we have said in our submission that we believe it should be restricted to branded bottled wine from Australian producer licences. We certainly believe that growth in export is really important for a couple of reasons, but particularly because the export growth will lead to an increase in demand that exceeds supply and will therefore provide that sort of price pressure we need for the value to flow through to the grower.

We believe that there is a number of wine companies that have come to the end of capacity to use EMDG grants, and we believe that perhaps there is an opportunity for any savings from a WET rebate to be invested in something like an EMDG grant—but wine brand building specific, that goes to the producers rather than associations on the basis of merit. We would like to encourage the industry not to exploit the current lower value of the Australian dollar and play a commodity volume game, as we believe that it is really brands, brands and more brands that are required. Going back to this point of whether, indeed, there are savings from the WET rebate, we believe they could be invested in a number of different ways through to wine companies on merit. These would include: assisting wineries with direct-to-consumer infrastructure, as it is not cheap to have software and the capability to run wine clubs profitably; infrastructure for wine tourism; and also, as I said, these EMDG wine brand development grants—call them that. Our submission is talking about finetuning the WET rebate and then, with the savings, investing in areas we think can improve our branded competitiveness in the global marketplace.

CHAIR: Thanks, Mr Duthy. Mr Lewis, do you wish to add anything?

Prof. Lewis : No, I do not have anything to add.

Senator EDWARDS: Hi. How are you? It is good to see you fellows. Are you two guys at one, then, on the issues facing the industry?

Prof. Lewis : Yes, we are. We put this submission together jointly.

Senator EDWARDS: When you say 'finetuning of the WET rebate', what does finetuning mean?

Mr Duthy : Specifically, we feel that there is a benefit in having the WET rebate applied to branded bottled products, and only people with Australian producer licences.

Senator EDWARDS: So, by implication, no New Zealanders?

Mr Duthy : Yes. I think there is a reason—

Senator GALLACHER: On that point, it is Australian taxpayers' dollars that have been reinvested, isn't it?

Mr Duthy : Correct. There is a reasonable amount of evidence to suggest that our Kiwi cousins have benefited from the rebate, particularly in sales of bulk wine and other branded wine that has ended up really being sold directly to supermarkets, which has made it incredibly difficult to compete from a small winery perspective. And whilst we are not in the business of producing New Zealand sauvignon blanc in Clare, Clare riesling competes directly with New Zealand sauvignon blanc as a seafood accompaniment, and it certainly has not done us any good. It has not done us any good that New Zealand sauvignon blanc growth has been encouraged in this manner.

Prof. Lewis : In 2013, Australia imported $337 million worth of wine from New Zealand. It is a huge amount of wine, so this has a huge impact. I think the issue for us is that the WET rebate was introduced for a reason. It was not to support bulk wine production or to support New Zealand production; it was there to support rural communities and the wine industry through tourism and cellar doors and to maintain the health of the industry. Why that intention has been bastardised over the years I really do not understand.

Senator EDWARDS: Mr Lewis, you are a very learned fellow, I have come to know. How does it restore profitability to the Australian wine industry by taking away a rebate from bulk and unbranded wine?

Prof. Lewis : Because the rebate, applied in these other areas, has distorted the market. It has allowed wine to be sold more cheaply than it should be sold and that has a downward pressure on all wine prices. It is clearly just a market distortion. Why we would want to have these sorts of market distortions and inefficiencies introduced just does not make any sense at all.

Mr Duthy : I would tend to agree. I think one of the greatest beneficiaries of the rebate, as it transpired—I do not think there was any intent—has been wines created for or by supermarkets. There are steps taken out of the chain, being subsidised, and then that creates price points in the market. The small and medium-sized wine companies have real trouble competing with that and getting a return on their capital.

Senator EDWARDS: The Australian wine industry extends from Margaret River, through the southern regions, right up to the Granite Belt in Queensland. How do we restore profitability to the Australian wine industry?

Mr Duthy : I have been in the industry for quite some time; I worked for most of the corporates for about 30-odd years.

Senator EDWARDS: That is why I ask you.

Mr Duthy : I will start by saying that we did extremely well in the nineties, and for probably about a 15- to 20-year period, in creating outstanding brands based on varietals and at value-for-money price points. We had exceptional key account management and we were able to develop really good relationships with supermarkets and other retail channels around the world. I think the first point is that we were incredibly successful—and still are, in that area—but we are somewhat paying the price of that success, because that activity has set a price point around 'Brand Australia'. What we need to do is to break out of that and focus much more attention on our premium and high-priced wines, and build the brands of our regional centres and, indeed, our high-quality brands. It is always easier to trade down in price from a premium position than to trade up in price from a commodity position. So all efforts must be made, I think, to trade from a premium position.

My personal opinion is that, with respect to how Australia is positioned, we have an amazing capability to be consistent year in, year out, with less vintage fluctuation, because of the sunshine we have and because of the fact that we are incredibly good technical winemakers, and to deliver a higher degree of trust at a higher price point, but still deliver value for money. I think focus can be applied in that area.

Senator EDWARDS: What would you say to Mr Morrison, the Treasurer, and Mr Joyce, the ag minister, if they called you in and said, 'We've got to fix the wine industry'? What are your first three actions?

Prof. Lewis : Just let me make a couple of comments about restoring profitability to the industry. In 2008, exports were about $3 billion and domestic sales were about $2 billion. Following the crisis, the value of exports collapse. In my view, that was largely self-induced because we sold too much wine in the export markets on the basis of price and we commoditised Australian wine. We are gradually recovering from that situation. Of course, the weakening dollar makes a huge difference to profitability as well. China offers significant opportunities and as long as we do not make the mistake we made in the US and UK markets by commoditising Australian wine—and to date we have not—we should see good returns.

The domestic market will continue to be very difficult because of the dominance of the two big players. That is going to be hard to deal with. The government is struggling with the Harper reforms, so I cannot imagine them dealing with the issues that are associated with these problems. Some of this will be fixed by the low Australian dollar and hopefully by Australian wine companies competing appropriately in these markets. I think, as profitability returns to the export market, it will put pressure back on Coles and Woolworths so we may see a little bit of relief there and perhaps some profitability returning domestically.

Senator EDWARDS: If I can paraphrase, the exchange rate will increase demand at the margin which will then take the supply out of Australia into other countries which will put some elasticity into, and pressure on, price points for the duopoly.

Prof. Lewis : The second part is right. The first part is that the exchange rate helps things, but equally it can hurt things. It is a question of whether the Australian wine companies compete appropriately in the foreign markets. If we do what we did during the last boom, we will once again commoditise Australian wine, and that problem occurred before we had the strengthening Australian dollar. The Australian dollar just exacerbated the problem we had. The second part, Senator Edwards, is correct: the elasticity and hopefully some help in the domestic market.

Senator EDWARDS: I will come back to you Mr Duthy, I know you have got the three points and my last question.

Mr Duthy : No, it is okay I was going to weigh in on the exchange rate thing too.

Senator EDWARDS: We heard earlier that a million tonnes of the 1.6 to 1.8 million tonnes that this country grows is commercial wine—which fits into that commodity that we are talking about. And we heard about the two tiers: the premium tier and the commodity commercial tier—so we cannot ignore that. Anyway, that was earlier evidence—but you were not there—and it was by representatives from the inland, warmer regions.

Mr Duthy : On the exchange rates, I have been waiting for our own sales to increase on the basis of production and the Australian dollar. I have been quite surprised at how it has not gone up. I mean, you have had hedging in place to start with, but also there have been quite a number of markets, particularly the US, that have not played with the prices. They have kept the prices the same. The fact that the Australian dollar has gone down has not had a huge impact on branded wine. What they should have done, of course, is increase the margins in the chain. What we need to see is that the increased margin at every level of the chain being invested in brand development for Australian brands in those markets. If we are reliant on price reductions through exchange rates, that is again a commodity play. I think the absolute key is to identify the brands that can grow and perform well in the marketplace and support genuine brand development activity in overseas markets. I think that really is the major key.

The wine tourism aspect is pretty important. We have seen initiatives out of Tourism Australia around Restaurant Australia, and so on, creating Australian places to go as attractions. I do not think there is any doubt about the fact that one of the reasons why some of the regions in Europe have grown and continue to be vibrant and vital is the amount of wine tourism and the exposure that people get to these wonderful brands and these wonderful regions. That changes patterns of behaviour upon return to home. So for me it is all about investment in brand, investment in premium margins and focusing on that, not the raw economics of volume.

Senator EDWARDS: Okay. These three things for the Treasurer and the ag minister?

Prof. Lewis : Before we come to that, can I just make a comment on the commodity side of things. It seems that people talk about commodity wine but they do not want to accept the consequences of that. Commodities are traded internationally, and the only way to win is by being a low-cost producer. The simple fact of the matter is that Australia is not a low-cost producer of wine and it is not about to be a low-cost producer of wine. A few months ago I spent four weeks in Chile and Argentina. There is no way in the world that we can compete with those countries if we are competing as a commodity. It is a hard message for much of Australia. We are selling a valuable resource called water at a price below what it is worth, and we are going to have to face up to the fact that we cannot compete in commodity wines internationally.

Senator BULLOCK: Why don't you answer Senator Edwards's question?

Prof. Lewis : Sorry?

Senator BULLOCK: Answer Senator Edwards's question.

Mr Duthy : I would certainly invest in wine industry infrastructure. I would invest in the EMDG type grants for wine brand development and also support the direct-to-consumer, wine club and cellar door infrastructure which is part of that tourism and also part of that high-margin domestic consumption.

Senator EDWARDS: Thank you.

Prof. Lewis : Can I just add my three things. I think the first thing is that the WET rebate needs to be dealt with. I think we do need export development grant schemes, but I think that they should be provided to firms who compete in these markets, not to the industry more generally. The other thing that we have argued here is for a modification of the label integrity regulations that would require all wineries to inform the grower of the final destination of their grapes. This information is very, very important to growers to know where their grapes are going. It helps them negotiate prices, and it also helps them understand what they need to do as a grower to upgrade the quality of what they are doing to get their grapes into the sort of product they want to to get the right sort of returns. That would be a fairly simple change that government could make. In fact, the government could do something about all three of those things.

Senator GALLACHER: You mentioned the WET rebate. What if the government just took it away? Who would suffer the most?

Prof. Lewis : Sorry—what if?

Senator GALLACHER: What if it just disappeared? What if the WET rebate were just removed? Who would suffer the most?

Prof. Lewis : I would imagine lots of small independent wineries.

Senator GALLACHER: But it would reset the price points in the market. There would be no subsidy. There would be no, 'You must supply this at the rebate price.'

Mr Duthy : There is that, but if you look at some of the large corporates, with a number of different brands, they only have the opportunity to claim the rebate once, but their economies of scale have enabled them to have lower cost production. So the largest corporate organisations would be least disadvantaged as a result of that, and the smaller organisations, for whom that rebate is a larger proportion of their P&L, would suffer the most.

Senator GALLACHER: So you would simply reset it so that the Clare or Coonawarra or McLaren Vale or Barossa could have their small cellar door operations.

Mr Duthy : In branded bottled wine for sure, and far more focus. I think that it originally came in to support the many small and medium-sized wineries across the country, and I think that has continued, but then there have been some of these other distortions.

Senator GALLACHER: Forgive my ignorance, but how long has it been about? Eleven years?

Mr Duthy : Yes.

Senator GALLACHER: So it would be easy to track from how it operated 11 years ago to how it is now, so the tax office can track that.

Mr Duthy : Yes. There were some good changes a couple of years ago.

Prof. Lewis : It would be very interesting to see where it has gone.

Senator GALLACHER: It might be something for estimates.

Senator EDWARDS: It has gone like that—up—and since blending rules came in on 12 December 2012 it has gone like that—down. That was just an outrageous exploitation of the rebate.

Senator BULLOCK: First, I should disclose that an old union colleague of mine, former Senator Farrell, has a small winery in the Clare, and naturally I would like to do anything I could to help him, but—

Senator XENOPHON: Are you investing or drinking it?

Senator BULLOCK: Drinking. A couple of your recommendations concern me because I do not know how you do them. Turning to them you say, 'Provide support for small producers to establish a direct route to market'—that is one recommendation, and another is, 'Direct government marketing funds and industry levies to individual businesses.' I am a little concerned that if we start picking areas in which to invest, whether they are small producers or individual businesses, that that is not the sort of thing that the government really should be doing. A rising tide lifts all the boats, and if we are investing in the industry as a whole, you would hope that everybody would get a lift. I am not sure that those recommendations are implementable: picking out individual businesses or segments and saying, 'We are going to concentrate on small producers.'

Mr Duthy : There have been plenty of grants, and T-QUAL grants for argument's sake. Some of those sorts of infrastructure grants have been in existence for a while—the T-QUAL one has disappeared—and basically they have been grants that have been available to organisations on merit, so—

Senator BULLOCK: So some public servant sits in there and assesses merit?

Mr Duthy : Hopefully, they ask a few people a bit of advice. There are quite a number of grants that are assessed on merit, and I think particularly in the tourism area around infrastructure. I think that that kind of mechanism does exist and certain organisations are in a position to make the investment. Most of these things—

Senator BULLOCK: Could you understand why decision makers might be a little bit wary of going down that route?

Mr Duthy : Sure. As I say, by and large, those sorts of grants are one for one, one for two, one for three or what have you. It requires the individual company to make an investment and get some support on meritorious grounds.

Senator BULLOCK: You represent growers and producers?

Mr Duthy : Yes, we do.

Senator BULLOCK: Earlier, we heard that there was not total commonality of interest between these two groups—that there were frictions from time to time. How do you find representing both ends of the operation?

Mr Duthy : In this particular case, Geoff is representing one group and I am another, but in Clare we have discussed all of the issues associated with this submission. We have talked it through. I think, by and large, the growers recognise that they are most likely to get the highest prices for their grapes and get a return on their vineyards if indeed the demand for Clare wines is going up, and if the prices for Clare wines go up relative to other regions and the Western world.

Senator BULLOCK: Within your organisation you are capable of reconciling the competing interests of the different groups?

Mr Duthy : Yes, I think we collaborate well.

Prof. Lewis : We are jointly developing our strategic plan for the Clare region. The growers recognise if we are going to get grape prices up then wine prices have to go up. It is that simple.

Senator XENOPHON: I will go to the issue of the mandatory code. There is a different view as to whether there should be a mandatory code. The Riverina grape growers said we need a mandatory code; Riverland Wine says we do not.

Mr Duthy : Sorry, a mandatory code for what?

Senator XENOPHON: A mandatory code in terms of indicative prices between wine grape growers and the winemakers. Do you have view as to whether the indicative price mechanism is useful, or not, at the moment because some witnesses say that it is next to useless in terms of helping wine grape growers plan?

Prof. Lewis : My opinion is it is next to useless.

Senator XENOPHON: It is useless?

Mr Duthy : Yes. My view is also that the government should not be intervening in the market in that way.

Senator XENOPHON: So it is useless because there should not be market intervention, or you are saying that—

Prof. Lewis : Two things: it is useless because it does not work. It does not achieve the intended outcome. Also, I disagree with it because I do not think government should be interfering in markets in that way. There is very clearly a role for government here, but it is not to get involved in those market transactions.

Senator XENOPHON: The river wine grape growers said that there are instances of disparities in market power, where people do not get a fair go and that you need to have a stick rather than a carrot, in essence, to deal with it. You don't think that applies to your members?

Prof. Lewis : There are enormous structural problems in the industry, starting with the dominance of the two retailers and working all the way back. The market power that the retailers exercise on the wineries is naturally going to be pushed back onto the grape growers. The grape growers and the wineries have a joint interest in dealing with those problems, because if we deal with the broader problems then the market between growers and wineries can be allowed to operate effectively, particularly if the growers are given that critical information of where their grapes are going. That is what is required.

Senator XENOPHON: So there is a role for Wine Australia to assist in providing better quality information?

Prof. Lewis : Yes, or the government through the Label Integrity Program to make it a requirement that wineries inform the grower of the final destination of their grapes.

Senator XENOPHON: Are you talking about the blending that goes on where—

Prof. Lewis : Well, does it end up in Grange or does it end up in a four-litre box, and what is the price? That is the information that the grower needs—as I said, for two reasons. Firstly, it gives them better negotiating power. They can then seek a reasonable proportion of the value that is being created. Secondly, it gives them very important signals about what they should—

Senator XENOPHON: So a vineyard to bottle comparison—is that what you are saying?

Prof. Lewis : Absolutely, yes.

Senator XENOPHON: Okay. If you could give us any more information as to how you think that could work, that might be useful. I would invite you to comment on how it would work and the mechanics of it. In terms of marketing investment, there is one view that says, 'Just give a global amount and let the industry bodies deal with it.' You are against that?

Prof. Lewis : Yes.

Senator XENOPHON: Do you think there could be a happy medium in the sense that there is a push to market Australian wine to the world, but you can have supplementary grants given to those individual winemakers that may qualify?

Prof. Lewis : I think the international market has developed way beyond the point where the consumer buys Australian wine. I think they go into a restaurant or a bottle shop and they buy a particular wine at a particular price. It may be Australian; it may not be Australian. The critical point here is that industries do not compete; firms compete.

Senator XENOPHON: Even if there is a wine that says 'From Bordeaux'? There are lots of winemakers in Bordeaux. Isn't it a regional thing—Barossa or Clare Valley?

Prof. Lewis : Well, if we wanted to move the argument to regional promotion, then I would be more inclined to agree with it. But people do not buy the wines of France. Even uninformed consumers are buying on a much more specific basis than that, and the industry has moved on. There were the good old days of the beginning of the fifth boom, when it was 'sunshine in a bottle', it was different, it was promoted differently, we did a good job and we had value-for-money wines. It did change the international industry, but that is the past. We have got to do it differently now and we have got to do it on the basis of Australian wine firms competing in those markets.

Senator XENOPHON: Just very quickly, can I ask you: do you agree with the Winemakers' Federation propositions that the WET rebate ought to be reformed?

Prof. Lewis : Yes, it should be reformed, absolutely. It is the one thing, to me, that obviously should be done.

Senator XENOPHON: Right. And you agree with them to the extent that it is being rorted, as they say, in some cases?

Prof. Lewis : There is no doubt about it. We all know it is being rorted.

Senator EDWARDS: I think we are all agreed on that.

Prof. Lewis : Anybody in the industry knows it is being rorted.

Mr Duthy : Even the tax department.

Prof. Lewis : Less since 2012.

Senator XENOPHON: Finally, what percentage of the growers in the Clare Valley who are wine grape growers, as distinct from winemakers, are doing it tough, in your view, and selling their grapes at below the cost of production?

Prof. Lewis : Well, everybody is doing it tough. Even those who are doing relatively well are certainly not returning cost of capital. If you are cash positive, you are doing well.

Senator XENOPHON: Going to Senator Bullock's line appropriated from a former Prime Minister about a lifestyle choice, there must be a point where people say, 'This is not the lifestyle choice I want if I'm going to continue to grow grapes and lose money on them.' There must be some point where people say there is no light at the end of the tunnel.

Prof. Lewis : And people do pull out and sell. That is going on. But, again, it is a structural problem in the wine industry that the barriers to exit are very high. If a vineyard were like a factory, where you could say, 'I'm not doing well. I will lay off the people and lock the factory gate and when things pick up in two year's time I will open up again,' that is what we would all do. But a vineyard has to be operated year after year after year. Once you pull out you cannot just unlock the door again—you have pulled out. So we need to recognise the structural factors of the industry that make it very difficult.

Senator XENOPHON: In relation to that, are you saying that we are going to get to a point where people will say, maybe en masse, either next year or at some other point in time, 'Enough is enough and unless there is some light at the end of the tunnel we are just not going to do this any more.'

Prof. Lewis : Again, there are two industries: there is the commodity industry and the premium industry. I do not think that will happen in the premium industry. Things are easing a bit. People are optimistic and they are more likely now to stay in than they were in the past. I can see that happening in the commodity end of the industry, because they all wish they had planted almonds five years ago. If you go to the Clare Valley, none of us has a block that is big enough to shift to any other economic use. Again, these are barriers to exit. If we were big enough and we had enough water to shift to almonds, we might. But we do not have enough water and for most of us the blocks are much too small. So it is wine grape growing or it is nothing at all.

Senator XENOPHON: To paraphrase Elvis Presley, they are caught in a trap and they cannot get out.

Prof. Lewis : The structure of the industry is such that it is very hard to exit.

CHAIR: You said earlier on to questions from Senator Xenophon, I think, that governments should not be interfering in the market.

Prof. Lewis : I also said there is a role for government, but they should not be interfering in markets unless there is an overwhelming and obviously compelling reason.

CHAIR: So you are not going to stand by that statement as a broad-brush one—

Prof. Lewis : No—

CHAIR: That governments stay out?

Prof. Lewis : I qualified it. So, yes, in principle—

CHAIR: I also remind you of your first recommendation, where the government would continue to address retailer power through looking at vertical integration and unconscionable commercial practices designed to drive wine prices down. Government has a role to play. You can't just let the free market rip.

Prof. Lewis : We need good competition law in this country. We do not have it. Professor Harper has made recommendations. With these recommendations, clearly with some of them the government can act. With others, they are very difficult—

CHAIR: What is clear is that you said governments should be interfering in the market only when the industry needs them to interfere.

Prof. Lewis : What was that?

CHAIR: Only when the industry needs them to interfere—that is acceptable.

Prof. Lewis : If there is market failure, if the industry structure is such that the market does not work properly, then there is a role.

CHAIR: Yes. I just get real nervous when people say that government should stay out of it and then the next thing—

Prof. Lewis : As I said, there is a role for government. In the wine industry it is very clear that there is a role for government.

CHAIR: There is a number of industries where government needs to regulate. Don't worry about this 'get rid of red tape' crap. Red tape sometimes is essential. Is that right?

Prof. Lewis : I am not sure. We are not fully in agreement. I think the government has a role to make sure that markets operate efficiently.

CHAIR: And if they do not then they have a role to play.

Prof. Lewis : Absolutely.

CHAIR: And interfere—call it what you like.

Prof. Lewis : Sometimes the natural structure of an industry is such that it is very hard for it to operate efficiently.

CHAIR: You are not the only industry it happens to—trust me.

Prof. Lewis : Absolutely. I know.

CHAIR: Thank you for your evidence. That concludes today's hearing. I thank everyone for coming here today and for their efforts, particularly those who stayed around all day and those who have put submissions in. Thank you to Hansard and Broadcasting and, of course, our diligent secretariat. Round 2 will be held in Tasmania tomorrow.

Committee adjourned at 14 : 49