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Australian Wine and Brandy Corporation

CHAIR —I welcome officers for the Australian Wine and Brandy Corporation.

Senator XENOPHON —Good evening to the AWBC. The AWBC’s website states that one of the organisation’s core responsibilities includes maintaining the integrity of Australia’s wine labels and winemaking practices. Can the AWBC explain how they fulfil this responsibility in relation to counterfeited wine of Australian labels in overseas markets?

Mr Guy —Yes. The AWBC’s prime responsibility is to ensure the quality and integrity of Australian wine that is exported, and we do that through a variety of mechanisms—principally through controlling the export of wine from Australia by requiring that exports are only conducted by licensed exporters, that each wine that is proposed for export is tasted to ensure its quality before it can be exported and also to ensure the safety of Australian wine by ensuring that the wines comply with the Australian food standards code.

In terms of the integrity of Australian wine, principally we have regard to the provenance of wine. We ensure that any claims made on behalf of the provenance of Australian wine can be justified; for example, if a wine is presented as coming from a particular region—say, the Barossa Valley—that in fact the wine does come from that region; if it is presented as being made from a particular grape variety, such as shiraz, that such a claim can be justified, and similarly with vintage.

Senator XENOPHON —Mr Guy, these are all very worthy and necessary controls in order to ensure that Australian wine that is marketed overseas fulfils the representations made about it, but if I can go to where it appears that non-Australian wines are labelled as Australian wines—in other words, the counterfeiting of Australian labels—what role does the AWBC have in relation to that? A number of winemakers have told me of the enormous damage caused to the Austrian wine industry in 1985 when contaminated wine labelled in Austria was discovered in Germany. Apparently the Austrian wine industry is only now recovering from the damage caused to it as a result of people having serious health effects.

Mr Guy —I am familiar with the Austrian wine scandal of 1985. That was not a counterfeiting issue per se; that was a clear case of Austrian wine producers using an illegal wine additive. In fact, they were using diethylene glycol, otherwise known as antifreeze, in order to sweeten the wine. It is true that the levels of Austrian wine exported—

Senator XENOPHON —Sorry, I should have clarified that—in the sense that, if a wine is tainted, it can cause enormous damage to an industry, and that includes if it purports to be from a particular area when in fact it is not.

Mr Guy —In addition to the controls I outlined previously, you might not be aware but close to half of the wine that leaves Australia leaves in bulk form rather than packaged form. It does not go in bottles or casks or some other form of package; it goes in bulk. Here there is clearly an increased risk of contamination, of substitution of different wine for Australian wine and of quality degradation. Hence, we have introduced controls on the export of bulk wine that go beyond what any other country does. In China and elsewhere, any facility that proposes to package Australian wine must be approved by the Wine and Brandy Corporation before they can receive that.

Senator XENOPHON —Because time is limited, can we just go to the issue of counterfeiting. We have already had a long discussion, I think when I was driving back from the southern Flinders Ranges.

Mr Guy —Yes.

Senator XENOPHON —We had a long and, I thought, constructive discussion in relation to this issue. There is one allegation of a counterfeiting case that has caused me a lot of concern and that relates to the Flinders Run winery in South Australia. I was contacted by Emanuel Skorpos. His family runs that winery. It has won a number of awards. It has been highly recommended in terms of the quality of that wine. In the middle of this year I received communication from him that the AWBC was notified in June of this year of counterfeit wines in China bearing the Flinders Run label. Apparently the ‘R’ of the registered trademark was the wrong way around; otherwise, it was a pretty good facsimile of that wine, bearing a fake Flinders Run label. You were notified by Nick Bartman of the Wine Protection Group. It is a private company which makes its money out of being based overseas and notifying winemakers around the world.

Mr Guy —I think that group is very much at a start-up stage. I am not aware that they actually have any members at the moment.

Senator XENOPHON —But the issue there is that on 1 July Mr Bartman of the Wine Protection Group notified Mr Skorpos of Flinders Run. He says that he notified AWBC. He took photos of these wine bottles with the dodgy labels with the ‘R’ the wrong way around, which alerted him to the problem, and sent them through to the Australian Wine and Brandy Corporation to notify them that this could potentially be a fake Australian wine. Does the AWBC agree that it was notified around that time?

Mr Guy —We certainly do not deny that.

Senator XENOPHON —What I do not quite understand is that at no stage did you notify Mr Skorpos of Flinders Run of that, until he notified you.

Mr Guy —In the intervening period we had considerable contact with Mr Bartman, both by email and by telephone conversation, in an attempt to gain further evidence as to in fact what this allegation constituted. I know for the producer it might not make a difference, but our response to such an allegation depends very much on whether the wine that is in those allegedly counterfeit bottles is in fact Australian wine, Chinese wine or wine from some other country. It might not make much difference to the person who believes their trademark or their intellectual property is being infringed, but in terms of our response it very much makes a difference whether it is Australian wine that is being presented with a different trademark or whether that is Chinese wine.

Senator XENOPHON —But, Mr Guy, section 7 of the act says:

The functions of the Corporation are:

(a) to promote and control the export of grape products from Australia;

(b) to encourage and promote the consumption and sale of grape products both in Australia and overseas;

Mr Guy —Yes.

Senator XENOPHON —If there is a prima facie case of at least the label being dodgy, surely that would alert you to issues of integrity at least in respect of the label and potentially that it could be a counterfeit wine.

Mr Guy —Frankly, if that was Australian wine and the vintage, the variety and the region that are declared on that label are consistent with the wine that is in the bottle, I do not think there is a role for the corporation in terms of the trademark infringement.

Senator XENOPHON —But the ‘R’ for the registered trademark was the wrong way around.

Mr Guy —That certainly was not brought to our attention and we certainly did not see that from the photograph.

Senator XENOPHON —I have seen the bottles in relation to that.

Mr Guy —For several months now we have been attempting to obtain the labels, the wine or, in the absence of that hard evidence, at least details of where we can obtain these samples of allegedly counterfeit wine and have yet to receive that information. We have repeatedly asked for that.

Senator XENOPHON —Is it because, though, you did not even bother to contact Mr Skorpos at Flinders Run? The Wine Protection Group may be a fledgling organisation or business, but I do not think there are issues as to its credibility, in that I think that it is well known at various wine trade shows overseas—and in France as well. Wouldn’t it be reasonable to notify a winemaker that an allegation has been made?

Mr Guy —Not necessarily.

Senator XENOPHON —Why not?

Mr Guy —There are times when people are surprised to discover wine with their labels in overseas markets. They say, ‘We haven’t exported that wine. That must be counterfeit.’ All that is evidence of is parallel exporting. It is not unusual for people to be surprised to find their products in export destinations.

Senator XENOPHON —But Mr Skorpos does not export his wine in bulk. He only exports it in bottles. It is not sold in bulk form, so it cannot be rebottled.

Mr Guy —But we had no reason to believe that that wine had been exported in bulk and bottled in China.

Senator XENOPHON —Maybe I am missing something here. If there has been an allegation that appears, on the face of it, to be credible of counterfeiting of an Australian wine, given the statutory functions of the AWBC wouldn’t it have been reasonable to at least advise the proprietors of that company that this allegation has been made? Then they could take it up with the person that has made the allegation to follow that up, at least.

Mr Guy —Again I would say not necessarily. It would depend on our investigation of the allegation. Once we knew the circumstances, then possibly we would refer the matter to the producer.

Senator XENOPHON —So the general rule is that if an allegation has been made of potential counterfeiting the winemaker will not necessarily be the wiser?

Mr Guy —That is quite possible.

Senator XENOPHON —Is there a review of that policy? Perhaps I could ask Mr Cheesman. Do you stand by that policy, Mr Cheesman?

Mr Cheesman —I think in the particular case that you are referring to there was a process of qualifying both Mr Bartman and his investigation business and attempting to investigate the allegation that had been made with respect to Mr Skorpos’s brand. I think too—Mr Guy’s point before—that one of the key aspects of our investigation that needs to be resolved is whether the wine is Australian or Chinese, because that then influences what the next steps of our investigation are, and we have been unable to get the cooperation to achieve that.

Senator XENOPHON —I know that we are having a meeting, I think on 8 November. Mr Skorpos will be there and I will be there, so I am hoping it will be a constructive meeting. But isn’t it reasonable to at least notify the wine producer, even in a qualified form, saying, ‘We’ve had this allegation from this person and we can’t verify whether it’s reasonable or not. We don’t have the resources,’ or, ‘We’re not inclined to investigate it further, but we thought you should know about it’? Isn’t that a reasonable thing to put to a wine producer in this country?

Mr Cheesman —If an allegation is made we would investigate it fully. We would not take a stance if we did not have the resources to investigate it.

Senator XENOPHON —Sure. But if I am a winemaker and it appears that, on the face of it, there is a bottle of my wine product that seems to be a counterfeit, I reckon I would want to know about it, to at least see the veracity or otherwise of that allegation. If you are there to represent the integrity of the wine industry, surely it is not unreasonable to at least notify winemakers that there is a potential problem out there?

Mr Cheesman —I think, as I keep coming back to, if we perform our preliminary investigation and get an understanding of what the allegation or the potential issue is, we would then communicate with the stakeholder. But in the particular example we are talking about we have not been able to extend our investigation.

Senator XENOPHON —Sorry, Mr Guy. Perhaps I could put this to both of you. Isn’t there a flaw in that logic? You are saying you need to perform your initial investigation. Wouldn’t it be reasonable to perform your initial investigation by contacting the winemaker that may be the subject of a counterfeiting scam?

Mr Guy —There is no breach—

Senator XENOPHON —I think the chair just said, ‘Sounds fair.’ Is that on the record, Mr Chair?

CHAIR —It is now.

Mr Guy —It might sound fair, but there is no breach of the Wine and Brandy Corporation Act, which is what we administer, provided the provenance of the wine is correctly displayed. If that is Australian wine, the fact that there is a trademark breach, albeit with the trademark logo incorrectly displayed, is not a matter for the corporation.

Senator XENOPHON —If it happens to be a counterfeit product and that counterfeit product includes some inferior wine—whether it is Chinese or some other wine or, God forbid, a tainted wine—that could have huge implications for the Australian wine industry, couldn’t it?

Mr Guy —Theoretically yes, but there has been no suggestion that that wine has any health and safety implications or, in fact, quality implications.

Senator XENOPHON —Don’t you manage the risk, though?

Mr Guy —There is a risk with the export of any product that can be consumed.

Senator XENOPHON —But there could be a greater risk if somebody is counterfeiting an Australian wine.

Mr Guy —Possibly, and, because of the greater risk associated with bulk exports, we control that. In fact, we are quite constrained by our act in precisely what information we can divulge to other parties—information that we gather through our functions.

Senator XENOPHON —Minister, does the government have a view in terms of the integrity of the labelling of Australian products and the issue of counterfeiting and is it concerned, given what it has heard tonight? As I understand it, the corporation says they are constrained by the legislation. Is that something that the government will be looking at?

Senator Ludwig —What I would rather do is try to resolve one of the first problems that seems to be available. Are you able to assist the Wine and Brandy Corporation in obtaining a bottle of this particular wine?

Senator XENOPHON —I am happy to, and we have a meeting on 8 November.

Senator Ludwig —Let us see what happens from that first.

Senator XENOPHON —But, Minister, do you see—

Senator Ludwig —It is a hypothetical question.

Senator XENOPHON —No, I am going to ask you a question that is not hypothetical.

Senator Ludwig —It is at this point in time.

Senator XENOPHON —In terms of general principles, if there is an allegation—

Senator Ludwig —We have not ascertained the facts in this matter. I am not going to speculate on something about which I do not know the facts.

Senator XENOPHON —Something that is not the subject of speculation is this: the Wine Protection Group—a private entity—contacts the Australian Wine and Brandy Corporation sometime in June saying that there is a label, Flinders Run wines, that appears to be counterfeit. The corporation does not contact the winemaker. It is only when the winemaker is contacted by the Wine Protection Group direct that he becomes aware of this, and the winemaker in turn goes to China and sees that—

Senator Ludwig —Yes, I understand the question.

Senator XENOPHON —That is not hypothetical, though.

Senator Ludwig —The Wine and Brandy Corporation has answered that question.

Senator XENOPHON —But do you have concerns about that?

Senator Ludwig —It is not a matter of whether I have concerns about that. The Wine and Brandy Corporation has answered your question in respect of it.

Senator XENOPHON —Do you think it is reasonable?

Senator Ludwig —It is not a case of asking me to subjectively view something without having all of the facts before me. What I would be keen to do is to find out all of the facts, and then I could have a proper assessment of it. What you are asking me to do is to speculate based on what we are now having—a dialogue between you, the media and the Wine and Brandy Corporation.

Senator XENOPHON —I will not take it any further, Minister. I thank the corporation—

Senator Ludwig —I think you should take it further. I do not think you should leave it at this point.

Senator XENOPHON —No, at 10.35 on a Wednesday night I will not take it further, but I am looking forward to having a good discussion during the break.

Senator Ludwig —I am hopeful that at some point the department will be able to provide a brief in respect of this issue. I think it is an issue that does need a little further information.

Senator XENOPHON —We should discuss it—maybe not over a glass of red, though.

CHAIR —I thank the officers from the Australian Wine and Brandy Corporation, and now call Australian Wool Innovation.

Senator NASH —Can you give us a bit of an update of where you are at at the moment with AWI’s recent developments. How long have you now been in this role, Mr McCullough?

Mr McCullough —I was appointed acting CEO on 9 March and on 21 May, just before the last Senate estimates, I was appointed to the full-time CEO position.

Senator NASH —I understand in that time you have also been responsible for some new wool marketing strategies. You might like to outline those as well.

Mr McCullough —We did touch on a few things at the last Senate estimates gathering on 24 May. At that point we had the statutory funding agreement well under negotiation. That was signed off on 29 June by the minister and delivered to us on 1 July. We were a long way through writing a strategic plan for the next three years, and that has been completed as well. An operating plan out of the back of the strategic plan has been written and delivered to government. Behind that, of course, comes an org chart of the company and what resources we might need to deliver that strategic plan. We also had a Productivity Commission submission due on 25 June, and that was done.

We are currently going through a one-year-on review of performance, which was called for as part of the three-year review of performance delivered last year. That will be finished in the next few months and will be an appendix to our next Productivity Commission submission.

We can report that the company fiscally is in very good shape. We posted a surplus for the 2009-10 year. Licensee sales are up 100 on this time last year. Out of the org chart changes made, we have made some redundancies in the Northern Hemisphere. We have taken out the second layer of the company, which is the regional managers’ roles, and also closed down a testing laboratory in Italy. So there has been a bit on.

Senator NASH —That sounds like an understatement! In terms of those marketing strategies, how are you planning on measuring their success?

Mr McCullough —There are four ways that we measure any of our projects. We measure marketing reach, of course, and the value of that marketing. With a case such as Savile Row last week, you would measure how far that went and who it went to, and of course it is editorial media, which is far more highly valued than advertorials or advertisements. We always work with partners, so we can then measure the dollar contribution that they might make or the in-kind contribution that they might make. Significantly, if you are working with a retail partner, you can always measure their retail sales.

Senator NASH —That all sounds great. On the other hand, what would you say your greatest challenge is over the next 12 months?

Mr McCullough —We have had to really hotfoot it this year and make sure those key documents were in place. Even though we are rolling out three significant marketing strategies, we are already thinking about the full winter selling season for next year and how we can expand those. We have to market our product year in, year out and this is the first significant marketing program for wool in the Northern Hemisphere in the last 14 years. Even prior to that the wool industry delved into marketing. For example, it might have done an advertising campaign on television and then got out of it for the next three years and then got back in. So we have got to have some consistency in our marketing strategy and profile the Australian wool fibre year in, year out.

Senator NASH —Mr Merriman, how would you see AWI sitting now compared to 12 months ago? In your view, where are you now compared to where you were then?

Mr Merriman —If we go back to two years ago we had a situation where, at the expected rate of income and expenditure, the company would have been broke in 2011. So the main thing that has happened is that this board and the staff have reined in the costs. We have taken $25 million out of a $70 million spend and now we have money to go and do these marketing projects. So that has been the main change in the last two years.

Senator NASH —How many staff have you got working at AWI?

Mr McCullough —We have 129 as of yesterday.

Senator NASH —How many of those are domestic?

Mr McCullough —Forty-three.

Senator NASH —In how many other countries are the rest?

Mr McCullough —Twenty-six.

Senator NASH —Very good. What is the average length of tenure of some of your overseas staff, or does it vary?

Mr McCullough —To be honest, I have not looked at that, but we had one staff member who celebrated his 40th year the other day and we have another one that has 37 years up. We have a lass in London that has got 20 years up. We have a lot of staff that have been with the wool industry for significant amounts of time, including back in the IWS days.

Mr Merriman —We got a history when we acquired Woolmark; we got people who were with Woolmark that came across.

Senator NASH —They are still there. Interesting, isn’t it? Very interesting.

Mr Merriman —Yes.

Senator NASH —In terms of the last financial year, what was your operating budget?

Mr McCullough —Our turnover, our income stream last financial year was $55 million.

Senator NASH —What percentage of that would you say went to marketing in the last financial year and how will that differ, if at all potentially, in this financial year?

Mr McCullough —In the 2009-10 year we posted quite a surplus. There was some preoccupation there and there was some reining in of costs that were done in that year, so we had a surplus. In a normal business that is called a profit, but in our business it is called a surplus. That goes into our cash reserves. Last year we did a modest amount of marketing, probably only about $1.2 million worth. This year we will do in excess of $12 million.

Mr Merriman —All of our marketing, our whole business, is based on the WoolPoll result in which growers voted for a 70 to 30 split between off farm and on farm. So Stuart and the staff have embedded that through the strategic plan and the operational plan.

Senator NASH —Thank you very much, Chair.

CHAIR —Thank you, Senator Nash. Thank you, Mr Merriman and Mr McCullough. It is good to have a happy story. Well done!

Senator NASH —Exactly. We might try and get you a little further up the list next estimates. You always seem to be here very late.

CHAIR —No. We might give you next time off.

Mr Merriman —Thank you.

CHAIR —Just on that, Mr McCullough, thank you for the briefings you did offer prior to estimates. I took you up on that offer and I appreciate that. Sorry, did I cut you off, Senator Back?

Senator BACK —No. I was going to ask what expenditure was on research but perhaps I can put that on notice and get some idea from you as to the expenditure and the projects into which AWI expended funds on wool research, but with time constrained I would be happy for you to provide it on notice.

Mr McCullough —Okay.

CHAIR —Thanks, Senator Back. Thank you, gentlemen. I now call the lucky last, the Grains Research and Development Corporation.

[10.45 pm]