Question: AUSTRALIAN WINE MAKING INDUSTRY The Wine Industry In Australia Commenced In 1790 Around The Coastal Areas Of Sydney. The Industry Was Further Expanded In The Mid-1800s With More Grape Wines Planted Across The Eastern Coast Of Australia. By The Early 20th Century, Australia Was Producing Enough Wine To Export To The United Kingdom. The Industry Experienced …

AUSTRALIAN WINE MAKING INDUSTRY
The wine industry in Australia commenced in 1790 around the
coastal areas of Sydney. The industry was further expanded in the
mid-1800s with more grape wines planted across the Eastern coast of
Australia. By the early 20th century, Australia was
producing enough wine to export to the United Kingdom. The industry
experienced significant growth at the end of World War II, aided by
an influx of migrants from Europe who brought with them their
knowledge and taste for wine.
In 2019, the winemaking industry had total revenue of $6.985
billion and contributed 6.34% to the global wine market from only
1.9% of the total vine planting area. As a result, Australia is now
the 5th largest producer of wine and 3rd
largest wine exporter. The growth in the industry has been created
by innovative practices in grape cultivation and wine processing
technology with Australian technology and production skills highly
sought after internationally. The Australian winemaking industry is
at a mature stage and continues to seek new international markets.
Despite major growth, there are signs of slowing export and
domestic consumption, prices are declined making it hard for small
and medium sized producers to compete with larger producers who
benefit from economies of scale. Supply is greater than demand
putting further pressure on prices.
Demand Trends
Consumer preferences have been instrumental in the growth of the
industry. This growth has been fuelled by an increase in dining
out, demographic and sociological factors (greater participation of
women in the workforce and ageing population) and more awareness on
health and social responsibility.
In 1975, Australian domestic consumption was 2 litres per person
per year. Of that, 82% consisted of fortified wines such as ports
and sherries. Four decades later the consumption of wine has
increased dramatically to 25 litres per person per year. In
comparison to the rest of the world, Australian consumption is
still considered low, with France and Italy consuming 57.6 and 54.6
litres respectively. Wine is now a mainstream alcoholic beverage.
It is no longer only purchased when dining out but frequently forms
part of a meal at home. However, tightening driving laws have
imposed restrictions on consumption.
Market research indicates wine is often purchased based on the
brand and label design. The research has also found that consistent
quality and continued support for a brand over time is essential to
ongoing market success. Medical research also supports the health
benefits of regular consumption of wine, as it has been found to
reduce the risk of cardiovascular disease and extend life
expectancy for people who consumed red wine.
Trends
The following factors summarise the trends that will impact the
industry in the future:

The demand for wine is relatively price elastic.
The effects of substitution between wine and other alcoholic
beverages (beer and spirits) is yet to be ascertained.
Wine consumption has experienced favourable conditions as the
price difference between beer and wine is negligible.
Growth in income and increased living standards has enabled
more households to purchase wine.
Demand for wine is income elastic.
Consumer tastes and an increase in disposable income have
changed over the last 10 to 15 years. As such, premium products are
favoured more, including premium wines.
The heavy reliance of wine being exported has placed an
increasing significance on exchange rates, overseas income and the
general economic condition in the overseas market.

Key Success Factors
The future success of the wine industry, according to experts,
is dependent upon:

An ability to switch between wine varieties as consumers have
an ever-changing taste for different wine varieties. Accordingly
producers need to be able to a secure supply of different types of
grape and be able to change production and blending process quickly
to adapt to taste changes.
Assurance that grape supplies can be sourced from different
geographic areas.
Supply contracts for raw materials such as yeast and packaging
materials
The development of export markets and distribution channels are
crucial as the domestic market is relatively small and mature.
Strong branding and relationships with wine merchants are
required.

Competition
Competition in the wine industry is high for both domestic and
export markets. The basis of competition is listed below:

Price – the low to mid-price range has the highest level of
competition.
Marketing and brands – consumer selection is very much based on
brand and label design.
Distribution channels – Large retailers tend to deal with large
suppliers while smaller wineries sell through their cellar door and
mail orders.
Quality – Consumer tastes have become more refined and
therefore demand has increased for premium quality wine.

OAKEY WINES LIMITED
Oakey Wines Limited was established in the 1860s by one of the
founding winemaker’s Clarence Oakey from Rutherglen, in North East
of Victoria. The company was listed on the Australian Stock
Exchange in 1995. Today, the company is ranked 10th
among the Australian wine producing companies and makes only
high-quality premium fortified wines for both the domestic and
export market. The wide range of soils and micro-climates within
North East Victoria has enabled Oakey Wines to produce a unique
range of fortified wines and to a lesser extent white and red table
wines. The current managing director, Caroline (Carrie) Oakey, is a
sixth-generation winemaker and is highly regarded in the wine
industry.
The last 5 years have been turbulent for the company. In
December 2018, the company fended off a hostile takeover bid from
the leading Australian winemaker, Ritzy Wines Limited. Carrie Oakey
spoke out strongly against the takeover and called for all
shareholders to reject the takeover bid. She argued that Oakey
wines hold a strong position in the market place as an independent
family-owned wine company and if the takeover went ahead the
family’s strong heritage would be swallowed up by the corporate
giant. Carrie was able to sway a few small shareholders to vote
against the takeover. This was not well received by the
institutional shareholders who were attracted to the 20% premium
offered on the shares.
strategy
The vision for Oakey Wines Limited is to be Australia’s most
prominent winemaker and be in the top 3 wine companies by 2027. To
achieve this vision, Oakey Wines believes that the following
strategic goals will guide them:

Produce only superior quality wines.
Expand the distribution base to create wines that are suited
for the domestic and export markets.
Purchase only quality grapes from grape growers and expand
current vineyards by purchasing land in diverse regions.
Increase return to shareholders as well as have sufficient
funds to further expansion plans.

Operations
Oakey Wines sources grapes from approximately 160 growers who
are spread over 650 vineyards. Many of the growers are
3rd and 4th generation farmers and have
supplied to Oakey Wines for all of that time. There is a unique
relationship between the grape growers and Oakey Wines and Oakey
Wines believes that it is their duty to protect the livelihoods of
the growers and the northeast region. It is due to this unique
relationship that Oakey Wines made a choice not to purchase
vineyards in the northeastern region, thereby supporting local
grape growers.
Wine production is carried out at a single location located in
the northeast. Oakey Wines uses a combination of American and
Italian oak barrels to age and enhance the flavour and richness of
the wines, while stainless steel tanks are used for lower quality
wine. Oakey Wines has the capacity to crush 40,000 tonnes of grape
per season. Bottling is done through a local filling station that
attaches the relevant label and packs them for either the domestic
or export market.
Oakey Wines implemented a Hazard Analysis Critical Control
Points (HACCP) plan for the production of the wine and were the
first one to do so in the region. This has proved to be a
competitive advantage for Oakey Wines as retailers are more likely
to choose their brand over others. Oakey Wines also implemented
policies to conserve water, energy and chemical use. These policies
have since been found to be ineffective with a recent claim against
the company for incorrect use of chemicals resulting in a
neighbouring vineyard suffering significant damage from spray
drift.
Distribution
Oakey Wines uses their strong relationships with several wine
merchants to distribute wine to large retailers, restaurants and
special events both domestically and internationally. Various
targeted promotions throughout the year have enabled Oakey Wines to
expand into boutique markets they would have otherwise not supplied
to.
A cellar door club and mail-order sales have proven to be very
successful for Oakey Wines with customers signing up to receive
selected bottles of wine four times a year. The club also offers
special discounts and offers on new release varieties.
The cellar door, located at Rutherglen provides wine tasting and
sales to the general public. These sales contribute approximately
8% of all of Oakey sales. The cellar door includes a café where
light meals are served and local produce can also be purchased.
Management
The culture of Oakey Wines has changed over the years as people
have joined and left the team. Carrie recognises and celebrates
employees’ loyalty, hard work and talents every year and has a
clear promotional pathway for team members to move up the
ranks.
The current team is made up of:

Winemakers who are instrumental in the winemaking from the
selection of grapes to the ageing of the wine. This team is
involved in all the major decisions and works closely with the
operation manager.
and administration team, located at Rutherglen, are
responsible for the financial management, communication and
customer service. Their role includes liaising with the winemakers
and operations team.
The production team are in charge of batching of grapes to the
bottling.
Research and development team is made of speciality chemists
whose role is to develop and test new wines and ways to improve
efficiency in producing the wine.

Current Situation – Jan 2021
The Cellar Club has received significant success in the domestic
market and is now considering implementing a direct sales model
across all states. By taking such an approach, this would
strengthen pressure from major supermarkets to reduce the sales
margin. The marketing manager has already held several prestigious
events in exclusive hotels around Australia with great success.
Customer’s reactions were very positive, as evidenced by the number
of emailed and online orders received.
The marketing manager recently attended the annual winemaking
industry symposium. The theme was ‘Growing Australia Wine in an
uncertain world’. The closing panel summarised the future state on
the industry by stating: ‘The Australian wine industry is one of
the largest wine exporters in the world, behind France, Italy and
Spain but well ahead of any immediate competitors. The challenge
for the future will be to continue to stay ahead. Positive outcomes
will only be achieved by maintaining a competitive advantage and
the availability of competitive products.’
Question 1 – Strategic Management (20
marks)
You have been asked to prepare a report for Oakey Wine on the
strategic position that should be pursued if it wants to further
increase its market share and stay competitive. You need to present
a response at the next board meeting.
Areas you need to address include:

What are the key issues that will affect the future growth of
the industry? What is their likely impact?
What are the key issues that will affect the future
profitability of the industry? What is their likely impact?
What are the strategic capabilities of Oakey and do these meet
the strategic goals of the company?
Who are Oakey Wines competitors? What are their strengths and
weaknesses?
What customer and geographic market does it plan to serve?