The challenges faced by the Australian wine sector since the beginning of 2020 have been unprecedented. Global markets for Australian wine have been significantly disrupted by a number of events, including the pandemic and the imposition of significant duties on Australian wine to mainland China. Exacerbating these market challenges was a record Australian grape crush in 2021 that led to Australian red wine stock levels to rise above demand and this is continuing to negatively impact red grape prices, most particularly in the major inland regions, as stock levels remain high.
To help navigate through these challenging times, this bulletin provides an update on the latest insights for export and the domestic markets and the key trends that are impacting wine consumption around the world that may provide some opportunities for Australian wine producers. This bulletin is complementary to Peter Bailey’s (Wine Australia Manager, Market Insights) presentation at the recent Global Market Update.
Australian wine exports
The volume and value of Australian wine exports have declined in the past five years (see Figure 1). This mirrors the trend in the global wine market over the same period, which has declined by an average of 2 per cent per year in volume since 2017. The downward trend in global consumption is driven by commercial/value price segments (below US$10 per bottle retail), while premium price segments are still growing, although at lower growth rates than recent years.
Figure 1: Australian wine exports over time
Source: Wine Australia
While the decline in export volume stabilised in the past 12 months, this was due to an increase in bulk wine shipments at relatively low prices. This was driven by an easing of shipping challenges which plagued international trade throughout 2021 and 2022, plus the need to reduce wine stocks in Australia which have risen to above ideal levels, particularly for red wine.
There are some different trends when comparing exports below and above $5 per litre, which roughly represent the commercial and premium price segments respectively.
Firstly, wines priced at under $5 per litre account for 89 per cent of the volume of Australian wine exported. Australia over-indexes the global market in this segment, which has 85 per cent of the volume sold in commercial price points. Three-quarters of this volume is shipped in bulk and packaged in-market. Like global sales of commercial wine, exports in this segment have declined in the past five years (see Figure 2).
The average price below $5 per litre has also declined in the past 3 years, due to a combination of more wine being shipped in bulk as well as a decline in the average price of bulk wine.
Figure 2: Australian wine exports priced at less than $5 per litre over time
Source: Wine Australia
Excluding mainland China from the figures, exports of wine priced at $5 or more per litre, which is mainly premium wine, has gradually increased over time (see Figure 3). However, the increase in premium Australian exports has not matched the growth in global premium wine sales over this period. If mainland China was included, the growth in premium exports between 2015 and 2020 would be much stronger as Australian exports to mainland China were predominantly premium wines prior to the imposition of the significant duties on Australian wine.
Some of the increase in premium exports in 2021 and 2022 is due to companies seeking replacement markets for mainland China. The decline in volume of premium exports in the past year was influenced by the increased cost of living and stagnant incomes in many markets around the world, which has impacted spending.
Figure 3 also shows that the average price has been on the rise, reflecting the global premiumisation trend that has been evident in most key wine markets and will be examined later in this bulletin.
Figure 3: Australian wine exports priced at $5 or more per litre over time (excluding mainland China)
Source: Wine Australia
Figure 4 shows the value of Australian wine exports to the major export regions, including showing mainland China separately (the blue line).
Currently, the value of Australian exports are split relatively evenly between Asia (34 per cent share), Europe (30 per cent) and North America (28 per cent). The rest of the world contributes 6 per cent.
Figure 4: Australian wine exports by region (A$ million FOB)
Source: Wine Australia
Exports to Europe and North America have been relatively stable over the past decade (notably there was spike to Europe during COVID and the pre-Brexit period).
Most of the recent growth in Australian wine exports has been to Asia. This includes growth to a number of markets in South-East Asia, such as Thailand and Vietnam. As many of these markets are emerging, there will be some annual volatility in exports.
Asia is where most of the world’s economic growth will come from in the next 30 years – and this translates into greater purchasing power. This will help fuel growth in wine consumption in the region. Australian wine is well-placed to take advantage of this growth given proximity to the region and our already strong position in many of these emerging markets.
Domestic market
Figure 5 shows the volume of sales in the domestic market over time, split by Australian wine and imported wine. It illustrates that the volume of wine sales in the domestic market has declined in the past three years and had already been relatively flat prior to the pandemic.
Both Australian and imported wine sales have fallen over this period, with domestic wines hit slightly harder than imported wines. Consequently, the Australian wine share of sales has fallen slightly, from 83 per cent in 2014 to 81 per cent in 2022.
Two-thirds of the volume of imported still wines are from New Zealand (mainly Sauvignon Blanc) with 13 per cent from France and 8 per cent from Italy. For the volume of imported sparkling wine sales, 45 per cent is from Italy and 42 per cent is from France (mainly Champagne).
Figure 5: Domestic off-trade market – Australian wine versus imported wine
Source: IWSR
There are varying performances in the domestic off-trade market by price segment (see Figure 6). The decline in sales is coming at all segments below $15 per bottle retail. On the other hand, the growth in the market is coming between $15 to $30 per bottle. It is understood that new product development is driving this growth.
Varieties with sales growth at between $15 to $30 per bottle include Shiraz, Cabernet Sauvignon, Grenache, Pinot Noir, Chardonnay, and Riesling. Sauvignon Blanc sales have been relatively flat while Pinot Grigio sales is growing at $10 to $30 per bottle. Sparkling wine sales are growing between $20 to $50. Prosecco growth is strongest at $15 to $20 while growth in rosé is coming at $15 to $30.
Figure 6: Domestic off-trade market by Price Segment
Source: Circana
Global wine market
Looking at growth opportunities for exports, global sales of commercial wines (less than US$10 per bottle) have been declining and are forecast by the IWSR to continue to decline in the next five years (see Figure 7).
In comparison, premium wine sales ($US10 or more per bottle) have been rising but growth has been impacted by COVID-19 and the soaring cost of living around the globe in the past couple of years but is forecast to grow out to 2027, albeit off a much lower base than the commercial segment and at a lower rate than the previous decade.
Commercial wines are by far the major segment of the global wine market, accounting for 85 per cent of total volume sold and 60 per cent of the value. It is important to note, that the growth in premium wine sales has not offset the decline in commercial sales. In the past five years, commercial wine sales declined by 56 million cases, but premium wine sales grew by 29 million cases – roughly half the decline in commercial volumes.
Figure 7: Global wine market by price segment
Source: IWSR
Market opportunities – commercial wine segment
Figure 8 illustrates the relative global opportunity by market for commercial wines. The size of the bubble reflects the size of the market, while the x-axis shows the historical value growth, and the y-axis shows the forecast value growth. The best opportunities are in the top right-hand corner of the chart – where there is both strong historical and forecast growth.
For the commercial segment, sales are in decline in the major, more mature markets such as Australia, United Kingdom (UK), United States of America (US), and Canada. The growth is coming from smaller European markets and more emerging markets in Asia and the Americas.
Australia generally has a relatively large share of the imported commercial wine segment in the mature markets, which are in decline. For example, Australia holds a 24 per cent share of the imported commercial wine segment in the UK and a 20 per cent share in the US.
While these markets are substantial in size and will remain so, they are declining markets for commercial wine and thus the opportunity lies in taking market share off competitors which is a tougher proposition in a declining market. Margins are also very tight at this end of the market, and oversupply will add further pressure. To compete at this end of the market also requires scale and relatively low production costs.
Figure 8: Commercial imported wine markets
Source: Wine Australia analysis, IWSR
Market opportunities – premium wine segment
The opportunities for premium wine sales are greater in terms of the number and diversity of the markets that are in growth and in the total value of the growth forecast in the segment out to 2027.
The biggest opportunities are in the more mature markets where commercial sales are declining but premium wine sales are growing such as the US, Canada, Australia and, to a lesser extent the UK, China and Japan.
There are also opportunities in emerging markets in Asia and the Americas and in smaller markets in Europe.
In many of these markets, Australia’s share of premium sales is well below its share of the commercial segment. For example, Australia holds an 11 share of the imported premium wine market in the UK and 9 per cent in the US. Hence there is significant upside in these markets for premium Australian wine.
While there is opportunity in most premium price points, $15 to $30 per bottle is the sweet spot in most markets for Australia. This is supported not only by the sales data but by independent research. For example, research from Wine Opinions that was commissioned by Wine Australia shows that the both the trade and consumers in the US see this price segment as the best growth opportunity for Australia in the US and this is across a range of varietals including Shiraz, Cabernet, red blends and Chardonnay.
Figure 9: Premium imported wine markets
Recruiting new drinkers to the Australian wine category
As global wine consumption is falling, driven by moderation trends, the growth opportunity for Australian wine is to recruit new consumers to the category, rather than encourage existing customers to drink more. This is particularly important for the younger demographic who are drinking less wine than previous generations.
The opportunity is significant as there is a large cohort of wine drinkers who have yet to discover Australian wine.
Research from Wine Intelligence on seven key wine export markets (UK, US, Canada, Japan, South Korea, Vietnam and India) showed almost 200 million people are regular wine drinkers across those markets (see Figure 10). Of these, 100 million are aware of Australian wine but only 42 million drink Australian wine.
This suggests that there is an untapped pool of almost 160 million people that currently drink wine but do not currently drink Australian wine. Encouraging this group of consumers will be crucial to growing sales of Australian wine in the future.
Figure 10: Number of wine drinkers (million people)
Source: Wine Australia
Global trends impacting wine consumption
To recruit more drinkers to the Australian category, it is critical to understand the factors that are influencing wine consumption globally. These include health and wellness, demographic shifts, sustainability, packaging innovations, economic factors, technology advances, authenticity/provenance/and buy local, and changing tastes.
Health and wellness
Health and wellness is probably the most influential trend impacting on wine consumption. A greater focus on health and wellness has seen all alcohol consumption fall, including wine. Some people are abstaining from drinking wine, others are drinking less but choosing to pay more, while some are seeking no and lower alcohol (NOLO) options. For the NOLO category for wine, the opportunity appears to be in mid-strength, in the 7 to 9 per cent alcohol bracket. Younger consumers are driving the NOLO category, but wine is under-represented and presents as an opportunity.
Demographic shifts
By 2040, the global population is expected to reach 9 billion and the demographics of the population will continue to evolve.
On average, global consumers are getting older and living longer as a result of declining birth rates and rising life expectancy. This leads to a growing number of increasingly affluent senior consumers. It is therefore important to consider how best to cater for the needs of older consumers in the years ahead. Meanwhile, Generation Alpha (those born after 2010), despite their weaker purchasing power relative to older generations, is set to rise in number and importance as future trend setters. However, younger drinkers are not consuming as much volume of wine as previous generations.
Consumers are also more diverse than ever before driven by global migration. This is shaping the global economic and consumer landscape. Although migration is a global trend, it is concentrated in a relatively small number of countries, with the US being the top destination for immigration and India for emigration.
Temporarily reversed by the pandemic, urbanisation is set to pick up pace between 2022 and 2040. Globally, city dwellers are concentrated, easy to reach, often more affluent and open to new products and services, which makes them an important audience for business. However, plenty of potential rests within rural consumers, many of whom will become the city dwellers of the future.
Sustainability
Environmental, social and governance (or ESG) is an area that the Australian wine sector cannot ignore. The rapidly changing international landscape means there is a significant market access risk over the medium- to long-term if the sector does not act.
Retailers and distributors are increasingly demanding compliance with sustainability policies, and this has impacted how wine is shipped to export markets. For example, almost 90 per cent of wine exported to the UK is in bulk and packaged in market, partially due to cost savings but also in an effort to reduce the carbon footprint of transporting wine from Australia to the UK.
Consumers are also increasingly motivated by sustainability in their purchase habits and they are more likely to be younger, higher-income and more engaged with alternative wines.
This is supported by some recent research which showed that in the US, 28 per cent of wine drinkers aged in their 20s cited sustainable practices as being “very important” in their wine purchase decisions, compared to 23 per cent of those in their 30s, 12 per cent in their 40s and 8 per cent of the over 50s.
The wine sector is already responding to the demands of consumers and retailers with product innovations. For example, there is a move toward more sustainable packaging types such as lighter glass bottles, cans, sustainable seals, bag-in-box and PET bottles. There is also innovation in the development of alternative wine styles such as natural wines, preservative free wines, organic wines, and biodynamic wines.
Packaging
Apart from sustainability drivers, developments in packaging are also catering to other consumer needs. For example, some producers are creating packaging that is more informative and engaging, such as augmented reality packaging. Ways of offering smaller serving sizes such as single-serve cans and 375ml bottles are also present as opportunities. This is playing to the growing trend toward portability. In addition, in some markets such as Sweden, bag-in-bag are far more associated with premium wines than in markets such as Australia.
Economic factors
Looking at economic conditions in the short-term, spending on discretionary items such as wine will be impacted. Economies are still recovering from the impacts of the pandemic, decades-high inflation has resulted in alarming increases in the cost of living, and stagnant disposable incomes and economic and political uncertainty are occurring in many markets globally.
However, over the longer-term, global real disposable incomes are expected to grow from now until 2040. Asia Pacific is expected to be the leading region, with real disposable income growth almost double the global average over the period. This will translate to higher purchasing power in the region with a new middle class that has an increasing appetite for the consumption of discretionary goods and services, including wine.
By 2040, emerging and developing Asian consumers are expected to account for 30 per cent of global consumer expenditure – up from 20 per cent in 2021.
While economic growth in the advanced economies is expected to be lower in comparison out to 2040, their capacity to spend will remain higher overall, with North America remaining the region with the highest per capita disposable income.
Technology advances
In 2022, there were 4.7 billion internet users globally which equates to 60 per cent of the population. Like all areas of retail, wine saw a significant shift to online purchasing during the initial wave of the COVID-19 pandemic. Even as markets return to normal, consumers have become accustomed to and comfortable with connecting and living online.
Wine makes up about 15 per cent of total online alcohol sales value globally and is expected to grower faster online than other alcoholic drinks out to 2025.
Another positive trend in e-commerce is the increase in the number of users expected over the next three years, and wine has the highest number of users of any alcohol segment and the highest percentage of the total population that purchases the product online.
Online wine shoppers are more likely to be younger, higher income and urban and be more frequent wine drinkers. They are also likely to spend more. There is also a significant untapped potential online wine consumer base in most markets. For example, a third of regular wine drinkers in the US and Canada say they are open to online purchases in the future but do not currently participate in the channel.
Authenticity, provenance, and localism
Consumers are increasingly seeking wines with a clear and authentic origin, leading to greater opportunities for wines with a geographical indication attached to it. Supporting this is that research from Wine Intelligence shows that wine consumers strongly associate authenticity with Australian wine. Across seven key export markets 87 per cent of regular wine drinkers associated Australian wine as “trusting the authenticity of the wines”.
Playing into the trend towards provenance is localism. This presents opportunities in the domestic market. Consumers emerged from the pandemic with a renewed sentiment for supporting their local businesses and communities. Australian wineries should continue to leverage this sentiment by through compelling product and experiences.
Changing tastes
Across all drinks categories, there is a growing trend among consumers around experimentation. Loyalty is still important but individual consumption repertories have expanded. Younger consumers, in particular, are increasingly interested in other beverages, such as craft beer, cocktails, and non-alcoholic drinks. They also want to explore new tastes and flavours as part of their traditional drinks. From a wine style perspective while traditional varietals remain important, there is also growth in lighter styles and varietals as well as sparkling wine and rosé.