Evaluation of Wine Australia's marketing activities

Abstract

The CIE was commissioned by Wine Australia to conduct a cost benefit analysis of Wine Australia’s marketing activities. Wine Australia organises and runs marketing events in wine export markets to increase awareness and demand for Australian wine. Broadly speaking, these marketing activities are intended to raise awareness of and demand for Australian wine in the international market.

For this project, cost-benefit analysis was used to measure the economic impacts of Wine Australia’s marketing program, compared to a base case under which the marketing program is not pursued. If the benefits of the marketing program exceed the costs, this means that the program provides a net benefit, which is an improvement to social welfare.

This cost-benefit considers the impact of marketing activities in countries that are in the top ten wine export destinations and where Wine Australia undertakes marketing activities, namely Canada, China, Germany, Hong Kong, Japan, the UK, and the United States. In 2018, these seven countries represented 83 per cent of Australia’s wine exports by volume.

Summary

• Using historical data on Wine Australia’s marketing spending and wine exports for the top ten export markets, we find evidence of a positive relationship between export volumes and marketing spend.
• We estimate that for each dollar of marketing spend by Wine Australia, 0.51 additional litres of Australian wine is exported. That is, direct spending of $9.3 million in 2017-18 is estimated to be associated with 4.7 million additional litres of Australian wine being exported.
• However, there are limitations associated with the statistical modelling. Most importantly, the size of Wine Australia’s marketing program is small relative to other influences on the market that we are unable to capture using available data. This includes marketing programs by the private sector or other countries, supply-side influences such as weather, and changing tastes and preferences for wine varieties.
• The economic benefits to Australian wine producers associated with a higher price and quantity is referred to as producer surplus. Producer surplus is roughly equal to profit, being the difference between the amount the producer is willing to supply goods for and the actual amount received once traded. Marketing activities increase the quantity of Australian wine demanded by consumers, which results in a subsequent increase in the price of Australian wine for supply and demand to remain in equilibrium. Given a price elasticity of supply of 1, and a change in export volumes of 0.6 per cent, this implies an increase in price of 0.6 per cent (from $4.26 to $4.29 per litre). The additional producer surplus associated with this change is $88.6 million over 5 years (in discounted terms).
• The discounted costs of the marketing program over five years are $40.9 million in direct costs and $14.8 million in operational costs. The discounted value of benefits is $88.6 million over this period. This implies net benefits of $32.9 million and a benefit-cost ratio (BCR) of 1.59. The BCR can be interpreted as saying that each $1 of marketing spend by Wine Australia is associated with economic benefits of $1.59 for Australian wine producers.