Chapter 3
Wine retail
3.1
This chapter considers the power and influence of retailers of Australian
wine in domestic and export markets.
3.2
It is estimated that Woolworths and Wesfarmers collectively share just
under 60 per cent of the domestic wine retail market.[1]
Treasury Wine Estates provided an even higher estimate of 70 per cent in what
they described as a 'virtual oligopsony among retailers'[2]—a
market with a small number of buyers whose choices directly affect prices.[3]
The Department of Industry and Science explained that:
Woolworths owns the BWS and Dan Murphy’s retail chains plus
the Cellarmasters online outlet and the Langton’s fine wine auction business.
Wesfarmers owns the Liquorland, First Choice and Vintage Cellars retail chains.[4]
3.3
The committee heard that increasingly 'Costco, Metcash (Cellarbrations,
IGA Liquor and Bottle-O stores), and the Aldi chain also have a significant
presence in Australia’s domestic retail liquor market.'[5]
Accolade Wines observed the introduction of Aldi in the UK as delivering 'lower
prices to consumers... funded by further reduced margins to suppliers.'[6]
3.4
Other markets are beginning to emerge as an alternative to distribution
through major retailers. IBISWorld has estimated that 6.9 per cent of
sales will occur through niche downstream markets, such as direct to consumers
(including cellar doors), online markets, caterers and businesses, in
2015–16.[7]
Private or own brands
3.5
Some retailers have dual roles as wholesalers and producers of wine. In
particular, many submitters and witnesses discussed with concern the wine
produced and sold under private or 'own brands' of key wholesalers Woolworths
and Wesfarmers.[8]
3.6
The committee heard that private brands account for 'at least 16 per
cent of domestic sales,'[9]
and may be as high as 18 per cent[10]
or 20–25 per cent.[11]
By way of comparison, Wines of Western Australia estimated that private brand
sales were only five per cent in 2005.[12]
3.7
The Australian Small Business Commissioner submitted that private brand
development was 'likely to put further price and margin strain on growers and
wine producers alike,' an issue of concern from a recent industry roundtable.[13]
The Department of Industry and Science submitted that private brands further
concentrate market power, explaining that:
As in many industries where the retail market is controlled
by a concentrated few businesses, producers are vulnerable to the decisions of
those retailers. This is exacerbated by the fact that Woolworths and Wesfarmers
now have established private brands.[14]
3.8
On the other hand, WGGA told the committee that private brands were part
of the solution in an oversupplied market, as they 'provide a viable
route-to-market for fruit that may not find a home in wine company brands,'
which can increase commercial opportunity for some producers.[15]
Labelling
3.9
The committee heard concerns that major retailers' private brands were
labelled in a way that could mislead consumers.[16]
WFA Chief Executive Officer Mr Paul Evans reported that:
Concerns are raised with me reasonably regularly that the
approach to labelling of the home brands of Coles and Woolworth is to visually
come very close to branded producers.[17]
3.10
Submitters and witnesses called for larger retailers to label products
in a way that allows consumers to make informed choices. WFA submitted that their
consultation with industry 'has highlighted strong support' for clear marking
of the private brands owned by retailers. [18]
This is support by the submission of WGGA that:
Wine labelling should clearly distinguish between wine
company brands and those belonging to retailers – so that wine companies can
derive the benefit of promoting their value propositions and consumers can
choose.[19]
3.11
Likewise, Mrs Virginia Tropeano argued that:
Truth in labelling is an issue which needs to be addressed by
government so as consumers can clearly differentiate between wine produced and
marketed by an actual winery and wines which have been purchased in bulk and
labelled as a brand by retailers.[20]
3.12
Treasury Wine Estates agreed with 'the need for there to be clear
transparency for consumers to make informed decisions.'[21]
Recommendation 2
3.13
The committee recommends that the Government amend labelling
requirements so that wine labels must declare whether wine is produced by an
entity owned or controlled by a major retailer.
Market share
3.14
Aside from the development of own brands, producers identify the large
market share held by retailers in the wine industry as 'a major issue
affecting... profitability'.[22]
Barossa Wine and Grape Association reported that 'patchy' profitability for its
members can be attributed to a number of factors, including 'ruthless use of
market power by major retailers.' They explain that the 'concentration of
retail outlets gives wine producers little bargaining power in negotiating
sales.[23]
3.15
Mr Marc Allgrove told the committee that major retailers are 'offering
convenience, range and price with which few can compete.'[24]
Like the South Australian Wine Industry Association,[25]
Mr Allgrove submitted that the opportunity to enter the retail market is
limited to only a few suppliers:
The conditions imposed by retailers chasing profits and
shareholder returns have not only impacted profitability of individual
operators but also limited the number of suppliers who are able to trade with
them.[26]
3.16
The committee heard examples of 'unconscionable commercial practices'[27]
by retailers that flow from their dominance in the industry. WFA told the
committee that commercial dealings in the wine industry are operating according
to unfair practices:
The fragmentation of the wine industry and the relatively
small scale of even its largest producers compared to the large wine retailers,
has seen commercial agreements become commonplace that may otherwise be deemed
unacceptable in other more consolidated sectors. These agreements sanction
practices that are considered unfair by WFA and they may exist only because of
the imbalance in power between wine retailer and wine supplier.[28]
3.17
Examples of uncommercial practices included high marketing fees, lower margins,
and variable or 'retrospective' pricing. Wines of Western Australia explained
that producers pay for the opportunity to be sold or promoted, which leads to
the situation where:
...if you want to go into a catalogue, you are required to
stump up big, big money for them to sell your product. Then on top of that, you
have to give them blue sky [more than 40 per cent of gross profit] in terms of
margins.[29]
Pricing concerns
3.18
Pricing of wine grapes is agreed in contracts between growers and
producers, with final price set by fruit 'grade' and ultimate product line.[30]
Treasury Wine Estates stated that this staged approach carries risk for both
growers and producers, because:
...there is not always an obvious quality outcome until the
grapes are converted into wine, with early commitments to final pricing
consequently likely to be highly speculative and given the conservative
uncertainty, potentially damaging to both grape grower and wine producer.[31]
3.19
The committee heard evidence that the speculative nature of pricing
gives larger retailers considerable influence when setting price and margins. Wines
of Western Australia told the committee that retailers achieve higher margins
by passing additional costs on to growers and producers:
Every single administrative cost and every single possible
operational cost, they try to pass on down the chain. The wineries and the
growers are wearing a lot of the burden of the way that they operate their
business.[32]
3.20
WGGA submitted that growers seldom profit from any cost savings, while
lower prices for consumers continue to be prioritised:
...cost savings are not likely to be realised by the grower but
are instead absorbed in increased margins to the more powerful players in the
value chain – or lower costs to consumers.[33]
3.21
Several submitters argued that the behaviour of retailers has contributed
to the price of wine being 'too low'.[34]
WFA Chief Executive Officer Mr Paul Evans told the committee that '[f]or the
last six years the industry has not witnessed above-CPI retail pricing
increases, because of the discounting behaviour in the local retailers.'[35]
FARE submitted that because of 'heavy discounting':
The price of wine has fallen by 25 per cent relative to the
consumer price index (CPI) since 1980. Wine can now be purchased for just 29
cents per standard drink.[36]
3.22
WFA cited cleanskins 'advertised for prices ranging from '$3.30 to $5.90
per bottle', each containing 'roughly eight or nine standard drinks.'[37]
Several submitters remarked on the fact that wine is the cheapest form of
alcohol in Australia.[38]
3.23
WGGA explained that widespread discounting by retailers does not reflect
the fact that Australian wine has in fact improved over the past decades:
At the end of the day, the simplest answer to how we have
undermined the perception of Australian wine is by discounting it... the fact is
that quality has improved massively in the last 20 years... we continue to win
awards overseas in international competitions—but the price has declined, and
we continue to describe quality as price. For any grower that is massively
confusing.[39]
3.24
The actions of larger retailers have flow-on effects for smaller
retailers, who are unable to match heavily discounted prices. By way of
example, Mr Brett Butcher of the Yarra Valley submitted that:
We have been told by many smaller boutique bottle stores that
if we do business with Coles or Woolworths we can no longer do business with
them as Coles and Woolworths will demand the lowest price.[40]
3.25
As well as for growers and producers, low wine prices are a significant
concern for FARE, who submitted that:
...low alcohol prices contribute to increased consumption and
harms. There is strong evidence to show that the lower the price of alcohol,
the higher the levels of consumption.[41]
Addressing the market power
imbalance
3.26
The committee heard few solutions to the problem of market concentration
during this inquiry. South Australian Wine Industry Association submitted that
'it is difficult to understand what government can do to assist the industry
deal with this issue.'[42]
Riverland Wine submitted that the wine industry's challenges 'are common with
many primary producers of other crops.'[43]
They argued that the structural problem of an 'oversupplied market' contributes
to the retailers' 'ability to command margin at the producers' expense.'[44]
3.27
WFA submitted that 'additional regulation would improve the competition
process and enable consumers to make informed choices.'[45]
They recommended a Productivity Commission reference to 'conduct analysis of
the domestic wine market and the impact of retail consolidation on margins and
profitability for wine businesses.'[46]
3.28
The Department of Industry and Science, while discussing R&D Tax
Incentive, Entrepreneurship Infrastructure Programme and Industry Growth
Centres, did not discuss measures to assist industry in overcoming this
particular challenge to profitability.[47]
Competition Policy Review
3.29
The committee heard from some witnesses that competition policy reform
would assist in addressing the imbalance between producers and large retailers.[48]
Professor Geoffrey Lewis from the Clare Region Winegrape Growers Association
discussed the final report of the Competition Policy Review conducted by
Professor Ian Harper, arguing that:
We need good competition law in this country. We do not have
it. Professor Harper has made recommendations.... clearly with some of them the government can act.[49]
3.30
Likewise, WFA President Mr Tony D'Aloisio AM told the committee that the
Australian Competition and Consumer Commission (ACCC) could play a greater
role:
We think there should be greater vigilance from the ACCC. A
lot of the recommendations that Harper made went in that direction, and we
would support those.'[50]
3.31
WFA and the South Australian Wine Industry Association both called for
section 46 of the Competition and Consumer Act 2010 to be amended to
prohibit conduct by those with substantial market power that has the likely
effect of lessening competition.[51]
Further, WFA made the following specific recommendation about the practice of
retrospective pricing:
...that the Government’s response to the Harper Review enable a
determination to be made of whether retailers’ demands on retrospective pricing
support from suppliers, in fact constitutes a misuse of market power.[52]
Recommendation 3
3.32
The committee recommends that in responding to the Competition
Policy Review’s Final Report, the Government specifically consider commercial
agreements between growers and producers of wine and the major retailers.
Code of conduct
3.33
The committee heard that voluntary codes of conduct govern some
relationships between growers, producers and major retailers. An example is
'the Good Wine Buyer and Supplier Principles which WFA co-signed with
Woolworths Liquor Group.'[53]
WFA advised the principles include measures such as:
...ensuring things like contracts are in writing, outlining
proper information, issues around how negotiations are for particular
promotions, disallowing unilateral changes to commercial agreements.[54]
3.34
The committee also heard that the Woolworths Liquor Group 'is changing... education
and training for its staff' towards improving relationships with the wine
sector.[55]
3.35
The WFA Actions for Industry Profitability 2014–16 recommends
'closer industry ties with the national wine retailers to help grow the
category domestically.' As one of the 43 actions listed as a 'blueprint to lift
the profitability of Australian wine businesses,' WFA stated that to 'maximise
open and fair domestic competition':
WFA will work with the national wine retailers and
competition regulator on fairness, transparency and equity in the domestic wine
market. The outcome will be a more sustainable domestic marketplace for
industry where companies can grow share through quality, innovation and
investment.[56]
3.36
WFA reported that retailers have 'responded positively' to a proposal to
collaborate on shared issues through a standing industry working group,
including to 'progress discussions over a set of agreed principles and
practices'.[57]
3.37
Despite this, Clare Region Winegrape Growers Association and Clare
Valley Winemakers submitted that actions taken so far have had little effect on
price or culture, explaining:
There are already government initiatives underway to address
claims of unconscionable conduct by the two main players: Woolworths and Coles,
and to put a regulatory framework in place such as the Food and Grocery
Industry Code of Conduct to protect smaller suppliers. However, there appears
to have been little impact on the behaviour of the major retailers, and
certainly no discernible improvement in wine prices.'[58]
3.38
The committee encourages increased collaboration between the wine and
retail sectors, including through the proposed industry working group.
Delivery
3.39
The committee heard evidence that selling directly to consumers is 'the
most effective and profitable strategy' to increase the market share of smaller
producers.[59]
Selling direct from rural and regional settings comes with challenges, however,
including the inbuilt cost and unreliability of delivery. This was illustrated
by Ms Robyn Lewis from WineFoodTechMedia Group, based in Tasmania, who stated
that:
One of the big problems is the price and difficulty of
getting wine sent direct—and Australia Post is one of the leading providers. [60]
3.40
Ms Lewis described the 'near monopoly' of Australia Post on freighting
wine from small producers and the 'fundamental problem... that they cannot
guarantee delivery'. [61]
3.41
As a partial remedy to this problem, Wine Tasmania advised that they
have been working with Australia Post:
...on an arrangement whereby the combined delivery quantity of
all members of Wine Tasmania is taken into account to provide a subsidised rate
for everyone to access.'[62]
3.42
Despite their efforts, Wine Tasmania reported 'it has been difficult for
us to get some sort of outcome'.[63]
3.43
In a different jurisdiction, Wines of Western Australia advised that
they 'have an industry agreement with Australia Post' including negotiated
rates.[64]
3.44
To facilitate certain wine export sales, Margaret River Wine Association
reported that Australia Post will establish a pilot distribution arrangement
with Chinese e-commerce company the Alibaba Group (Alibaba.com) which will
simplify exports from the region to China. The committee heard that, if
successful in Margaret River, the arrangement could be rolled out from 'another
10 to 12 Australian fine wine regions' and to Japan and South Korea. Chief Executive
Officer Mr Nick Power explained that:
What that will mean for the Australian fine wine regions—with
Margaret River being the pilot—is that a consumer in China will be able to
directly order wine from a cellar door in Margaret River... You have an
Australian story there that is just going to build, not only for Margaret
River, but also for the whole Australian wine industry.[65]
3.45
Wine Tasmania called for 'support to help producers to claim from and
comply with' the Tasmanian Freight Equalisation Scheme, [66]
including 'education and some online tools.'[67]
The committee heard that 'some producers are choosing not to claim back against
the freight equalisation scheme because of the compliance and the paperwork
involved.' Other producers engage providers who 'do all that paperwork for
you', charging rates of up to 40 per cent of the subsidy.[68]
Wine Tasmania suggested that the compliance program would be better located
elsewhere than Centrelink.[69]
Recommendation 4
3.46
The committee recommends Australia Post review its approach to
wine delivery in each Australian state and territory with a view to developing harmonised
agreements across Australia.
Responsible Service of Alcohol qualifications
3.47
The committee heard that differences in liquor licensing laws between
states and territories create a financial and administrative burden for wine
producers. Because state-based responsible service of alcohol qualifications
are not universally recognised, those who travel interstate to promote their
wine are required to acquire 'four or five different responsible service of
alcohol accreditations.'[70]
In some cases, this requires additional travel to complete locally-based
courses.
3.48
Mutual recognition of qualifications is available between Victoria and South
Australia. The South Australian Wine Industry Association stated that:
The Victorian licensing authority is now willing to recognise
South Australian responsible service of alcohol qualifications when undertaking
tasting events in Victoria, which allows some cost savings for South Australian
wine businesses, not having to undertake a Victorian course or to update their
qualification prior to visiting that market.[71]
3.49
The committee supports a collaborative, national approach to marketing
Australia wine, and notes WFA's recommendation to:
Develop either a single national RSA accreditation scheme or
provide for mutual recognition of existing state qualifications, between all of
the states and territories, to facilitate wines reaching new domestic
consumers.
3.50
In particular, the committee is of the view that industry would benefit
from responsible service of alcohol qualifications being mutually recognised
between Australian states and territories.
Recommendation 5
3.51
The committee recommends that the Commonwealth Government,
through the Council of Australian Governments (COAG), work with states and
territories to establish mutual recognition arrangements for responsible
service of alcohol qualifications.
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