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Australia's $3 Billion Wine Hangover · What the Flux

• 0:05
  Speaker 1: This is what the fluffs.
• 0:06
  Speaker 2: I'm Larissa and it's Wednesday, the twenty second of July.
• 0:09
  Speaker 2: Here are the three biggest news stories today. For our
• 0:12
  Speaker 2: first story, Toyota is scrambling to ship cars to Australia
• 0:15
  Speaker 2: and roll out new evs to try and compete with
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  Speaker 2: Chinese manufacturers. Chinese makers accounted for thirty nine point six
• 0:21
  Speaker 2: percent of all vehicle imports last month, making them Australia's
• 0:25
  Speaker 2: top castles. For our next story, AI chip maker Advanced
• 0:29
  Speaker 2: micro Devices or AMD, is getting ready to ship an
• 0:32
  Speaker 2: AI supercomputer to customers like Microsoft later this year. It's
• 0:36
  Speaker 2: the first system of its kind to take on in video,
• 0:39
  Speaker 2: and AMD's shares jumped more than four percent on the news.
• 0:42
  Speaker 2: For our final story, KPMG has slapped a group of
• 0:45
  Speaker 2: its staff and partners with fines as high as one
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  Speaker 2: hundred and eighty thousand for using confidential information from Optis
• 0:52
  Speaker 2: to try win a Telstra contract. It's all part of
• 0:55
  Speaker 2: an ongoing audit leak scandal that's caused KPMG's CEO and
• 0:59
  Speaker 2: several senior audit partners to leave the company. In this series,
• 1:02
  Speaker 2: Going Deep, we'll be doing bite sized explorations into the
• 1:05
  Speaker 2: most interesting industries, businesses, and economic events in Australia and
• 1:10
  Speaker 2: around the world. For today's episode, we're diving into the
• 1:13
  Speaker 2: Aussie wine crash, a three billion dollar export industry that
• 1:17
  Speaker 2: lost its biggest customer overnight and then spent three years
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  Speaker 2: drowning in unsold bottles, and what it actually takes to
• 1:24
  Speaker 2: rebuild a billion dollar industry when the world has moved
• 1:27
  Speaker 2: on without you. I'll be breaking this all down on
• 1:29
  Speaker 2: the episode with Justin.
• 1:32
  Speaker 1: Thanks LSA. Now, I'm not sure if this has ever
• 1:34
  Speaker 1: happened to you, but I can recall one time in
• 1:36
  Speaker 1: my life where someone rocked up to its night we
• 1:37
  Speaker 1: ate three hundred dollars bottle of pan foles.
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  Speaker 2: I assume everyone knew what that was.
• 1:41
  Speaker 1: They did.
• 1:41
  Speaker 2: Pinfolds is one of the great success stories of the
• 1:44
  Speaker 2: Australian wine industry, but.
• 1:45
  Speaker 1: It's not the only success Actually, Australia's wine industry is
• 1:48
  Speaker 1: one of the great agricultural success stories of the last
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  Speaker 1: thirty years.
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  Speaker 2: Yeah, in nineteen ninety it was a pretty small industry,
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  Speaker 2: or as they like to call it, cottage industry, but
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  Speaker 2: it grew very fast.
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  Speaker 1: By the mid two thousands, Australia was the fourth largest
• 2:01
  Speaker 1: wine exporter in the world.
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  Speaker 2: The key to all of it was China.
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  Speaker 1: But Larisa, that was a market basically went from nothing
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  Speaker 1: to Australia's biggest export destination overnight.
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  Speaker 2: Yeah, the Australian China wine exports rose from just fourteen
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  Speaker 2: million in two thousand to one point three billion in
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  Speaker 2: twenty nineteen.
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  Speaker 1: And a lot of that was driven by the China
• 2:20
  Speaker 1: Australia Free Trade Agreement that was agreed in twenty fifteen.
• 2:24
  Speaker 2: That was the deal that majorly cut tariffs and opened
• 2:26
  Speaker 2: the floodgates of wine.
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  Speaker 1: And every wine maker decided to get on the Shiraz
• 2:30
  Speaker 1: gravy trade.
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  Speaker 2: By twenty nineteen, China accounted for around forty percent of
• 2:35
  Speaker 2: Australia's total wine export value.
• 2:37
  Speaker 1: And that meant the industry needed to move fast.
• 2:39
  Speaker 2: Yeah, there were vineyards, new wineries. In fact, Australia was
• 2:43
  Speaker 2: opening hundreds of new vineyards to keep up with the demand.
• 2:45
  Speaker 1: And then came COVID.
• 2:47
  Speaker 2: Oh, we love to talk about it. And then also
• 2:50
  Speaker 2: came the diplomatic war that changed everything.
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  Speaker 1: Okay, so what actually happened during this diplomatic war you
• 2:55
  Speaker 1: speak of.
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  Speaker 2: In March twenty twenty one, China announced what they called
• 2:58
  Speaker 2: the anti dumping terarift of up to two hundred and
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  Speaker 2: eighteen percent of Australian wine.
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  Speaker 1: Now, the official reason was the Chinese government claimed that
• 3:06
  Speaker 1: Australia was unfairly subsidizing exports and undercutting Chinese producers.
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  Speaker 2: But the real reason the Australian government had called for
• 3:14
  Speaker 2: an international investigation into the origins of COVID nineteen.
• 3:18
  Speaker 1: And China was making it very clear that there would
• 3:20
  Speaker 1: be consequences for that action.
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  Speaker 2: China hit some of the key Australian export industries other
• 3:25
  Speaker 2: than wine.
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  Speaker 1: Yeah, they also hit frozen beef obviously, wine, cotton, bali, timber, rock, lobster.
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  Speaker 2: Within months, Australian wine exports to China collapsed.
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  Speaker 1: That one point three billion dollar industry became just ten
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  Speaker 1: point one million dollars in two years. We're talking a
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  Speaker 1: drop of more than ninety nine percent.
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  Speaker 2: Nearly twenty two hundred exporters had been selling to China
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  Speaker 2: before the tariffs, but by twenty twenty three only one
• 3:48
  Speaker 2: hundred and seventeen was still trying.
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  Speaker 1: Wow. At the same time, the wine industry was suddenly
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  Speaker 1: sitting on a mountain of wine it could not sell.
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  Speaker 2: Yeap Rabobank estimates. Get this, a surplus equivalent to two
• 4:00
  Speaker 2: point eight billion bottles in storage or eight hundred and
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  Speaker 2: fifty nine Olympic swimming pools.
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  Speaker 1: That's eight hundred and fifty nine Olympic swimming pools full
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  Speaker 1: of wine that nobody wants to buy.
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  Speaker 2: Which sounds like every Uni student street.
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  Speaker 1: A groa started leaving fruit on the vine because there
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  Speaker 1: weren't enough buyers.
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  Speaker 2: It actually became cheaper to leave the grapes hanging there
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  Speaker 2: then turn them into wine that nobody would drink.
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  Speaker 1: So naturally Australian wine makers scrambled to find new markets.
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  Speaker 1: They looked at the UK, they looked at the US,
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  Speaker 1: Southeast Asia, Singapore, South Korea.
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  Speaker 2: The problem was that none had China's appetite or China's
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  Speaker 2: price points for the Aussie wine.
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  Speaker 1: Then, in March twenty twenty four, the new government repaired
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  Speaker 1: the diplomatic relationship with China and the tariffs were lifted.
• 4:41
  Speaker 1: Entirely let the wine flow, but it did. The rebound
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  Speaker 1: was pretty instant.
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  Speaker 2: And the nine months after the tariffs were removed, nine
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  Speaker 2: hundred and two million dollars worth of Australian wine was
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  Speaker 2: shipped to China.
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  Speaker 1: Total twenty twenty four export value jump thirty four percent
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  Speaker 1: to over two and a half billion dollars.
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  Speaker 2: So does this mean everything's back to the twenty nine
• 5:00
  Speaker 2: teen boom.
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  Speaker 1: Not quite. China came back, but the China that came
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  Speaker 1: back wasn't the one that Australia remembers.
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  Speaker 2: Per capital, wine consumption in China and twenty twenty two
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  Speaker 2: was one third of its twenty twelve.
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  Speaker 1: Peak and the import volumes fell fifty five percent since
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  Speaker 1: twenty seventeen.
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  Speaker 2: While Australian wine was priced out of the Chinese market, France,
• 5:19
  Speaker 2: Italy and Chile all took significant market share.
• 5:22
  Speaker 1: Turns out, if you disappeared from a supermarket shel for
• 5:24
  Speaker 1: three years, someone else tends to fill that space.
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  Speaker 2: And the Chinese alcohol drink has found new favorites domestic
• 5:31
  Speaker 2: by Jou, French, budet Or, Chile and Melvik.
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  Speaker 1: And getting shelf space back means displacing competitors who have
• 5:37
  Speaker 1: spent three years building those relationships.
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  Speaker 2: But that's not all, because there's also a structural split
• 5:42
  Speaker 2: happening inside of the industry itself.
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  Speaker 1: Yeah, big premium brands like Penfolds still doing pretty well,
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  Speaker 1: sales rep seven point three percent in the f twenty
• 5:50
  Speaker 1: five financial year, but.
• 5:51
  Speaker 2: For small and medium growers the recovery is basically non existent.
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  Speaker 1: There were four consecutive vintagers through twenty twenty five of
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  Speaker 1: falling red grape prices.
• 6:00
  Speaker 2: And bulk charras, cabinet and merlow prices are still hitting
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  Speaker 2: historic lows.
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  Speaker 1: And in many cases the wholesale price is actually below
• 6:07
  Speaker 1: the cost of production.
• 6:09
  Speaker 2: And it's not just China. Global wine consumption and twenty
• 6:12
  Speaker 2: twenty four had its lowest level since nineteen sixty one.
• 6:15
  Speaker 1: Gen Z are drinking less. We're seeing a thirty four
• 6:17
  Speaker 1: percent decline in the monthly wine occasions among legal age
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  Speaker 1: gen zs.
• 6:22
  Speaker 2: Apparently gin Z would rather spend eighteen dollars on March
• 6:26
  Speaker 2: than a glass of shreds and I can say that's
• 6:27
  Speaker 2: true with some of my friends.
• 6:29
  Speaker 1: So, Larisa, the wine industry made a bet on a
• 6:32
  Speaker 1: huge return of Chinese volume. The problem is the mid
• 6:34
  Speaker 1: range red wines. They no longer exist at the same scale.
• 6:37
  Speaker 2: KPMG's twenty twenty five report was blunt. At least twenty
• 6:41
  Speaker 2: percent of vines in Australia are surplus to requirements.
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  Speaker 1: All right, So you seem like the familiar around here. Larisa,
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  Speaker 1: what actually happens from here?
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  Speaker 2: Okay, so we've got the optimistic case. China restabilizes as
• 6:52
  Speaker 2: a premium market for Australian wine.
• 6:54
  Speaker 1: And australia zero import tariff gives it a bit of
• 6:57
  Speaker 1: a price advantage over its competitors like France Chile, which
• 7:00
  Speaker 1: pay a standard fourteen percent hour.
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  Speaker 2: And where Australian wine doesn't come back in China, it
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  Speaker 2: grows in other markets like Southeast Asia, South Korea, India
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  Speaker 2: and Japan.
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  Speaker 1: And that's where there's a growing middle class and more
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  Speaker 1: of an appetite for these imported wine. Yeah.
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  Speaker 2: But the not so optimistic case, the bottom half of
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  Speaker 2: the wine markets still doesn't have a home.
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  Speaker 1: That's the stuff filling those eight hundred and fifty nine
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  Speaker 1: swing force.
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  Speaker 2: So now the wine growers are trying to figure out
• 7:25
  Speaker 2: whether to find new customers, replant and tire vineyards, or
• 7:28
  Speaker 2: walk away all together.
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  Speaker 1: Yeah, And Larissa, just recently one of Australia's largest family
• 7:32
  Speaker 1: owned wine makers, Debauderly, they destroyed vines that were forty
• 7:36
  Speaker 1: years old and still producing great wine.
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  Speaker 2: Why are they doing all this well, because the.
• 7:40
  Speaker 1: Cost of production is greater than the value of the product.
• 7:42
  Speaker 1: At the moment unfortunately.
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  Speaker 2: And then there's the big wild card. If Ginz's relationship
• 7:47
  Speaker 2: with alcohol keeps declining, then the entire category shrinks regardless
• 7:51
  Speaker 2: of what China does.
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  Speaker 1: So there's here's what I keep coming back to with
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  Speaker 1: this story. For a decade, the Australian wine industry told
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  Speaker 1: itself a single story, China is the answer.
• 8:00
  Speaker 2: In China close the door, the Australian wine industry had
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  Speaker 2: to deal with the fact that it had become a
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  Speaker 2: machine optimized for one customer.
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  Speaker 1: And not only is China not returned, but there's also
• 8:08
  Speaker 1: a generational headwind.
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  Speaker 2: So if you're a small barossa grower right now, you're
• 8:13
  Speaker 2: being asked to reinvent your business model.
• 8:15
  Speaker 1: You may need to replant your vines or find new
• 8:17
  Speaker 1: customers in a shrinking global market.
• 8:19
  Speaker 2: And just while some will do it, mini won't.
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  Speaker 1: So Larissa, well, the Penfolds of the world will probably
• 8:24
  Speaker 1: be fine. It's everything below that label that's still deciding
• 8:27
  Speaker 1: whether there's a future worth fighting for. Fox Sam, we
• 8:30
  Speaker 1: hope you enjoyed our deep dive into the decline of
• 8:32
  Speaker 1: the Aussie wine industry and the struggle to rebound back
• 8:35
  Speaker 1: to its peaks. On Friday, very excited to be going
• 8:38
  Speaker 1: in conversation with Matt Heiner, CEO of netwell. We cover
• 8:42
  Speaker 1: off everything from the growth of netwel, how Matt got
• 8:44
  Speaker 1: to the position he's in, and also some juicy details
• 8:46
  Speaker 1: about his first job. Thanks for listening and we'll see
• 8:48
  Speaker 1: you on Friday.