ACCC rejects Telstra price proposals - 21 Dec, 12:06pm Bill Ford named new UWA law dean - 21 Dec, 11:33am Not all cheer for wine, beer next year - 21 Dec, 11:23am Tanami green light on $9m gold project - 21 Dec, 11:21am Eureka Mines lists at a slight premium - 21 Dec, 10:53am Macmahon wins $250m BHP Billiton iron ore contract - 21 Dec, 08:07am Cape Lambert makes strong return to market - 21 Dec, 07:51am Today's headlines - 21 Dec, 07:47am Australian wine and beer makers still face big challenges in 2006 as they struggle to overcome a continuing oversupply of grapes and a receding thirst for beer among consumers.
The wine sector may have to wait five years before it clears a backlog of wine built up from bumper grape harvests in 2004 and 2005.
The problem facing wine producers was put into sharp relief in November when Australia's second-biggest listed winemaker, McGuigan Simeon Wines Ltd, said 2004/05 was one of the worst in the last 40 years.
McGuigan added that tough conditions - an oversupply of grapes in Australia and overseas and heavy discounting of wine - looked set to continue for the next 18 months to two years.
"The Australian wine industry has been going through the industry equivalent of the perfect storm," McGuigan Simeon chairman David Clarke told shareholders at the company's annual general meeting.
Record harvests, accelerating production, low growth in domestic consumption, the high value of the Australian dollar, more overseas producers, and consolidation among big liquor retailers had put significant pressure on wine prices.
Although McGuigan managed to lift its sales by 16 per cent and exports by 49 per cent over 2004/05, the pressure on wine prices resulted in an 11 per cent fall in annual profits - the first ever profit downturn for the company.
Mr Clarke said the short-term future would be "enormously challenging", and the wine sector needed reform in the growing and pricing of grapes.
He said that in recent months, it had become apparent that the domestic market would be even more difficult than the company had anticipated.
Sales of bottled wine had weakened as higher fuel prices forced consumers to tighten their spending, and producers were making smaller profits on each bottle sold because discounting was becoming more prevalent.
The day after the McGuigan AGM, industry group the Australian Wine and Brandy Corporation (AWBC) said it could take two to possibly five years for winemakers to clear their stocks of excess wine.
The AWBC's manager of information and analysis, Lawrie Stanford, told the 2005 Wine Industry Outlook Conference in Adelaide that striking a balance between supply and demand was not expected until 2009/10.
Mr Stanford said that although Australian wine exports had been growing at an annual rate of 18 per cent over the last four years - to total 660 million litres worth $2.75 billion for the year to June 2005 - the rate of export growth was set to slow as foreign competition intensified.
Nonetheless, Australian winemakers were well positioned to take advantage of export opportunities, having moved in recent years to account for oversupply by writing down stock and renegotiating grape contracts.
"Although the Australian wine sector holds excess stock, a considered assessment of demand prospects in Australia's major export markets suggests this wine will find a home," Mr Stanford said.
For supply and demand to come into balance by 2009/10, exports would have to grow by 10 per cent per annum.
Mr Stanford said Australia's current glut of red wine production could ease over the next few years but an oversupply of white grape varieties could develop, especially chardonnay grapes from warm inland regions such as the Murray Valley, Riverland and Riverina.
Credit Suisse First Boston analysts Larry Gandler and David Khaw said the Australian oversupply situation may exacerbate with the March 2006 harvest, which could be as big as the 2005 vintage.
"When it comes time to clear tanks for the new vintage (February to March), strong discounting is likely to prevail," the CSFB analysts said a briefing to clients in late November.
"We could see new writedowns from wine companies with public listings."
But in the 2007 vintage, demand may exceed supply and stocks to sales ratios could approach comfortable levels.
"Although grape pricing at vintage may not immediately be reflected in wine pricing, investors are likely to look forward - taking its cue from vintage outcomes," the CSFB analysts said.
"In essence in about 18 months, investor optimism may return to the wine industry."
Beermakers are also facing challenging conditions in 2006.
Overall sales of beer by volume have been declining in recent years as consumers shift to wine and other alcoholic drinks.
But sales of more profitable premium beers have been climbing as consumers move upmarket, so major brewers such as Fosters Group Ltd and Lion Nathan Ltd are trying to get more out of this sector of the market.
Foster's, which acquired winemaker Southcorp Ltd for $3.2 billion in May 2005, is seeking to rejuvenate its core beer brands, especially its flagship Foster's label which it wants to have a more international look and feel.
Foster's said in September that it would invest eight to 10 per cent of revenue in its brands over 12 months, focusing on the Foster's beer label and the Rosemount wine label.
Similarly, Lion Nathan is looking for growth in its national beer brands such as Toohey's and XXXX and in premium beer brands such as Beck's and Heineken.
The company has said it will lift investment in core brands, which could result in more moderate earnings growth in the short term.
Lion Nathan is also fighting to keep alive its $420 million takeover bid for family-owned Coopers, which include the well-known Coopers Original Pale Ale and Coopers Sparkling Ale.
The hostile bid was placed in grave doubt in December when Coopers shareholders voted to strip Lion Nathan of its pre-emptive right to buy shares.
Lion Nathan is pursuing legal action to reverse the decision, although managing director Rob Murray has admitted that the deal is looking less strong.
Lion Nathan wants the Coopers brands to boost its portfolio of premium beers and grow the Coopers portfolio in other states outside of Coopers' home base of South Australia.
FGL Price at posting:
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