Profited from the favorable natural conditions and advanced technology, Australia has been providing good wine at a relatively low price to almost everywhere of the world, and Australia has become a pioneer of new world wine producers. Wine industry is one of the backbone industries of Australia, as the sale of wine contributed more than A$5.5 billion for Australia's GDP in 2009 (Wikipedia, 2010). The export and consumption of Australia wine increased notably in 2009, indicating an optimism development potential.
There might be a good opportunity for the company to initiate a business in Australia wine industry. In order to make a deliberate decision, the competitive environment, opportunities and threatens in the market should be considered carefully and systematically. In this report, the competitiveness and investment attractiveness of the wine industry in Australia are evaluated based on the Porter's National Diamond Model, so as to start the business in wine industry. According to the analysis, it can be concluded that it is advisable to invest in Australia wine industry. Thus a further analysis is carried out to give the company suggestions about how to enter the market properly.
1.0 Introduction
Australia is the sixth largest wine producer in the world, and the forth largest wine exporter, providing wine for more than 120 countries (Wikipedia, 2010), and it also has a large consumption demand from domestic, with Per capita wine consumption stabling at 22.4 liters per person per year in 2006, only behind French (Australia Wine and Brandy Corporation, 2009).
The main wine regions in Australia are located in southern, cooler areas, including South Australia, New South Wales, Victoria, and Western Australia, each of which produces different wines because of the variety of climatic, topography and soil types (Department of Foreign Affairs and Trade, 2008).
In 2008, there were about 2,300 wine companies and 172,676 hectares under vine, producing 1 237 million liters, including 480 million liters of domestic consumption and 714 exports (Australia Wine and Brandy Corporation, 2009).
2.0 Contextual Analysis
In order to make an advisable decision on whether to initiate a business in Australia wine industry, the national investment context should be analyzed carefully and systematically. Porter's National Diamond model is applied to assess the environment in the following respects:
2.1 Factor Conditions
In Porter's Diamond model, productive factors can be categorized into junior factors and senior factors (Sledge, 2005). For wine industry, key junior factors include soil climate, and workers, while senior factors include experienced winemakers, sector infrastructure, research and development, and access to capital.
2.1.1 Natural Resources
- Areas under vine. According to Figure 1 showing the area under vine in Australia in the last 5 years, there is large square of vineyard in Australia, as the area under vine in 2009 was about 163,000 hectares, 2.12% of the country's area. As Australia has the second largest area among the six largest wine producers, just behind the USA, the large vineyard area will ensure sufficient grape production for wine industry. It should also be paid attention that the area under vine decreased sharply in 2009, which might indicate a limitation in increase of wine grape production in future.
Natural conditions. Australia has advantageous in geographical location and sunshine conditions which is proper for viticulture, and as there is little pollution in Australia due to its large land and few people, vineyard are free from pollutions (Wikipedia, 2010). So high-quality grapes are produced for wine industry, ensuring the good taste.
2.1.2 Winemakers
On one hand, as there are more than 2,320 wineries in Austria, so many skilled winemakers are available, promising adequate human resource for initiating a new wine company. On the other hand, many universities in Australia have set up wine making major to cultivate professional talents of wine making (Pritchard, 1999). This will be conducive to attracting enough talents to work in a newly-built wine company. However, due to most wineries are producing wines with machine (Australian Wine and Brandy Corporation, 2009), wine maker experienced with hand craft skills might be not sufficient.
2.1.3 Research and Development
Compared with its competitors, R&D investment in Australia wine industry is at a moderate level, and there are world class research organizations supported by commercial capital in Australia, including Australian Wine Research, Institute, Australian universities, state departments of primary industry and ventures such as Cooperative Research Centers (Wine Australia & The Winemakers' Federation of Australia, 2007). Therefore, the wine industry in Australia has been powerfully supported by its R&D system.
2.1.4 Infrastructure
Until 2007, about 98% of vineyard has been mechanized for pruning and harvest, and automatic programs of the third generation have been applied all through the value chain, from viticulture, wine making and servicing in all states under vine. Australia also has good condition of transport, ensuring wines produced in vine area to be sold anywhere in the country and almost all over the world. For the company, the transport of its production is worthy of notice. Additionally, quality assurance systems, shipping service and contract services all give strong backing for the industry (Wine Australia & The Winemakers' Federation of Australia, 2007).
2.1.5 Access to Capital
According to the study of Australia Wine Sector, wineries in Australia are able to access to capital via commercial liability, private and public equity, listed securities and stocks, and international investment, indicating that there is adequate capital resource supporting wineries developing and advocating (Wine Australia & The Winemakers' Federation of Australia, 2007)
2.2 Demand Conditions
In Porter's National Diamond theory, domestic market is quite important even for an international company, as it provides a direct and primary driver of growth, innovation and ongoing improvement. Although Australia is exporting much more wines than domestic sales, which can be attributed to its spare population, the domestic demand is still very important for the industry. Firstly, there is a big demand in Australia. In terms of Appendix 1, domestic market has taken significant portion of the total sales. Meanwhile, per drinker consumption in Australia is the highest in the world, only after French. In figure 2, it can be seen that per drinker consumption of Australians is obviously more than the other three main wine consumption countries. What's more, the domestic market is also very important for wine sales.
Moreover, the domestic demand character will impact the industry in various ways. Compared with French wine, domestic consumers have low degree of brand loyalty toward Australian wine, as about 37% Australian drinkers often ask for advice on wine in shops or restaurants, and 64% of them like to choose wine by their type or variety rather than brand (Stanford & March, 2008). Besides, there are few significant choice cues for Australian wines comparing with wine in general. For example, in domestic wine market, regionality and ranking are not taken for importance. To a certain extent, the demand conditions might lead to the lack of top brand of Australian wine in global market.
In figure 3, it reflects that the domestic consumption of Australia wine increased steadily until 2008, and the consumption liters in 2009 dropped sharply by about 30%, while the revenue form domestic sales reduced only a little, indicating an increase in average price consumed in Australia. This trend has made Australian wineries make effort on high quality wines and brand strategy.
2.3 Related and Supporting Industries
The viticulture is the supporting industry of wine, providing the most important raw materials. Considering that the production and quality of grape have direct influences on wine producers, large wine producers usually have their own vineyards, or fixed group suppliers from different under vine areas, to avoid the risk of price inflation, and the possibility of raw material shortage.
Figure 4 displays wine grape production in the last 6 years, which reveals a reduction in grape production for 2 years since 2008, and the production decrease by 8.9% in 2010. Additionally, there is a drop in production of both the raw materials and products as shown in Appendix 2, which indicates the oversupply of wine will be alleviated and a rise in wine price could be expected.
2.4 Firm Structure, Strategy and Rivalry
There have been about 2,320 wineries in Australia in 2009, most of which are small private companies while the major four now produce over 70% of Australia's wine, even though there are a staggering 1424 wineries to be found (Australia Wine Spot, 2010). So the Australia wine industry has the characters of an oligopoly market. According to the machinery manufacturing style, most wineries positioned their products as medium level, and take cost advantage strategy. Reflecting carefully on today's challenges and opportunities, the Australia Wine Sector launched "Direction to 2025" in May 2007, and formulated sector strategy in 3 aspects: improving decision making process via information collection and analysis, maintaining leadership in R&D, and strengthening alignment of associates to support market development (Wine Australia & The Winemakers' Federation of Australia, 2007). What's more, as most Australian wines are manufactured by machine, they are quite stable in quality, which provide convenience for consumers while choosing wines. But they have little advantages in high brand comparing with traditional wine in French and Italy, because of the lack of hand craft products (Kemner, 2010). Therefore, in order to improve the international prestige, Australian wine industry has direct its strategy towards brand making in the next 2 decades.
2.5 Government
Besides the four factors in the model, the impact of government and opportunity should also be considered. Australia government is supporting its wine industry in various areas, such as tax preferences, R&D facilitations, market access and trade related reforms (Wine Australia & The Winemakers' Federation of Australia, 2007).
2.6 Brief Sum-up
Having applied Porter's National Diamond model to analysis of wine industry in Australia, it can be indicated that there are opportunities as well as challenges in the market. On one side, there are favorable factor conditions for wine industry, viticulture industry provides adequate raw materials with high quality, notable demand in domestic market, and powerful government supports in diverse areas. As the brand loyalty is rather low in Australia, it is favorable for the entrant into the market. On the other side, Australian wine industry is encountering a series of challenges, including disadvantage in high brand, over supply in domestic and oversea market, and the change of consumer demand. Thus it should be reflected carefully while making an investment decision.
3.0 Recommendations
If the company has decided to enter Australian wine industry, in order to achieve advantages, it is suggested to act as follows:
- Enter the market via acquisition in order to obtain factor resources, advanced technologies, skilled workers, and distribution channels in a short period;
- Consider the industry's direction carefully while choosing the acquisition objective, especially taking a prior consideration of those one whose product lines, resources and competitive advantages are in accordance with the strategy;
- Make an ongoing effort on innovation and expansion after the acquisition.
4.0 Conclusion
Conclusively, Australia wine industry is an attractive market and provides an opportunity for the company to initiate a new business, as wineries are supported with adequate productive factors, ensuring their production, innovation and expansion. Additionally, an active demand in domestic market, developed viticulture industry covering large area, and powerful support from government all enhance the investment attractiveness to invest in the industry. On the other hand, the strategy reform under challenges of over supply and price reduction should be carefully considered. So it is suggested to invest in Australia wine industry prudently while considering carefully the resources and advantages of the company itself. And then, if the company decides to invest, it is suggested to enter the market via acquisition, and choose the proper acquisition objective in accordance with the integrate strategy of the industry.
