Analysis of Australia Wine Industry Using Micheal Porter

陈帅男

【Abstract】This report is written based on the investigation and analysis of the Australian wine industry by using Micheal Porter's five forces model. Through the industry force analysis， the power of substitutes and the power of buyer are rated as high； the bargain power of supplier is low； the threat from new entrants and competition in domestic and international wine market are rated as medium. Wineries have some reactions to the industry forces such as adopting new technologies， reducing cost and advertising. Micheal Porters five forces model is a very useful business analysis model wildly used in different industries. It helps managers make better decisions.

【Key words】Porters five forces model； wine industry； Australia

According to Australian government （2007）， Australia is one of the top 10 wine producing countries in the world and it is one of mere countries that produce all major styles of wine. The wine industry in Australia is well known by its quality， innovation and depth. There are over 60 wine-producing regions that located in different states across the country， such as Barossa Valley in South Australia， Yarra Valley in Victoria， Hunter Valley in New South Wales， South Burnett in Queensland， Margaret River in Western Australia and Tamar Valley in Tasmania and even in Alice Springs. The businesses in the industry are geographic spread related to the distribution of graph production. In 2012-13， 1.75 million tonnes of grapes were crushed and 1.23 billion litres of beverage wine was produced in Australia， 42.4% of grapes were crushed in SA， 33.9% was made up by NSW and ACT， and VIC contributed 19.7% of the national volume （Australian Bureau of Statistics， 2013）. The industry profit was $302.6 million， while the annual revenue has decreased at an annualised 1.9% since 2009， due to the reduction of export volume and losing bargaining power in domestic market. However， the industry revenue is expected to annually growth by 2% in next five years due to the recovering economic （Lin， 2014）. The competition is high and increasing due to the expansion of global wine production， there are various competitors in global wine market including new entrants of New Zealand， Argentina and Chile and major wine producing countries such as France， Italy and Spain are. The external competitors such as beer industry also create an increasing competition to Australia wine industry. Australia wine industry has several advantages to attract investors， not only because the various climates and suitable soil types for grape growth， but also includes the advanced research and qualified education in grape growing， wine making and marketing at universities. Because the trend of wine becoming part of Australian culture， Australians are getting more serious of their wine which promotes development of Australian wine industry.

1 Porter's Five Forces Model Analysis of Australia Wine Industr

Porters Five Force Model is a straightforward method to identify and analyze the situation within the industry so that the company can come out with a strategy to response to the force in the industry and create a competitive advantage for the company. At the same time， managers can use the model to realize the threat and opportunities within the industry and apply an effective information communication technology.

1.1 Threat of New Entrants

According to Lin （2014）， competition has risen from new low-cost wine producers as a result of customers' preference to cheaper wine. However， these new low-cost producers may have wine-making experiences by hiring an experienced winemaker but do not have reputations as the original wineries especially those who existed for more than decades like Wolf Blass， Brown Brothers and Orlando. Thus， the threat of new low-cost wine producers is medium. Also， several new wineries in are entering the global market in recent years. Wineries in New Zealand， Argentina， Chile and South Africa has become the new competitors for Australian wine industry as they have lower cost and increasing popularity as substitutes for Australian wine. The threat of these new overseas wineries are considered to be low due to the lack of wine-making experiences as well as the reputation since these wineries were not wine producers before. Overall， the rate of threat of new entrant for wine industry is medium.

1.2 Power of Substitutes

In recent year， sparkling wines and ciders become customers' favorable choices and fastest growing products within the wine industry. Especially ciders become popular during hot summer among young drinkers. Thus， sparkling wines and ciders are highly threatened to wine as a substitute. Beer is also a high power substitutes as it comprises about 48% compared to wine at 29% and spirits at 21% in Australian alcoholic beverage market worth $16.3 billion （Kirin Research Institute of Drinking and Lifestyle， 2004）. As spirits like Vodka， Absinthe and Tequilaare very strong for most of drinkers， we considered it to have medium threatening to wine as a substitute. Overall， the power of substitutes is high.

1.3 Bargaining Power of Suppliers

According to the Wine Australia Cooperation （2013）， it is estimated that winegrape crush was 1.83 million tons in 2013 while winegrape purchased was 1，067，000 tones. Obviously， there is an oversupply in winegrapes which indicates that suppliers bargaining power is low as the wineries can bargain on winegrapes price due to the oversupply. Meanwhile， the price of winegrapes collapsed from2012 to 2014 as a result of oversupply of winegrapes （Winetitles， 2014）. Overall， the bargaining power of suppliers for Australian wine industry is low.

1.4 Bargaining Power of Buyers

According to the Australian Bureau of Statistics （2013）， there is a significant surplus of wine which leads to a high rate of bargaining power of buyers. At the same time， a high customer bargaining power was influenced by customers preference such as taste， cost and brands. An increasing control in liquor retailing of Coles and Woolworth by setting more liquor stores in Australia over the past five years has given them a more significant bargaining power over wine producers. These supermarkets has pushed wine producers to limit their whole price selling by carrying out a market-wild discount and reduce the branded products' shelf space， push wineries to do everything electronically （Roberts & Toleman， 2004）. Thus， the bargaining power of supermarket as customers is high. Overall， the bargaining power of buyers is high.

1.5 Competitive Rivalry

The existed competitors for Australian wine industry including domestic and international rivals. Domestic wineries are competitors to each other. According to the Australian and New Zealand Wine Industry Directory （2014）， there are 2，573 wine producers in Australia and it is considered to be a highly competitive market. Competition is also increased from iconic wineries like France， Italy and Spain as they are they are famous for having long history of wine production and they have high reputation in the global wine industry. Regarding to Australian Bureau of Statistics （2013）， wine imports of Australia in 2013 was 83.1 million. It was increasing in each year from 2006 to 2013 and it was 18% as domestic sales in 2013 which can be considered have a medium competitive rate. Australia are considered to be the second largest wine importer to China after France （Lin， 2014） which indicates that Australian wine are more competitive in Chinese wine market and we considered the rate of competitive in overseas market to be medium. Overall， the rate of competitive rivalry is medium.

2 Business Responses to the Industry Forces

2.1 Threat of new entrants

Barriers to entry in Australian wine industry are considered to be medium and is increasing as the major wine companies like Treasury Wine Estate and Pernod Richard acquired Australian and international wine operations which will increase the power of these wineries. This gives these companies a sustainable competitive advantage.

2.2 Bargaining Power of Suppliers

As the suppliers' bargaining power is low， wineries have a high bargaining power on prices. For example， wineries can bargain on a farmers winegrapes price to be lower or buy other winegrapes with lower prices. In this case， it forces farmers to sell their winegrapes in a lower price or otherwise the winegrapes will be useless. This gives wineries a competitive advantage in cost of resources.

2.3 Bargaining power of buyers

To response to high bargaining power of business buyers， wineries have to invest on e-business such as EANnet which is used to manage electronic order process with Coles and Woolworth， in order to maintain their position of national supermarket chain supplier as a sustainable competitive advantage （Roberts & Toleman， 2004）.

2.4 Competitive Rivalry

In response to high competition in the market， wineries have to adopt new technology to lower its cost and increase sales. For example，comparing with Scarpanton Estate， Wolf Blass， Orlando and Brown Brothers are having a competitive advantage as Scarpanton Estate is still using traditional winemaking process which leads to a high cost in workforce. Also， Wolf Blass and Orlando belongs to the two major wine production companies in Australia， they not only focus on boutique wine but also low price wines which gives then not only a competitive advantage but also a sustainable advantage as they can attract customers in different income level and increase their sales. In addition， Wolf Blass， Orlando and Brown Brothers sell their wine through not only on website but also from cellar doors， retailers， export， night club and pub while Scarpanton Estate only sell their wine on website and recently opened cellar door to sell their wine as well. This gives Wolf Blass， Orlando and Brown Brothers not only a competitive advantage but also a sustainable competitive advantage since by using different approaches to increase the sales.

2.5 Power of Substitute

To response the high power of substitute of beers and spirits， most of wineries put into their advertisement that wine are good for heart healthy， help lose weight， reduce forgetfulness， boost immunity， and help prevent bone loss. This will give wine companies a sustainable competitive advantage as BBC news， one of the most influential news companies， stated that red wine is good for health on its website as well.

3 Conclusion

By using Micheal Porters five forces model， Australia wineries identifies the power of substitutes and the power of buyer are rated as high； the bargain power of supplier is low； the threat from new entrants and competition in domestic and international wine market are rated as medium. Therefore these wineries adjust their producing and selling strategies in order to adopt market requirements.

References：

[1]Porter， M 1996， ‘What is strategy？， Harvard business review， vol. 74， no. 6， pp. 61-78.

[2]Australian government， 2007， ‘Australia's wine industry， australia.gov.au， viewed on 2 May 2014.

[3]Australian Bureau of Statistics， 2013， ‘Australian Wine and Grape Industry， 2012-13， viewed on 2 May 2014BBC， 2013， ‘Red wine - what's behind its healthy reputation？

[4]Grund T， 2006， ‘Rethinking and reinventing Michael Porters five forces model， Strategic Change， Vol. 15， Issue 5， p. 213.

[5]Lin.R， 2014， ‘Industry Report C1214： Wine Production in Australia， IBISWorld

[6]Roberts. B， Toleman. M， 2004， ‘E-business adoption in Australian wineries： DOI perspectives， University of Southern Queensland， Toowoomba， QLD， Australia

[7]Wine Australia Corporation， 2013， Wine Australia Corporation Annual Report 2012-2013， Australian Government， Canberra.

[8]Kirin Research Institute of Drinking and Lifestyle， 2004， ‘Per Capita Beer Consumption by Country， Vol. 29， Kirin Holdings Company.