The Wine Rules

Cricket. Re-imagined. (Part 2 of It’s Just Not Cricket. Or, Is it?)

The hardest thing to change isn’t other people’s opinions (pointless) but their perspective (possible but hard).

Apple understands this better than perhaps any company. From their earliest products they designed from a consumer’s perspective, giving consumers choices that they both didn’t know they could have and ones they couldn’t believe they didn’t already have from other products (e.g. beautiful typefaces, icons, a mouse, touchscreens, great printers, etc).

The only thing that separated Apple from the rest was that they took a consumers’ perspective over the long term. The difficulty facing most companies, governments, industry associations and other traditional non-profit bodies is that their perspective is often shaped by their largest customer(s), segment(s), investor(s), ethnicity(ies), union(s), etc over a relatively short time frame. This is a cardinal mistake and the reason so many organizations never rise above mediocrity.

The right question isn’t “who is my biggest xxxx?” It is, as Apple surmised, “Who am I doing this for?” In short, Apple chose to put the customer at the center of their product design and, more radically, to enable the customer to re-imagine and re-design their experience of the product(s) that Apple created. This in turn gave Apple a massive feedback loop advantage over its rivals. By doing so, they designed in a bias that impels them to innovate for customers that don’t exist yet as opposed to a bias that just tries to placate incumbents.

ibmapple

 

In the Australian wine industry, the newly created Australian Grape and Wine Authority (a merger of the old Wine Australia and Grape and Wine Research Development Corporation) ‘sits’ on top of the industry. While their temporary Board decides on a new CEO, the Board must seriously start looking at strategy (particularly marketing) to implement rapidly that delivers far better returns (more bang per dollar spent) than the returns of the past ten years. By definition, this means change – driven by rapid innovation – if different results are to be expected.

On the marketing side of the business, one of their key functions is hosting (usually this means paying for) wine industry influencers, buyers and distributors on trips to Australia where, frequently / usually, the guests are part of larger group often from one country. In reviewing annual reports, this seems to be about 100 people per year.

These guests travel around on a well-managed itinerary (think lots of bus trips) principally to those regions and producers who pay extra (surplus to the normal levies, taxes, fees that all exporters and producers are subject to do so by law) to Wine Australia to have these guests visit them. That this bus trip, tasting, regional experience, meal, tasting sleep, rinse, repeat approach excludes authentic serendipity and the development of personal connections for all but a few, is a great tragedy in the rush to show everything and appear to be ‘fair.’ Its a bit like taking visitors to the zoo where they never get so close to the exhibit as to touch anything but a koala.

Happy to be off the bus and on the beach.

Happy to be off the bus and on the beach.

While the box checkers can pat themselves on the back that everyone goes home happy, the product is the IBM “green screen” desktop PC of our time – designed in another era for an audience with different expectations.  This isn’t to diminish the IBM PC’s success or Hazel Murphy’s road trips with UK influencers decades ago. On the contrary, both legitimized entirely new product categories in spectacular fashion. While IBM was once the biggest PC company in the world, it has been profitably out of the PC business for most of a decade already while remaining a huge and important computer company while Wine Australia has kept its If its Tuesday, This Must be Belgium business plan intact.

 

Not exactly what Ken Kesey had in mind

Not exactly what Ken Kesey had in mind

To be successful, Wine Australia needs to embrace a higher leverage model (fewer staff, overheads and labor intensive programs) deploying scarce funds at the coal face educating guests not squandering funds on overpaid bureaucrats.

Digital natives and near-natives (Generation X turned 50 this year) now dominate the wine industry’s ranks. These groups famously value authenticity, unique experiences, choice, independence and, above all else, being treated as an individual with unique needs. As a starting point, if we want them to value Australian wine, we need to show them how we much we value them first.

Here are some ideas that could be rapidly developed and delivered at a far lower price than current approaches with potentially much better outcomes.

#1 Treat different people differently.

Recognize that not everyone wants to have the same experience and that they hate spending their time on experiences that do not meet their needs. Moreover, different guests with different attributes warrant different levels of attention and investment. This could mean sorting guests into maybe three ‘buckets':

Bucket 1 – younger, learning types of influencers – sommeliers, bloggers, MW students, WSET students with a job in the industry – on premise or off.

Bucket 2 – buyers / decision makers in relevant categories, bloggers and writers with traction / followers, senior sommeliers, wine educators, etc.

Bucket 3 – influencers with national or international reach, major buyers, writers, etc.

Show those worthy of funding respect by calling them Scholars – they are professionals here to learn more about us. This process alone would be media worthy (free) world-wide if marketed appropriately.

#2 Re-invent the Visitor Program part of Wine Australia to act as a great concierge.

Wine Australia could be an incredibly knowledgeable, contextually nuanced (e.g. polite while understanding your budget)  organization able to solve problems in real-time – instead of being a full-time cruise director and/ or travel agent. If there are groups of guests who prefer group travel, outsource the work to businesses like MW Tim Wildman’s James Busby Tours who do it better (and make money doing it).

In addition to better private tour businesses emerging, another outcome of this approach would be that regional specialists / consultants would emerge in no time to assist Scholars, businesses and regions. Given appropriate context setting, the private sector will innovate far better solutions than any top-down organisation like Wine Australia. And, if businesses and regions don’t adapt, innovate and improve to the new context, they just won’t get many visiting Scholars and visitors. That is fair.

#3 Instead of inviting people, make people apply, and compete, to receive a Wine Australia “Scholarship” regardless of their ‘bucket.’

Rewarding people who work for things they want instead of those who simply accept freebies eliminates a lot of wasted spending up front. For Bucket 1, this may mean for only paying for their airfare. For Bucket 2, it may mean setting a decent amount for them to budget. For Bucket 3, it may mean a generous / business class budget (enough for high end accommodation, airline seats, etc) for their visit. (Crucially, Scholars should only be reimbursed once they have provided detailed study notes and feedback about their experience(s) to Wine Australia.)

#4 Once accepted, find out what the Scholar would like to experience.

What regions? Varieties? Restaurants? Climates? Wine styles? Flora, fauna,  beaches, slow and / or ‘off’ days are also key differentiators of the Australian experience that too frequently get crowded out by another tasting or bus ride. Our job is to get the customer to fall in love with the entire culture of wine in our country. This is our biggest point of difference to other countries, not our buses. This can only occur on Australian time not Beijing, London or New York time.

#5 Let the Scholar define their experience and how to spend / stretch their budget.

Wine Australia’s job would be to assist Scholars’ in experiencing as many of their preferences as possible within the scholarship awarded.

The promise here is empowerment, not control. The theme is that we trust the Scholar (and each other) to create great experiences. Our job is to provide fantastic choices and appropriate information. Who under 50 goes to a travel agent and asks “where should we go?” We go online. We research. We ask friends. We go to TripAdvisor and read other guests’ feedback. We balance costs and choices – this is ‘how we do’ in 2014. Our Scholars are the same (probably much more so) – treat them with respect by enabling them to make decisions that suit the learning experience they wish to have.

Did they already invent this for us?

Did they already invent this for us?

#6 Create or adapt a TripAdvisor like platform for reporting feedback from and to Scholars and industry alike.

Nothing sells like transparency and accountability. We all need it if we are to rapidly improve the offering.

This platform, in turn, can become the touchstone of how consumers  research wine tourism in Australia. This would be valuable. What if we just handed the Scholar a mobile phone and a connected iPad when they arrive (with the information,  maps contacts, possibilities)  loaded according to their preferences for them to use while here? If we replace control (or anxiety) with information and the possibility of serendipity, then the Australian wine culture will soak in for the Scholar. (We could probably even get a TripAdvisor to act as a partner to do the site development instead of trying to do it in-house).

#7 Solicit the industry (individual businesses for specific experiences and regional bodies for regional attractions, offerings and events) to register what they have to offer (A+ sort of thing but deeper).

For example, this should even include the possibility of having Scholars stay in our homes, join us for a meal to stretch their budget so they can afford a great meal at Fino or Salopian Inn or even help out in the vineyard, winery or lab for a day. Or, or, or. Almost everyone in the industry has something to offer but we need to re-imagine the possibility of experiences for our guests. (The Golden Rule is a good starting point).

In 2012, we invited a young backpacking, MW studying, European sommelier to join us for picking and pressing Viognier one day. We sent him photos of his day here via email and stayed in touch using social media. Today he is a sommelier at Michelin starred restaurant and helping introduce us to distributors in Europe. Imagine the commercial outcomes of hundreds or thousands of these sorts of possibilities and relationships being kindled per year between producers here and influencers overseas. The results could be staggering for the entire industry in a short few years.

 

Customer for Life

Customer for Life

#8 Every trip should start at the National Wine Centre for two days of intensive education about the Australian wine industry.

And, set the expectation that this is the country where the old world rules don’t apply, where experimentation in vineyards is only matched by our technical contribution to world-wide wine knowledge (sequencing genomes is very sexy if told as part of an engaging story), where laid-back rustic charm, sustainability, technical excellence, finesse, diversity and great wine communities are different sides of the same die.

Then, set the Scholars free to discover it all for themselves at a personal level.

NatwinCenAus_3

The Scholar’s stories will travel for decades in their home countries, selling Australia and Australian wine all along the way.

Just imagine the possibilities if Wine Australia relentlessly asked “Who are we doing this for?” and innovated instead of repeated.

To be continued…

 

 

 

Its Just Not Cricket. Or, is it?

The new Australian Grape and Wine Authority Board of Directors is a curious beast. Without going through all of the bios, TheWineRules offers its best wishes to Chair Brian Walsh as he grapples with a somewhat mad slate of Directors. Walsh is a good and intelligent man with a difficult brief. He is responsible for the merger of the Grape Wine and Research Development Corporation and Wine Australia into one new body (AGWA) and for hiring a CEO by 1 October.

The Minister for Agriculture apparently rejected many of the recommendations (9 of 10?) made by the Winemakers Federation and appointed a Board that, despite grave compromises, at least demonstrates the positive use of the word oversight. The significance of this is that it is apparent, even to those unfamiliar, that the wine industry lacks leadership and direction. Reports are that the Minister is concerned about Wine Australia’s years of financial losses and the wine industry’s health (exports have declined 30% in recent years).

walsh-662x288

Board members John Casella, Kym Williams (ex-News Corp) and Brian Croser will each be likely trying to stamp their fingerprint on the Australian industry for decades to come with the selection of a new CEO, buying matching furniture for the merged entity and much else. These are big personalities comfortable with getting their way. Walsh’s job is not enviable.

With all respect for Casella’s business acumen (his hugely successful $5.95 per 750ml Yellowtail is fetching prices 3-5x of some of Treasury’s wines at Walmart right now), a singular focus on developing Australia’s reputation as a fine wine-producing country is required immediately.

Masstige marketing hits rock bottom

$1.04 less and Lindeman’s would be priceless (photo courtesy of TKR)

The world is fully aware of our ability to make cheap and, to some palates, tasty / cheerful wine. But only Casella seems to have figured out the business model as to how to do it profitably. In the huge US market, there is only room for two big players in this segment – Gallo and Franzia.  Australia probably shouldn’t plan on their being many more success stories similar to Casella’s here.

Max Allen has well documented Brian Croser’s special share of responsibility as the co-architect (with Len Evans) of the current industry situation his book The History of Australian Wine.  Evans and Croser’s mad zeal for Australia to be a huge wine producer in the 1990’s lies at the root of our unsustainable industry today. (for more on this, see Wine, War and Metaphor and Croser’s responses to same.)

Kim Williams is a wild card except having a reputation for being a tough operator. Perhaps he is there to report back to the Minister what’s really going on in the wine industry. The rest of the Board is a mixed bag with one Board member from a vinegar company. Vinegar? Whats the message being delivered with this one?

The short analysis is that this scenario bears an eerie resemblance to the Australian cricket team over the past decade. We all remember the good days, don’t we? The risk averse selectors kept the old players in for so many years that, in order to win again, we have now had to skip a generation (or two even) of perfectly good talent that never got to play at the top-level at the age and for the time required to be winners.

And, while the old players were winning for so many years, the game was “professionalized” with managers, trainers, doctors, academics and lawyers taking over management of the game with the selectors’ blessing. As the old players retired, the old selectors and the new managers played the 32-year-old clean-skins because it was “their turn” and excluded some real talent because they didn’t fit their statistical and psychological models. Australia proceeded to lose and keep losing until Darren Lehmann stepped in and restored the focus on winning cricket matches with diverse talent and letting bowlers bowl.

lehmann-413458

The wine industry finds itself in a similar mess of its own design. The “professional” managers (lawyers, accountants, MBA’s, HR folks, etc) in industry bodies are beholden to the selectors who hired them while remaining wildly out of touch with the weird long tail of the new world of wine. Worse, much of the harm they do is both craven and self-inflicted – threats of “serious consequences” for natural wine makers, peak bodies threatening journos with lawsuits for doing their jobs, spruiking the big companies agendas, relaxing Phylloxera standards, equalizing winery and vineyard workers awards, the list goes on.

The fact is that the old boy (not too many women here) selectors and the new professionals have seen to it that the next generation of players hasn’t been given real space to develop or lead let alone develop the generation behind them. As with cricket, it just isn’t in their mutual interest to do so unfortunately. (I await the rebuttal about the Future Leaders program). The reason cricket changed course after just five or so years of losing and the wine industry hasn’t changed after ten years of losing is that the Australian public cares deeply about cricket. They don’t give a toss about the fortunes of winemakers.

So, here we are with a strange three-month interim Board charged with selecting a new CEO for the new merged business. The leading candidate is Acting (great title) CEO Andreas Clark. Clark isn’t just a lawyer. By background, he’s a Canberra lawyer cum wine industry bureaucrat who doesn’t list any business (aside from legal), viticulture, oenology or scientific research experience on his up to date LinkedIn profile. Clark was quietly parachuted into the job when former CEO Andrew Cheesman (and Croser’s former CFO at Petaluma) resigned.

Prior to this, Clark was the COO (see page 54 for org chart) at Wine Australia in charge of the entire back office and compliance function (e.g. pretty much all but marketing) while Wine Australia spent about a million dollars per year on average more than it brought in since 2010. Apparently, these annual losses were ‘part of the plan’ because Australian wine exports tumbled from $4 billion to $2.8 billion over roughly the same period. At the culmination of this orgy of losses in 2013, Wine Australia held a massive “we did something” box ticking event called Savour in Adelaide that was supposed to be the major game changer for the industry.

Simply put, Savour paid the way for hundreds of overseas media and wine buyers to come to Adelaide to get “re-sold” on Australian wine. The guests got to watch sessions like “Mythbusting – Australia’s regions, sites, innovations, sites, quality, diversity and its characters” (is selling against a negative our best pitch to lead off with?) and this 30 minute presentation pitching the national wine industry. (Rookie sales advice – sell the sizzle, not the steak).

Then to defray some costs, it sold places at the show to regional industry associations and Australian wineries to show their wares to the guests. It was deemed a great success by participants. (Aren’t all expenses paid trips to Australia for a week of drinking and eating always a great success for the participant?)  This hugely expensive exercise was apparently underwritten mostly by state and federal government grant money.

Contrast Savour to the wildly influential and controversial Landmark Australia Tutorials for a dozen or so top media and trade people worldwide from five years ago that was a) paid for by outside sponsorship and b) shut down because levy payers (who hadn’t paid a cent) thought them too elitist (e.g. their plonk wasn’t poured). Another event to contrast Savour with is the New Zealand Pinot event in 2013 that put a strong second leg under the NZ wine industry. Even John Lennon couldn’t imagine an event in Australia about one variety that wasn’t Shiraz.

The Landmark and NZ Pinot events fundamentally changed how key gatekeepers around the world viewed the potential of Australian and NZ wine in the same way – intense focus and by sharing knowledge – but at different scales. Savour tried to do everything – spruik the industry, talk about regions, talk about brands, etc. – without being about any one thing. Great marketing shows, while poor marketing tells.

Landmark Tutorial Guests

Landmark Tutorial Guests

There is a long-term revenue problem that still hasn’t been fundamentally addressed by Wine Australia  –  levies are in decline because the industry  (particularly exports) have been shrinking in Australia. With its accumulated reserves largely spent after years of losses, Wine Australia was merged with GWRDC (the interesting and innovative 2/3 of the AGWA business) with the hope that it would be able to tap into GWRDC’s much larger budget. The pitch seems to be that having spent all its money and failed, the problem is lack of funding, not lack of imagination, talent or strategic capability.

A few years ago, Wine Australia began selling member programs to individual wine companies and regions to raise additional revenue. These are voluntary ‘user pays’ schemes where the chance of ever seeing a visitor brought here with your levy funds without belonging to one are near zero. User pays events should be funded and organised by users, not by statutory bodies with governance responsibilities to all levy payers.

Just one example of how this works out in the real world – when a major buyer from Europe came to Australia last year (I believe at their employers expense but with Wine Australia’s assistance with scheduling), they requested to visit us while they were in McLaren Vale because we had met once overseas and they wanted to see a micro Australian wine-making operation out of curiosity.

Instead of just organizing a one hour visit to one non-program member winery, Wine Australia ended up organizing a dinner for 15-20 winemakers and a tasting of 150+ local wines and invited us to attend at the end of our guest’s day in McLaren Vale. When I asked our guest how their day was, they politely said “It was nice. I saw the same wineries I saw the last time I was here. I came to Australia to see what was new.”

These are highly intelligent and sophisticated industry people who can see through what they are presented. They visit many countries and are comparing us to them at every point in their analysis. To treat them in a way that assumes they are not intelligent is a core issue for the image of Australian wine overseas and Wine Australia’s integrity.

This, in a nutshell, is the problem Clark hasn’t / can’t  solve because Wine Australia is beholden to the program members at the expense of everyone else – even if the visitor is paying their own way. The customer wants to know what is new and interesting about Australian wine, not who pays a cut to the man. For the wineries desperate for global attention, they’ll pay almost anything they can afford.

Then there’s the expenditure problem. The total cost of employee benefits for  Wine Australia was $5,510,000 in 2013. The cost for 2012 was $4,440,00. This is a $1,070,000 increase, or 24% in one year. The crazy bit here is that one Senior Executive (presumably Cheesman) earned $396,835 in 2012.

After a bit of digging, it appears that, excluding bonuses (one time events can distort the picture), the average compensation package of the Wine Australia senior executives increased from approximately $177,000 in 2011 (with six senior executives, $1,061,000 total + a $55,000 bonus for Cheesman) to $198,000 in 2012 (with five senior executives, $994,000 plus Cheesman’s $105,000 bonus that year) to a $239,000 average in 2013 (with four executives, $956,000 in total plus $36,000 in bonus paid).

This is a 35% increase in average guaranteed compensation for senior executives over just two years while Wine Australia was roughly losing, on average,  a million dollars per year and the wine industry was hemorrhaging in the export market. But, because they ‘dropped’ an executive each year, the total didn’t change much. (All figures taken directly from Wine Australia Annual reports 2011, 2012, 2013). The only thing missing in this analysis is the 2014 annual report that probably won’t be published until after the choice of a new CEO.

Andreas Clark

Andreas Clark in the only picture we could find of him.

Because the sum of senior executive salaries stayed about level, or down, in 2013, the balance of the million dollars in wage increases must have been directed to the staff.

According to the annual reports, total staff employed by Wine Australia has hovered between 45 and 55 over the past few years.  Austrade used to employ ten to fifteen Wine Australia staff for practical / legal reasons on behalf of Wine Australia in other countries. TheWineRules’ understanding is that these salaries were still indirectly paid by Wine Australia (with an administrative surcharge) through Austrade and (although noted in the annual report) these employees were not directly counted as employees in the annual report.

The 2013 annual report would lead you to believe Wine Australia increased headcount from 45 to 48 but the like for like analysis is that they employed 42 directly and 13 indirectly through Austrade in 2011 (55 total) 45 directly and 10 indirectly through Austrade (55 total) in 2012 and 48 directly plus 3 indirectly through Austrade (51 total) in 2013. Assuming this analysis is correct, headcount actually decreased by 7% between 2012 and 2013 while total staff compensation increased by about 25%. This equates to an average compensation increase of 34% for staff in just one year after remaining roughly level for years beforehand. Or, a million bucks in extra salary split between about fifty people.

Also, in the 2013 annual report, Wine Australia notes receiving $1,050,000 in income as “receipts from government”. A best guess is that this amount was intended for planning the Savour event. This revenue was not a common event for Wine Australia. In 2011, they only received $125,000 and $150,000 in 2012 in government funding. What Wine Australia appears to have done with this large one time grant is to have spent it on permanent salaries and entitlements. By doing so, their $530,000 cash decrease from 2012 (following 2012’s $1,926,000 cash decrease from 2011) looks like a major improvement in performance. In reality, if staff compensation had remained approximately level (as it had in previous years) and no government grant had been received, Wine Australia would have lost in the ball park  of $1,500,000 in 2013. Or, $3.4 million of losses in just 24 months while the management handed out raises all round.

Accounting being accounting, not all losses are created equal. When you buy something for $200,000 and sell it for $100,000, you need to book a $100,000 loss. When you increase recurring expenses by $100,00 and don’t have recurring income to pay for them, you create a loss of $100,000 per year forever (or until you get rid of the expense(s)).

Out of fairness, let’s look at the GWRDC budget in the same period as a comparison. Both bodies faced intense revenue pressure as levy income decreased. Perhaps they both faced similar business pressures to increase their costs.

The GWRDC manages a budget that currently constitutes more than 60% of the combined AGWA entity revenue base. Despite this, their total income has decreased in recent years from nearly $24.8 million in 2011 (with a $447,000 dollar loss) to $22,733,000 in income (with a $318,000 profit) in 2012 to  about $21.9 million in income in 2013 (with profits of $941,000). Despite an 11% decrease in revenues (or $2.9 million dollars less per year) over the two-year period, the GWRDC  turned a $447,000 annual loss into a $ 941,000 annual profit. Nor did they wind down their substantial reserves in the lead up to the merger.

GWRDC has a highly leveraged model (big budget with a high ratio of senior executives to total staff)  with only 11 full-time employees. Total compensation expense at GWRDC rose from $1,349,000 in 2011 to $1,425,000 in 2013, a 5.6% total increase over two years. They have three senior executives whose average salaries average about $173,000 each. In 2011, they averaged about $162,000 each. This represents an increase of average total compensation over two years of 6.1%.

So while average incomes were within 10% of each other in 2011, Wine Australia senior execs averaged $66,000 more per year than GWRDC execs just two years later. The sad part here is that GWRDC had a $941,000 profit in 2013 that it could have splashed out to its employees and execs to make sure they didn’t get stiffed in the new organization, but they didn’t.

The real story here is that the net effect of the compensation increase was to fundamentally increase Wine Australia’s cost base well beyond its revenue base so that the relatively frugal and cash positive GWRDC would have to bail out Wine Australia out of the GWRDC’s operating funds after they merged.  It is difficult to fathom the self-interested cynicism of this ‘poison pill’ strategy.

Given that reports were published as early as April 2012 that this merger was in the works – well within the financial year that these extraordinary compensation increases occurred – saying “what a coincidence” is not a possibility. The one thing they didn’t plan for was that the Labor government would be turfed and a Minister who actually knows accounting would end up with oversight of them. Rut-Ro.

When questioned by Senator Sean Edwards, Mr. Clark made it clear he is comfortable with the current Wine Australia strategy in his testimony to a Senate hearing. (He is even prepared to “defend” it.) Given that Minister Joyce is  an accountant by profession, this may be exactly why he has appointed a temporary board of directors.

 

Senator and Grape Grower Sean Edwards

Senator and Grape Grower Sean Edwards

 

Agriculture Minister Barnaby Joyce

Agriculture Minister Barnaby Joyce

One last example of Wine Australia’s lack of strategic orientation – why isn’t Wine Australia threatening the makers of nationally distributed Hunter Valley flavored potato chips and the makers of Barossa Shiraz gravy with ‘serious consequences’ and at least trying to protect the enormous brand value created by our Geographic Indicators (GI) system instead of threatening a few folks making bathtubs of ‘orange’ wine?

The fact is that many (not all) of the ‘professionals’ and the ‘selectors’ in many bodies (not just cricket and wine) are primarily concerned about their own positions, prestige, relevance and incomes. Losing and winning are of no direct financial consequence to most of them in a game played with other people’s money.

In the Australian wine industry, they are also the uninteresting, un-new and un-weird that have been losing market share, relevance and attention in a rapidly changing market for the world-wide wine consumer. Or, perhaps they just have a natural  affinity for the part of the market that is losing share and money at knots. In either case, our ‘selectors’ and ‘professionals’ at Wine Australia have been on the wrong side of history and not just the wrong side of a currency market. Serious change at these levels is vital, important and urgent for the industry.

Whose “turn” it is to be on the Board or the CEO of Wine Australia is of little or no interest to the 30,000 people who work in the industry. We just want winners who will create and communicate a vision that resonates with the industry and consumers alike.

And, if they can win big, TheWineRules is only to happy to see them make even more money. Unfortunately, we have folks who are depleting the funds we need for marketing for their own salaries while losing in the marketplace like Brazil against Germany in soccer.

These choices – both for a CEO and a long-term Board, are (possibly? finally?) the inflection points we have all been waiting for to put the Australian wine industry on a sustainable path to greatness. Hopefully, the accountant in Mr. Joyce sees this as clearly in the accounts from the past few years.

My questions for the industry is this – Who is the wine industry’s Darren Lehmann? (And, who will select him or her?)

 

 

 

Australia’s Best Independent Wine Shops 2014

2 June 2014

 TheWineRules and sponsor WBM magazine are proud to announce “Australia’s Best Independent Wine Shops 2014” as follows:

Large / Diversified:

 Blackhearts and Sparrows – Melbourne VIC

Specialty (three winners):

Wine Republic – Fitzroy VIC

 Bond’s Cnr Fine Wines – Northbridge NSW

 Armadale Cellars – Armadale VIC

Regional / Boutique:

 Heathcote Wine Hub – Heathcote VIC

Online:

 Vinomofo – Melbourne VIC

In announcing the results, TheWineRules and Inkwell Wines founder Dudley Brown said “this years results show that social media is the place wine stores need to be seen. Nearly four times as many online votes were cast in 2014 compared to 2013 to recognize Australia’s best independent wine shops.

The theme that emerges from the 2014 winners is about creating unique experiences for customers by offering wines and service not available at major chains. The best also find new ways to connect and build relationships with their customers using social media.”

Paul Ghaie from Blackhearts and Sparrows, a five store independent wine group in Melbourne commented, “customers want to eat and drink differently and to have unique experiences. That’s where we come in.”

The only repeat winner, John Cox of Bond’s Cnr Fine Wines said “to have won a second time is a great honour. We hope it gives customers the confidence to support specialist shops and wineries where they can learn from talk to passionate experts.”

“There were some other interesting results this year Brown commented – Victoria had a massive showing with five of the six winners, there was only one repeat winner from 2013, nearly 50% of all votes were cast from an Apple device and one really excited person from Malaysia voted nearly 1600 times for the same shop (their votes were disallowed).

Phil Hude of Armadale Cellars in Victora said “We’re excited to be recognised by our customers. The wine retail business is all about customer relationships and ensuring that customers enjoy their wine journey as much as we do.”

All of the winners share a commitment to wine knowledge, consumer education and service that sets them apart. The real winners are the consumers who frequent these merchants,” Brown added.

Steve Oates of the Heathcote Wine Hub, winner in the Regional / Boutique category, said “It is great to be recognised as one of Australia’s ‘best’ and we’re proud of the great diversity of wines we sell from Heathcote.”

One recurring theme this year was a brand new store finishing at the top. Wine Republic is a new shop in Fitzroy featuring a 1000 wine bottle light sculpture (see below) proving there is always room for smart new approaches to retail. Owner Tom O’Mara said “We are thrilled for Wine Republic to win in Australia’s Best Independent Wine Stores Awards after just six months of operation.”

 

Wine Republic Fitzroy Victoria

Wine Republic Fitzroy Victoria

In the online category, Vinomofo founder Andre Eckmeier said that: “It is exciting and rewarding that so many of the customers who have come on the Vinomofo journey have voted for us. Customer confidence is the ultimate validation.”

Finally, Brown thanked the “social media army that is promoting diversity, greatness and small producers of wine online.”

About: TheWineRules  (@thewinerules1 on Twitter) is a wine industry blog written by winegrower Dudley Brown of Inkwell Wines  in McLaren Vale. All opinions, mistakes, etc. and are solely his.

WBM is the premier wine industry magazine in Australia.

e: thewinerules@gmail.com

Wine, War and Mixed Meta(for)

“Don’t follow leaders, watch the parking meters” – Dylan

“I read the news today oh, boy” – Lennon / McCartney

Wine industry hit by high $A

JULIE-ANNE SPRAGUE, AFR 15 Jan, 2013 07:09 AM

THE federal government’s statutory wine agency has warned Australia is not close to reaching sustainable wine production and urged producers to focus on selling and marketing more expensive wines to help combat the impact of the high currency.

This article ((and the pronouncement by Andrew Cheesman (I don’t make these names up) of Wine Australia)) were prompted by news that Casella Wines, makers of $7 per bottle Yellow Tail, had reported a $30m loss and were in breach of bank covenants primarily due to the strength of the Australian dollar. Casella was the news lead but the real story is that most everyone in the Australian wine industry is in a struggle for survival.

CheesmanWineRules

Andrew Cheesman and some, ummm, “product”

What did not rate a headline was a meeting held for over 100 grape growers held in McLaren Vale in 2006 where Warren Randall, owner of (then) Tinlin’s Wines (but now owner of Tinlin’s, Seppeltsfield and Boar’s Rock) bluntly and emphatically told growers “grow A or B grade or get out.”

In 2006, the big buyers of fruit were pulling back on their purchases of all fruit, particularly A and B grade. C grade (for $10-$15 per bottle wine) was the rage because the “high” Aussie dollar (then around $.75 USD, now $1.05 USD) was making lower priced wines unprofitable and higher priced Australian wines were in a slump. The bottom was falling out of the grape market at almost every level and here was Warren Randall telling us we should be doing the opposite of what wineries were asking (and, more importantly, willing to pay) for.

What Randall knew then was that the oversupply and the Aussie dollar would lead to a long drawn out war in the industry. Regardless of what the market wanted, the high cost of doing business in McLaren Vale dictated that we had to differentiate and sell smaller crops at higher value.

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Warren Randall of Tinlin’s and Seppeltsfield

Warren’s warning was the distilled essence of leadership akin to that given at Omaha Beach; “take that cliff and you might die. Stay on this beach and you will die.” It’s not what you want to hear but is something you need to act on. Was that the sort of thing Cheesman meant to say the other day? Or, not? It wasn’t clear or, in bureaucrat-ease, what they call “actionable”.

Seven years later, growers in the Vale find themselves in the most advantageous position in the wine grape industry (aside from TasMania). Shiraz fruit was pre-sold by November this year. Prices are well up for the third year in a row. Wine makers have followed suit with dozens of McLaren Vale wineries with $50+ offerings now. No one is in the clover, but not many are in deep shit with the bank anymore either. Regardless, the strong Australian dollar is hurting even diversified and successful wineries.

Since there is no “new news” in any of this, why does it rankle to read Cheesman’s comments seven years on?

War is so frequently used as a metaphor for business and business strategy it is odd to note that while they share so many features, notably purpose, they are the opposites in one significant respect – means.

In war, you fight and win knowing that both sides will suffer horribly. In business, if you cannot trade in a mutually profitable way, you lose.

For years, the large wine companies ran the industry like it was in a war. They engaged in an arms race buying and building refinery-sized wineries with capacity to buy, grow and make wine far beyond their collective talent for selling it. Unfortunately for the big wine companies, those were the good ol’ days. The first to suffer this awareness were the growers when their long-term contracts were up for renewal beginning in about 2004.

The wine companies then acted as though the growers were not long-term suppliers but the enemy who had misled them into their mess. They turned their might on growers cancelling tens of thousands of hectares under contract, restricting terms, reducing prices, etc.

Meanwhile the big public wine companies collectively wrote off over $7 billion dollars in losses and every public wine company but Treasury has since gone bust, sold up or been taken private. Interestingly, write-offs are usually and largely a function of the eventual recognition that management wildly overpaid for assets, not so much trading losses. (It seems write-offs also played a big role in Casella’s current loss as well.) Unfortunately for growers and shareholders of the big companies, they got the sting.

And, because these companies operated under the wrong metaphor, having never figured out how to trade in a mutually profitable way, most big winemakers finally admitted they lost that war and moved on. The ones that have changed their relationships with growers, notably Treasury, have seen their fortunes rise again recently. Conversely, those that haven’t didn’t. In any case, many growers refuse to sign contracts for more than one year now.

While the big boys stumbled through 2000’s, Casella swooped in like Mr. Wolf in Pulp Fiction and cleaned up the bloody mess created by the not so bright. They snapped up enormous amounts of low priced fruit and contracts and built an enviable, well-managed privately owned empire with one huge advantage / weakness – exposure to the US dollar.

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Casella Winery and Vines

Casella made money where Treasury, Accolade, Pernod Ricard / Orlando, Lion Nathan (owners of Brian Croser’s Petaluma where both Cheesman and CEO of Winemakers Federation of Australia CEO Paul Evan’s hail from), Australian Vintage, etc. saw only problems. And, crucially, Casella kept hundreds of inland grape growers’ backs from the wall after the big guys had walked away from them. There is much to admire about Casella despite their wine. Unfortunately, as a tall poppy growing in Australia, they and their growers may be much more vulnerable than good experience should dictate.

Anyhow, here we are in 2013 being told by Wine Australia to “move up market.” Perhaps we should welcome their horribly belated recognition of what was so bleedingly obvious to the acquisitive Warren Randall that he had no problem sharing it with the world in 2006. Or, instead, we can look at some of the rest of what Cheesman said:

“Australian wine exports delivered a solid performance in some of our key markets last year and, as global supply is tightening, we believe there are signals for cautious optimism….”

But, this really isn’t the case. As detailed by Wine Hero, the latest export figures are frankly depressing. The only big export market where there is any significant good news is China while the US, UK and Canada are all “bad” by any profitable definition. As my older former business partner used to tell me, “any fool can sell dollars for 99 cents.”

In the U.S. Civil War, Lincoln fired seven generals over three years before he found one “who will fight;” the outsider Ulysses Grant. Almost no war ends with the same general in charge as at the beginning because while they are experienced enough to get the job, their experience is rooted in another era. In short, they always try to fight the last war.

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Honest Abe

Leadership is the core problem for the Australian wine industry, not vines or currency. As history shows, most of the revered leaders that grew the wine industry in the    1990’s were not much smarter than a cheap Australian dollar and cheap equity underpinned by tax breaks. Most of the grape growers were not much smarter than cheap land, under-priced or nearly free water to irrigate with, tax breaks for planting and generous contracts written by the wine companies. I have no quarrel with every dog having his day in the sun but the lessons that these groups learned in the 1990’s haven’t applied in the real world since at least 2005 when all of these premises suddenly inverted.

In a cruel twist of fate, these folks have gone on to dominate almost every Board and position of leadership in every company and peak body at every level since that time. Those employees that didn’t hew to the belief that the good times would return for “cheap and cheerful” Aussie wine delivered by the traditional big companies have been systematically muffled or moved on by these same people. Meanwhile, the outsider, Casella was actually doing “cheap and cheerful” bigger and better than anyone ever before them and made money doing so. This situation reminds me that when the discouraged fox says in Aesop’s fable “those grapes were probably sour anyhow” we see how little has changed in 2500 years!

Those rare folks who actually tried to fight / change the paradigm and were moved on have then had insidious whisper campaigns about their skills and personal lives spread about them following their departure. Those who say nothing of this out of fear of similar treatment or being out of the “in crowd” thus become conspirators in this awfulness. It is too sad and pathetic to just say nothing of it. Professional lives get wrecked while the no longer fighting just paddle on to the next meeting or tasting.

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Brian Croser

The ones who stay on are tradesmen like Cheesman – former Wine Australia Chairman Brian Croser’s former accountant or the nearly mute “Board Sitters” who seem to just collect fees for their attendance. There’s hardly a great winemaker, great wine grower, great marketer or great salesperson under 60 years of age in sight governing any of these bodies. Nearly everyone at this level is over 60 years old and had their glory days in the last war. It’s not that they’re not smart. It’s that they’re Dad’s Army.

The under 60’s who seem to rule the industry roosts today tend to be lawyers, HR folk, accountants, other back office box checkers, journos, PR hacks and people with no prior relevant industry experience. It’s like a Labor party candidate pre-selection convention. Despite these other skills, most are simply not equipped with the experience to lead in a worldwide struggle for Australian grape grower and winery survival. There are some that I would be reluctant to hire to be V.P. of No Smoking in the Lobby. (By contrast, Ulysses Grant had  personal experience of combat in the Mexican – American War. Some experience matters more than other in certain jobs.)

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General Ulysses Grant

How many of these have successfully owned and operated a vineyard or a winery? How many have pruned, pumped over or fix leaks at 3am? (Before you go barking mad at my simplifications, there are always exceptions – a notable one being the formidable Kate Harvey at GWRDC). We need more like her but they don’t fall off trees.

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Kate Harvey, GWRDC

Cheesman’s analysis and summation was soothingly written to not startle the horses probably because he believes the rest of the industry to have equine numeracy skills. The substance of the export data leads only to the conclusion that Cheesman is, at best, a soothsayer and, at worst, intellectually contemptuous of members / levy payers and / or those bereft of analytical skills. As he is a CEO who always mentions his CPA (most try to just forget that part of their career), we can hope to rule out the latter.

Wine Australia’s (and all of the other industry bodies) levy payers and members deserve leadership comfortable communicating the unvarnished truth in plain language in real-time, not seven years after it was obvious to the merely sentient. Rather, we get weasel words from those more interested in their own survival than the levy payer’s with the vain hope folks don’t notice their thinly veiled contempt for everyone else’s intelligence.

Like Lincoln’s first seven generals, the rent seekers who hold these positions by creating and attending each others meetings while achieving startlingly little at great expense need to be quickly and continuously culled until this industry finds one(s) “who will fight” for the folks whose levies and fees pay their wages. But they won’t do it to each other. And the big companies who ensure these mild folk get these positions won’t do it. And, even if the positions were open most of the ones who would fight wouldn’t even apply to work for these people and these people would never even grant an interview to those who could save them from themselves. Its like some kind of  time warped self replicating reality distortion field for mediocrity where it’s always 1999. Something has to give.

What‘s it going to be?

Australia’s Best Independent Wine Shops 2014

WineRules Best Indy Stores 2014.

Voting for Australia’s Best Independent Wine Shops 2014 closed on 31 May 2014.

Winners will be announced here on Monday 2 June 2014.

 

Voting Open – TheWineRules Australia’s Best Independent Wine Stores 2014

WineRules Best Indy Stores 2014

Voting open from 1May to 31 May 2014

To vote, click below:

http://dudleybrown.polldaddy.com/s/australia-s-best-independent-wine-stores-2014

Nominations:

Nominations for TheWineRules Best Independent Wine Stores 2014 are open from 22 April until the contest ends on 31 May 2014.

Voting for nominees starts on 1 May 2014.

Anyone can nominate. Nominations should include name and location of store and which category (see below) you are nominating them for. Please review nomination list posted below to see current nominees.

Publicly submit nominations  by submitting a reply / comment to this blog (below), confidentially by DM on Twitter or by email to thewinerules@gmail.com

Nominees posted below (updated once per day)

Goal:
To recognize and promote wine retailers who ensure that “the wine rules”

Requirements for nomination:

Independent ownership and wine retail must be primary business (e.g. no supermarket owned chains)
Provision of a unique selection of wines distinct from the duopoly’s standard fare
Committed to great, friendly service and consumer education
Ongoing commitment to introducing new Australian wine producers to market
The shop must have a passionate proprietor with knowledgeable and engaging staff
The wine shop must be education oriented whether through classes, tastings, informative newsletters / websites / social media

Categories:
1) Large / Diversified (Wine, and probably Liquor and Beer, you probably don’t know the owner) – One winner selected
2) Specialty (principally Wine and maybe Beer, the owner probably works there daily) – Three winners selected
3) Boutique (specializing in one country, region or theme of wine, the owner might sleep in the back room) – One winner selected
4) Online – needs to have educational commitment / component – One winner selected

Tips for nominees:

Use your status as a nominee for TheWineRules Best Independent Wine Stores 2014 as a one-month marketing platform for your business. Some ideas to do so listed below:

Publicize the competition to your customers via email, social media, in-store displays, advertisements, etc. encouraging customers to vote for your store

Use your nominee status to build your online and social media following(s) by setting up an in-store laptop or tablet for customers to provide their email addresses, social media handles etc. so they can receive exclusive offers and announcements from you

Link in store promotions to your status as a nominee to encourage participation

Encourage staff to make your nominee status a point of conversation with customers to build word of mouth

 Current Nominees:

Large / Diversified:

Queensland:

Ferry Road Wine and Beer

South Australia:

Fassina

Victoria:

Blackhearts & Sparrows

Specialty:

New South Wales:

Best Cellars

Bonds Corner

Five Way Cellars

 Oak Barrel

Sackville Hotel Bottleshop – Rozelle

South Australia:

Bel Air Fine Wines

East End Cellars

Edinburgh Cellars

Goodwood Cellars

Parade Cellars

Victoria:

Banks Fine Wine – Kyneton

Barrique Wine Store – Healesville

Boccaccio Cellars

City Wine Store

Gertrude Street Enoteca – Fitzroy

Nick’s – Doncaster

Melbourne Wine House

Prince Wine Store

Rathdowne Cellars

Seddon Wine Store

Small Patch Wine Store – Hawthorn

The Tasting Table – Armadale

Wine Republic – Fitzroy

Queensland:

Craft

Cru

Grand Central Hotel

Spiro’s – Paddington

Wine Emporium

Wine Experience

XO Cellars – Noosa

West Australia:

Gangemi’s Fine Wines

La Vigna Wine Store

Steve’s Fine Wine

Boutique:

Queensland:

Enoteca 1889

South Australia:

Cork Wine Cafe

Little Red Grape – Clare

Victoria:

 Wine Hub – Heathcote

 

Online:

Cracka

Different Drop

Like This Love That

Taste McLaren Vale

United Cellars

Vinomofo

 

 

 

Australia’s Best Independent Wine Shops 2014

TheWineRules second annual on-line competition; Australia’s Best Independent Wine Shops 2014, will launch on 1 May and conclude 31 May 2014.

Winners will be announced online on 2 June 2014.

Nominations will open the last week of April so all entrants have the whole month to run their campaigns.

All rules, etc will be posted on the blog as well at that time.

All announcements will be made on Twitter, Facebook and LinkedIn directing you to the blog.

We will also be posting some tips to maximise the value of this on-line event for your business.

Finally, we’re very excited to have WBM Magazine back on board as a sponsor again this year! Now, if vintage would just end….

Cheers, Dudley

 

Life During Wartime

This ain’t no party, this ain’t no disco. This ain’t no fooling around. No time for dancing, or lovey dovey. I ain’t got time for that now.‘ – Talking Heads, “Life During Wartime”

After the Australian wine industry’s annus bizarrus of 2013, I’ve been ruminating on what steps (short of electro-shock therapy) that could be taken to nudge the industry powers that be, and our national industry, towards a path that leads to the top in 2014. While the conversation about the future of the industry seemed to come out of the closet in 2013, it also saw the industry appearing to expose itself as being run by conspiratorial corporate interests more concerned with their share of the industry pie than the size of the pie.

Despite the foregoing mash-up of mixed metaphors, it is logically impossible for forward looking, positive change to occur that benefits the entire industry with this belief system intact. To that end, I’m proposing an alternative (and abbreviated) list of proposed “actions” to those proposed by the WFA. But first, a telling joke.

Q: Whats the difference between a pig and a chicken?

A: They both make a contribution to breakfast but the pig’s committed.

chicken-pig2

Performance based pay

What if the CEO’s of the Winemakers Federation of Australia (WFA) and / or Wine Australia (WA) were paid for results that actually affect and benefit the entire grape and wine industry? In a scenario where growers and wineries were increasingly sustainable with grape and wine prices rising and world interest in Australian wine increasing, I would have no objection to these CEO’s making significantly more than what they earn today.

With “behavior follows compensation” being just about the only management nostrum that is demonstrably true, I propose that $750,000, or even $1,000,000 per year is required to make these difficult jobs attractive to superstars. Here’s the catch; the base pay needs to be a minimum / livable rate paid against results. Say, $80,000 per annum.

Their contract term would be annual. These people should be comfortable living with the same anxiety every grower and winemaker lives with every single vintage and release while juggling the short and long term needs of their business. In short, they should have the courage of their convictions and real skin in the game.

I propose three indicators that would be used to assess their performance:

1) Membership. That the government is now well aware that WFA is not a broadly representative body is the result of WFA’s ‘own goal’ in 2013. To correct this, what if WFA’s CEO went out and attracted 60%-80% of wineries in Australia to become members of WFA? Think of the credibility WFA would gain across the industry and with government. Right now, there are a number of regional associations with larger memberships than WFA.

To successfully woo this many new members, the CEO would have to create an offer so compelling that it spread by word of mouth. The imagination and discipline required to be successful in this endeavor is worth tens or hundreds of millions of dollars to the future value of the industry and needs to be rewarded accordingly.  No wine company is forever, but the wine regions, and their voters, are. The politicians know this.

2) Export price per litre. Because a large majority of Australian wine is export bound, this is as good an indicator as any other as it captures lots of upstream activities of wine companies. The obvious counter argument to this approach is to suggest that the CEO’s of WFA and WA don’t control currency fluctuations, crop size, etc. Well, winemakers don’t control these things either but this is what we deal with every day. And, we’re in this together and pay their salaries, no?

3) Grape prices – increasing prices for grapes would indicate that demand had finally exceeded supply. The CEO’s would have an interest in both reduction of undesirable supply as well as demand creation for supply. While it might seem counter-intuitive for the CEO of WFA or WA to get compensated for improving the growers lot, any compensation scheme that doesn’t embrace the needs of the entire supply chain dooms the entire industry to failure.

We got in the position we are in because the big companies and the peak bodies thought an endless supply of low-cost fruit was all they needed to take over the wine world. A CEO who realized they wouldn’t make money in an oversupply situation could have fought that idea then and could have saved members’ investors something on the order of $7-$10 billion dollars (so far). Numbers like these make munificent CEO compensation seem cheap. Rising grape and vineyard prices are perhaps the best KPI of all because everything downstream has to be working for either to increase.

john chambers

I’ve often said that we don’t have a surplus of grapes but, rather, a deficit of imagination and sales skills. In addition to being strategically focused, the CEO’s of the WFA and WA should also be our best salespeople. Great salespeople are game changers at any scale of organization. Treasury briefly understood this when they had David Dearie in charge.

The genius of great salespeople and leaders is their ability to fuse strategic insight to a knack for describing a future we can’t imagine  for ourselves. Listen to Warren Randall explaining why the opportunity in China is a “once in a lifetime gift to be grasped and not to be refused” instead of a “difficult, complicated effort undertaken in an alien business culture and you’re more likely to lose than win.” People with these skills don’t make a couple hundred grand a year. They make much more. We get what we pay for.

While any national industry body requires lobbying talent and a constant presence in Canberra, the defensive nature of lobbying isn’t the focus of a leadership position. The CEO’s job is outwardly focused, selling a positive and unique value proposition that other people want to be a part of.

World class CEO’s like Cisco’s John Chambers insist that 90% of their time be spent in the marketplace with customers and potential customers.  (Chambers has also said he learned this lesson when he had to fire thousands of employees at Wang Laboratories (remember them? they had 33,000 employees) after failing to convince founder An Wang of the growing importance of PC’s. The lesson Chambers learned was to embrace change as the only way to protect his future and that it was customers who had the information he needed to do that.)

A CEO who isn’t in the marketplace selling 90% of the time doesn’t have the right team minding the store and / or isn’t the person to lead in a changing industry.

If this was the compensation plan for these CEOs, what sort of applicants do you think would apply for this job? Compliance officers? Lawyers? Lobbyists? Or, strategic sales and marketing executives motivated by a big ass challenge?

Wine Integrity

Make Australia’s wine labeling rules the toughest in the world – lets say a variance of +/- .3% of alcohol by volume instead of the current +/- 1.5%. By  doing just this, we will send a message to the world that we are winemakers who take our products, and our customers’ health and education, very seriously.

Implement a system better than South Africa’s world’s best label integrity program. Their system leaves our current system in the dust, particularly for sustainability. The result of the integrated approach of the South African system is renewed faith in their country’s products from world markets despite challenging social and political conditions.

In my opinion, South Africa represents the single biggest threat to the main body of the Australian wine industry. Not only are they much more cost competitive than almost anyone, they have a better tourism offering than most, are located in the same time zone as most of Europe and have a fluent English speaking business culture.  Its a formidable combination we seem only dimly aware of. While they aren’t the only ones, we need to learn from any country that is innovating ahead of us.

South African bottle seal

Better Data

We are in the twenty-first century managing an industry like it’s still the twentieth century using processes from the previous millennium. Better data is critical.

Tony Keys recently made the suggestion that bulk wine export sales reporting should be made in ten-cent increments per litre. He’s right. It should.

Much more importantly to our future, export sales over ten dollars per litre need to be published in much greater detail than “greater than ten dollars” as at present . The data are already collected, just not reported in detail. This sort of information could be as critical to a growers’ strategy as it is to wineries’ marketing departments.

Similarly, we need detailed information published on the high-end of the market for grapes. Again, while the data is already collected (and available by request from Wine Australia) it needs to be widely published. This is the segment most likely to change the perception of Australian wine worldwide. It is also the area worth the most potential for profitable growth over time.

These three suggestions would collectively cost almost nothing to publish.data tag cloud

We only need one system for reporting on grape harvests – preferably through a combination of Wine Australia working in concert with the Australian Bureau of Statistics. In California, the tonnage and price of every single transaction is reported (but not the identity of the buyer and seller) to the Department of Agriculture and published. Is it any wonder California pulled vines equal to all of the vines in South Australia in less than two years in the early 2000’s and have been on an upward course ever since while we are still muddling along with oversupply from the same era?

Not only is this information valuable to growers and winemakers, it is information bankers, investors and potential investors need to fund the continued development of the industry. The money saved by the Phylloxera Board, SAWIA, WFA and others surveys could be better deployed elsewhere or combined to fund a single comprehensive system.

We also need a federal statutory system for recording all vineyards, varieties, disease status and age as a matter of priority. This is necessary to record and prevent pest and disease outbreaks and to protect our oldest vineyards in the world as national treasures.

Grower relations:

Require all payments (including bonuses) for wine grapes to be made by 30 June each year.  This way growers will have the funds to make the improvements and pruning decisions required before the season begins. We have to break the cycle of growers not having the means and information to grow appropriate quality fruit and thereby being unable to supply desirable fruit to wineries.

Also, the current regime of extended payments means growers fund wineries bad decisions and poor cash flow. Wineries that can not pay by 30 June should lose their export license for one year. Demand for grapes will dip initially but a little financial reality tonic will be good for everyone’s long term decision making.

‘There’s no such thing as a little heresy’ – Christopher Hitchens, “Hitch-22″

Industry Structure(s)

The WGGA either needs to be a truly representative body financially supported by levies or similar proportionate contributions from all regions and states or it needs to lose its government status as a “peak body.”

Similarly, if WFA can not convince at least 50% of the wineries in the country to join, it should lose its government status as a “peak body.” And, the same for all the other state based “peak bodies.” Maybe this threat would ensure they focus on the importance of a succinct value proposition.

If these bodies can not meet the standard set out here, we should start over with a clean slate with one body at each level and one funding model that is democratically transparent in application and representation.

In the meantime, all of these bodies should heed the dictum to “lead, follow or get out-of-the-way.” To that end, they need to specialize / focus on where they can create value and get out of the mini-government role they’ve created for themselves trying to rationalize their own existence. Then, they need to be judged by demonstrable / measurable outcomes.

christopher hitchens

Media and Wine Show Transparency:

How about a registry of industry journalists who pledge to publicly declare any compensation (aside from two 750ml sample bottles) received from wine companies whose products they have reviewed?  Amounts are not required, just the employers names.  I have no quarrel with making a living by whatever legal means, but we should ensure the credibility for all involved. Too many in the public believe the system to be a pay to play affair. And, it would be revealing to see who was unwilling to take this pledge.

In wine shows, judges should not be allowed to judge at shows where they have also entered wines they have made. Or, perhaps, they should only be allowed to judge at shows with their own wines. Its one or the other.

What about developing a national standard for double-blind sampling, confidential scoring by all judges (including associates) and data analysis of judges scoring etc at wine shows?  There are statisticians drooling to do work like this. Which show will be the first to take the plunge?

None of this is anywhere near as hard as many would suggest. It just takes imagination and discipline.

The bottom line is that if we want to win, we have to start playing differently. While these proposals are offered in the spirit of getting the blood flowing, they would get different results. Things will not change unless you start openly discussing what you think we can do better and differently to improve our wonderful industry’s chances. The much reported uproar at the McLaren Vale WFA roadshow in October showed how little it takes to change the conversation the industry is having. Lets have more of it.

Please write and let TheWineRules know what you suggest.

All constructive suggestions will be published.

2013 – Reality Wins. Or, It’s a Funny Old World

The Wine Rules wrap up headline for 2013 could be “Reality Beats Fiction” Or, “It’s a Funny Old World.”

The first funny bit – TheWineRules started out 2013 being described as “very minor” (by someone who considered himself very otherwise) and ended the year being attributed with the force itself; the power of resurrection. Another bit of fun has been observing unintended consequences caroming around the cosmos and, sometimes, coming home to awkwardly roost. The last funny bit is the observation that many years sort of end up where they started. Some years it’s hard to know whether life is a continuum, a series of bookends or just a bit of vinyl spinning at 33 RPM with a scratch in it. 2013 was one of those years. But we persist.

Yesterday, über-imp Zar Brooks called to tell me that, to the great hilarity of numerous industry heavyweights, he had publicly blamed TheWineRules (occasionally TWR hereafter) of single-handedly exhuming and resurrecting Brian Croser from the (metaphorical) dead. Since then, Zar has been sending me emails with various imagined punishments (some in Portugese) for exercising my powers thus. Like I said, it’s a funny old world.

Despite the self-evident quality of Zar’s mischievous mirth, this is not a cross I can fairly bear alone. I have had help. In fact, if I hadn’t had so much help, TheWineRules wouldn’t exist at all. Nor would it need to.

zar brooks

In the spirit of the festive season (or an imaginary awards banquet for contrarian wine industry bloggers), I would like to take the time to thank all those who have made life so much more worth living for an opinion blogger.

First, I have to thank the big man himself – Croser. There really is no one like him for attracting readers. Without his tetchy defense of the hirsute Andrew Cheesman (former CEO of Wine Australia) in January, TheWineRules would have remained an unseen, unread, unknown digital carbuncle. This is one of those unintended consequences for both of us.

Now, with Croser just having had a public dummy spit about the failure of leadership in the Australian wine industry (10 months after attacking TheWineRules for its blog about, um, the failure of leadership in the Australian wine industry), we proudly say, “Welcome to TheWineRules team, Brian.” It’s not a big team but, don’t worry, we have a big tent.

In all seriousness, for things to have gotten so bad that Croser has come out of his den to be heard is a serious indictment of the organization he once led. When distaste for mediocrity galvanises into disgust, it matters.

To give BJC his due:

“The refusal to recognise the different strategic imperatives of the two wine types is a failure of leadership. I had not appreciated until today the same frustrations are shared by many of the small winemakers of Australia whose passionate endeavours are supported by the rebate of the WET tax which the representative organisation, WFA has endangered by trying to act as the moral umpire and neighbourhood watch on potential abuse of the tax. That is not the role of WFA.”

And:

“It is difficult to see why Anthony Madigan is not owed an apology by the WFA for their treatment of an editor going about the business of reporting the industry, which is his brief. If there is reason for not offering an apology, that explanation should be forthcoming from WFA in a very open and public way.”

Bravo Brian. Good deeds deserve recognition.

cantbelieveprotest

In fact, it would be a far better industry if more considered opinions were put “out there”, more apologies were offered and more outliers publicly defended. All are central to the conversation needed to re-build a great and good wine industry. Pity that it was our industry’s nicest booster who was attacked and in need of defense from an unrepresentative wine industry association.

Madigan has been a supporter in a quiet way of TWR in WBM and TWTW even though he clearly thought us a bit OTT. He wrote that TheWineRules was in “dangerous territory” in TWTW at one point (how prescient he was) and, after he was muzzled by the WFA, privately, on TWR’s prescience regarding industry leadership.

Madigan

From the mail I receive, it is certain our industry has suffered from 1) a suffocating fear of the consequences of speaking out and having hard conversations in public and 2) the belief that disagreement is personal. It isn’t. It’s the obligation of a member of a free society and a great industry to honestly and publicly dissent when one believes it is warranted.

It is equally important to say “It was wrong” and / or apologize once one becomes aware of an unintended offense. This is where the offense is greatest – standing behind ones processes etc. while failing to recognize one has been wrong / tone deaf / uninformed etc. WFA should take it disaster management cues from Peter Beattie or Bill Clinton and not Kevin Rudd or “Dubya.” .

What happened at the WFA meeting in McLaren Vale was the tipping point of conservative and sober winemakers breaking out of their gloomy silence by A) publicly dissenting and B) giving the WFA what they needed – a schooling. This is industry leadership.

This “schooling” in bottom up leadership is what the WFA didn’t want reported by Madigan. They knew that a booster like him would be taken very seriously if he reported the degree of criticism reportedly to have been on offer from no less than a federal Senator.

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The beauty of 2013 is all that seemed like barking mad opinion in the TheWineRules just six or twelve months ago has been revealed as not only real, but even a tad average. There really are conspiracies! Who knew? It is all more fantastic than even I supposed. Be they malevolent conspiracies of intent or a passive ones of silence is no matter. What a hoot! But I digress from the narrative.

The blood stirring, nay, thrilling bit in this drama is that with a gentleman and scholar of Croser’s standing, it can be no coincidence his public call to arms occurred within a month of TWR’s favorite day – St. Crispin’s Day (that’s pretty close isn’t it?). For any one who slept through English class, Shakespeare supplied the following lines to Henry V:

This story shall the good man teach his son;
And Crispin Crispian shall ne’er go by,
From this day to the ending of the world,
But we in it shall be remember’d;
We few, we happy few, we band of brothers;
For he to-day that sheds his blood with me
Shall be my brother; be he ne’er so vile,
This day shall gentle his condition:
And gentlemen in England now a-bed
Shall think themselves accursed they were not here,
And hold their manhoods cheap whiles any speaks
That fought with us upon Saint Crispin’s day.

Henry V

I can’t help but regard the timing of Croser’s recent pronouncements as a coded invitation to link arms with the TheWineRules. I get goose bumps just thinking about the possibilities.

Second, (and only second because they just aren’t quality click bait), TheWineRules would like to publicly thank the leaders of the Australian wine industry for providing so much fodder for a blog like this. Without being overly modest, we don’t have the gifts of imagination required to think this stuff up ourselves.

To paraphrase one well placed wag talking about WFA leadership “One’s a compliance guy and the others a lawyer. I’m sure they think they’ve done everything right!” To belabor their threats, misfires and the glorious artlessness of it all would just seem like churlish gloating at this joyous time of year.

I’m reminded of an avant-garde public sculpture exhibit in Toronto in the early 1980’s. One sculpture was a series of pranged and mis-matched car doors welded together in a haphazard line about 20 metres long. After a week or two some genius spray-painted “Car Culture Kills” along the length of doors. The media that previously hated the sculpture leapt to the defense decrying the vandalism of art no matter how unpleasant. The artist was assured it would be restored to its prior glory and interviewed by the newspaper. She simply said something to the effect of “Leave it. At least he gets it.”

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So it is with recent events. TheWineRules is about the intersection of the written and unwritten rules of the industry. Sometimes events are just better than words at describing this. With any luck at all, WFA will be now just be seen for what its strongest members wished it to be – theirs.

But what of the rest of us? Who will represent us?

Happy Festivus.

The Wolf at the Door

“Were it not for mendacity and hypocrisy, there would be no discourse at all” – Ambrose Bierce

“The zeal which begins with hypocrisy must conclude in treachery; at first it deceives, at last it betrays.” – Francis Bacon Sr.

“Do not ask for whom the bell tolls, it tolls for thee.” – John Donne

In Bulgakov’s 1930’s masterpiece “The Master and Margarita,” the devil comes to Moscow disguised as a nattily dressed German who delights, outrages and deceives simultaneously. In little old Adelaide, we have to settle for Wolf Blass in a bow tie to provoke simultaneous astonishment and rage.

Mr Blass was not showing his age but his hand when he recently told the American Chamber of Commerce in Adelaide “In this country at the moment we’ve got no finance to promote ourselves overseas in the right direction generically. Hopefully we can enforce a levy on all registered wine companies. They must start contributing. In most instances – I should be careful – there are a lot of parasites in this industry that do not put their hands in their pockets and they try to rely on the major companies to help them get their products on the market internationally.” (reported by Madigan, Anthony TWTW / WBM 24 August 2013)

Oddly, I feel it is important to defend Blass’s intemperate remarks and show respect for him for bringing this situation to light. There are those who don’t pull their weight in the same way as others in our industry and it is appalling. These are the same businesses that skulk under the radar hoping no one notices and / or blame others for their problems. Blass only gets his target wrong.

When Blass says “we’ve got no finance to promote ourselves overseas in the right direction generically” he is plainly incorrect. All wine and grape businesses pay levies to the federal departments who in turn fund Wine Australia and the Grape Wine and Research Development Corporation. The former is responsible for various functions including the promotion of Australian wine overseas and the latter primarily for grape and wine research.

Wine Australia has a statutory responsibility to represent all producers. However, it also has additional funding streams received from export licenses and fees as well as user pays based “Market Programs” where levy payers and regions can pay extra to get Wine Australia’s attention.

Crucially Blass said two things that got little attention. The first was his use of the word “generically.” Simply put, he is saying we need more generic branding of wines from Australia. In this, there is a broad consensus outside of the “major” companies that this is simply wrong. In an online poll conducted earlier this year by The Wine Rules, 96% supported making regions the brand and Australia a sub-brand. Even given the response pool of about 100 people, this is a pretty freaky consensus given the number of major company readers this blog has.

Second, Blass said, “I should be careful.” This is not mistaken. When one is calling people and firms “parasites,” one should be careful if one also wishes to be correct. That he believes non-major wine companies to be parasites isn’t new or a slip of the tongue. As far back as 2008, Blass was quoted saying, “parasitic and idiotic funding systems for overseas promotion mean that overproduced wine from Australian irrigated fruit will hit rock bottom….” (reported by Woods, Catherine, Decanter.com (15 December 2008)).

The other thing that did not get much coverage was that Blass announced that a major review of the Australian wine industry undertaken by an investment bank, to which the Wolf Blass Foundation made a major financial contribution, would be released 27 August 2013. His awareness of its release date and the obvious reputational downside of not being in step with its findings give lie to the observation that this is not likely to be an arm’s length or independent review of the industry. That its release is timed to the federal election cycle should not be considered coincidental either. The part I find most interesting in this was the decision to employ an investment bank and not a marketing firm to figure out how to escape our oversupply driven problems.

Treasury Wine Estates is Australia’s largest wine producer. Think Penfolds, Rosemount, Wolf Blass, Beringer, Lindemans, etc. It is famously disciplined in managing its public image as well as it’s messaging. It is also a public company, responsive to the short-term orientation of the public markets. This isn’t a criticism, merely an observation.

Given this, it was of note that Treasury announced that it was opposed to the current method of alcohol taxation (ad valorem, or, “by value”) in the industry and instead supported volumetric taxation of alcohol last year. Pernod Ricard owned Orlando (Jacob’s Creek, Wyndham Estate, Morris, etc.) quickly followed suit.

Some time after this, Treasury CEO David Dearie announced that he also thought that the WET rebate (a scheme that rebates all wine equalization taxes for small producers) should be abolished and the funds ploughed back into marketing the Australian brand abroad. His rationale was essentially that small producers were getting a free ride and that the system was also getting rorted. He also said that small producers should focus on exporting and “restoring” the Australian wine brand overseas.

For those with corporate amnesia, Treasury (formerly Fosters wine division) has written off billions of dollars of shareholder wealth over the last fifteen years as a result of repeatedly overpaying for assets (e.g. buying other wine companies) when it acquired them (these transactions were undertaken with the encouragement and support of investment bankers like those employed to write Blass’ impending review) and poor management. One of these acquisitions was Beringer Blass.

After a lost decade of strategy du jour (would you like Grange or a VB with your burger?), Mr Dearie seemed to recently right the Treasury ship by getting the business focused on making and selling good wine, re-establishing the importance of the Penfolds and Rosemount brands and getting deadly serious about exporting to China. TWE also started to treat grape growers with more respect and paying them better than they had for most of a decade. These are all very welcome developments for TWE and the industry as a whole.

Then, last month, it came to light that the TWE CFO had left unannounced and TWE made a subsequent announcement of still another $160 million or so in write-offs. It was widely reported that this time it was because TWE appears to have “stuffed the channel” in the USA with inventory to “make the numbers” in prior financial years. The headline was about paying to destroy $30+ million in unloved bottled wine stocks in the USA. In fairness to good folk who work there, it is no middle management error when a half million cases of wine – that’s 8000 or 9000 pallets of wine worth about $5 per bottle – pile up.

None of these decisions occur in vacuums – they are decided at the top.

What was less discussed from this news was that about half of the write-off was to be directed to buying out grower contracts.

Having seen dozens of friends lose Treasury contracts as they expired over the past ten years, I’m surprised Treasury still has big ones to get out of. On the face of it, these must relate to large-scale, long-term supply arrangements at the low-end of the market and TWE chose to use the headline grabber to bury hard news it didn’t know how to tell the market any other way. On Wall Street they call this the “kitchen sink” announcement because management throws in every bit of bad news they can think of in at once. Then, the theory goes, when they later “surprise” to the upside, the stock will outperform.

With the USA in long-term grape under supply, it is unlikely TWE is reducing its contracts there despite its surprising oversupply of wine there. In Australia, where there is still an oversupply of grapes and wine, TWE’s announcement makes more sense. As TWE has been a big buyer of high-end Australian fruit in recent seasons, this leaves low-end Australian contracts as the most likely to be bought out. This also means that there will be a lot of fruit looking for a home in coming seasons.

$80 million dollars is a lot of money when it comes to fruit. It is equal to 150,000 to 200,000 tonnes of $400 to $500 inland fruit. Australia’s oversupply is in the neighbourhood of 400,000 tonnes per year. That in turn is equal to 110 to 140 million litres of wine per year. Those are big numbers even in TWE’s world.

Is this the same “overproduced wine from Australian irrigated fruit” that Blass warned would hit “rock bottom” back in 2008? If so, why didn’t TWE take this charge years ago? Maybe because they were trying to fight wars on two fronts – one at the icon and super premium end and the other to prevent Yellow Tail (or others) from exploiting the oversupply the majors did so much to create in the 1990’s?

You can see how management could be paralysed in such a scenario for years. To his credit, maybe Dearie has just bitten the bullet that should have been bitten years ago. And, Dearie has figured out that volumetric taxation is the only way to dry up the low-end fruit glut and mitigate TWE’s risk in loosing all that unloved fruit on the market at once. (Parenthetically, Yellow Tail was created when TWE consolidated its distribution in the USA leaving a giant hole in the market for distributor Deutsch and winemaker Casella to exploit. Interestingly, Casella and Deutsch have gone from strength to strength while TWE still struggles in the USA.) In any case, the timing and strategy of TWE’s current approach to cleaning up its contracts and the industry as whole do not appear coincidental.

One example of how large wine companies operate in the public sphere to deny competitors oxygen was when the Australian government changed the employment “awards” for vineyard workers, operators and contractors “in consultation with industry” a few years ago. No longer would agriculture workers be treated as such but, rather, they would be treated the same as winery workers. There is no parallel for this in other linked agricultural industries – think wheat farmers and bakers, apple growers and makers of frozen apple pies, beef farmers and butchers, hops and barley farmers with brewers, etc. The extra wages the big wine companies incurred with the award change were more than offset by administrative savings from having just one award system.

Today, if you want to harvest your grapes in the cool and safety of the night when all parties agree it is preferable and safer to work, growers have to pay industrial type penalty awards. No longer can you pay bucket rates or per vine pruning rates to encourage productivity. Unsurprisingly, the productive vineyard labour supply is rapidly drying up. That growers are headed for an unsustainable labour shortage is without question. It is often almost impossible to pick fruit on Sundays now regardless of the urgency or ripeness because the cost is just too high.

In short, the biggest companies saved themselves a bit but made everyone else in the entire industry less productive and less profitable thereby increasing their own comparative operating advantage of capital-intensive machine processes over qualitatively superior people driven processes. (For instance, every block of grape vines in the high value area where we grow is hand pruned except for TWE’s 200+ acre block across the road. There, tractors with cutting bars do most of the work regardless of the conditions or their impact on the wet soil.)

This approach is the most cynical sort of incrementally regressive strategic thinking while the government is only too happy to have another regulated workplace. Small, high value producers and providers never even had serious input in this step change, just the big companies and the industry bodies they dominate.

On still another track, Treasury and other large wine companies have long advocated “consolidating” and “rationalizing” regional and state industry bodies supported by levy schemes as well as the national bodies such as Wine Australia, GWRDC, AWRI, Winemakers Federation (WFA) and Wine Grape Growers of Australia (WGGA). With the impending merger of the GWRDC and Wine Australia, this process is well underway with the government’s blessing.

Perhaps TWE’s recent write-off was the last spasm of a dying monster –Treasury’s low end wine business – or, quite plausibly, it was just more bad news from the gang that still don’t “get it.” Or, it was part of a still bigger game to further dominate the Australian wine market at the expense of everyone else. Each single factor theory has its merits but there is a real possibility that all are equally true.

For the sake of inquiry, let us follow the trail of breadcrumbs TWE and now Wolf Blass have been dropping for those who recognise their influence on public policy in Australia. Mr Dearie has said TWE wants the ad valorem WET tax changed. (I happen to agree but for entirely different reasons.) Treasury also wants to get rid of the WET rebate because a) it is being rorted (sometimes true) b) because New Zealand producers are taking $30 million per year from it under the law and spanking the other big companies silly with their Sauvignon Blanc exports (mostly true) c) because the WET rebate is the only thing keeping many smaller producers in business (also sometimes true). I part with Mr. Dearie and the majors here and will take this up in another blog.

At one regulatory swipe, TWE could see off a) the cheaters, b) more competitive and successful overseas producers and c) quite a bit of the domestic competition (the “parasites”) all while increasing margins on their own high-end wines by tens and sometimes even hundreds of dollars per bottle. If you are Treasury, what’s not to like?

The WET tax is a devils bargain created in the early 1990’s that a) raised tax revenues for the government while b) largely exempting small producers (e.g. voters as well as those most likely to be friendly with the politicians) from the tax while c) simultaneously introducing the disastrous accelerated depreciation scheme for vineyard development. Something for everyone. This depreciation scheme was a handout to the big wineries so they could continue to rapidly grow their businesses while containing prices paid for fruit.

In a reply to a prior The Wine Rules blog, then WFA Chairman Brian Croser laid responsibility for this bargain at the largest wine companies’ feet. While we may never know, his assertion has the ring of truth. Unfortunately for him, it leaves him looking like the big boys’ pawn in this landmark negotiation. The good part for the Croser legend was that he brought home the exemption for small wineries. This contribution is not to be underestimated given the power of the major wine companies.

The vineyard depreciation scheme finally got spiked in the early 2000’s after the damage was well and truly done to the national industry. The WET rebate got badly rorted in the ensuing oversupply and the current government finally closed many, but not all, loopholes to the original intent of the rebate. In any case, the bargain that was is no more.

What is left is a mess where low-end wine producers have a monopoly on the lowest cost production of ethanol for human consumption in Australia. Just witness the destruction in Aboriginal communities where cask wine is the preferred drink on a buzz per dollar scale. That the wine industry fights to protect this “social license” is both hypocritical and indefensible.

The benefits to the majors for the changes floated are pretty obvious – collect millions in taxes from regionally based small producers and spend it on marketing Australian wine “generically” to the world. With “generic” (e.g. superregional, multi-regional or non regional wine which makes up probably 70-80% of a market which is virtually owned by Australia’s top 20 wine companies) wine receiving the benefit of a massive “generic” Australian marketing campaign, you can pretty much kiss goodbye to the high value, high quality and regionally differentiated producers of Australian wine.

This new marketing budget would presumably be governed and spent by Wine Australia. Given that Wine Australia has never managed a marketing budget of more than about $5 million dollars per year and have spent three or four million dollars more than they’ve brought in under the current management team, one can only imagine what would happen if their budget increased six fold.

What is still unclear to me is this – if Treasury and Orlando want to get rid of ad valorem WET tax, do they also wish to get rid of ad valorem levies paid to support the GWRDC, Wine Australia and the regional marketing organisations? Consider me interested in finding out. Maybe Blass and Co. will spill the beans.

While WET taxes and rebates do not apply to exports, Treasury wishes that the small producers would focus on exporting to re-establish Brand Australia. This is fascinating. Dearie and Blass propose to a) financially gut small producers with tax “reform”, then b) to tell these folks to go do the slow, hard and expensive work of exporting in a high dollar environment while c) the money raised from taxing them is used to deliver a “generic” overseas marketing budget to “support” these highly specialized, differentiated regional producers. Really?

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

– Adam Smith, The Wealth of Nations, 1776

 Dearie’s investors don’t employ him to think up ways to help the competition. They employ him to find ways to increase TWE’s comparative advantage in the market place. Why do we expect them to offer anything but what is good for them? It is naive to think otherwise.

The unasked questions in this so far one-sided discussion are revealing – who screwed up the Australian wine brand overseas in the first place? (Can I interest you in some Little Penguin or Yellow Tail, Mr. Robert Parker?) Who has perpetuated the oversupply and is now using shareholders money to tear up contracts on possibly hundreds of thousands of tonnes of fruit hoping that a changed tax regimen won’t expose them to disastrous discounting? Who continues to overwhelmingly flog wines whose only claim to geographic provenance is Southeastern Australia, South Australia and Australia?

In Australia, wineries and grape growers pay a bewildering number of levies to support research, marketing, regional promotion and political representation for industry bodies. At the state and regional level these tend to be voluntary. “Voluntary” means that you have to pay but that you can ask for your money back.

The regional associations are the (so far) publicly unmentioned bulwarks in this debate. These widely supported associations were created largely to brand and promote Australia’s wine regions. Given the largest companies’ preference for multi, super and non-regional branding (Jacobs Creek, Grange, Yellow Tail etc.), the regions organised themselves to give their wine and grape producers additional brand equity and awareness in world markets.

The Barossa and McLaren Vale have  headed the list of Australian exports by value for this reason for yonks despite the presence of major winemakers making non or multi-regional products in these regions. A recent study undertaken by the South Australian government discovered that every levy dollar paid into the regional association in question paid back eight or nine dollars in value. This must be the best ROI in the entire Australian wine industry bar none. This study was undertaken because an un-named “major” wine company doubted the value of these schemes. Oddly, you don’t hear much about this report from the major wine companies. “Why” you ask, “why”?

When I was the Chairman of the McLaren Vale Wine Grape and Tourism Association a few years ago, we restructured our funding model with the consent of the entire local wine and grape community. Basically, if you make wine in McLaren Vale, you now pay a levy of about $10.50 per tonne. If you grow and sell grapes here, you now pay a levy of about $7.90 per tonne. (This evens up in the end because about 30% of winery production is from their own fruit on which they pay no levy.)

Finally, we put a cap on the total amount any one company would pay of $30,000 per year because Treasury and Constellation refused to pay more. For example, without the cap, TWE would have been assessed at about $70,000 per year at the time. It was made clear to me that the government would not introduce the enabling legislation unless Treasury was on board despite it being the nearly unanimous will of the rest of the community. It’s a funny kind of democracy we live in folks where one company has a veto over an entire region. This “veto” is apparently in place at every level of the national industry – regional, state and federal. As a result, while a major wine company can block progress outside the scope of its business that it believes inimical to its own interest, it is free to pursue any interest it likes on its own without molestation.

To get this new levy implemented required extensive community consultation, numerous letters, mail-outs, emails, open town hall type meetings, one on one meetings, lunches, PowerPoint presentations, etc. When we had all that was required by the government, I wrote to the Minister with evidence of all of our consultation efforts to request that the enabling legislation be introduced.

Then the call came.

One levy payer had requested that we discuss some of their “concerns” before the Minister would consider our request. The levy payer was Fosters’ wine division (now called TWE).

In a one-hour phone call with a still employed TWE senior executive, I suggested that the $40,000 discount they were receiving as a result of having “veto power” was pretty rich but, if they supported the levy, I would consider their concerns. Their first concern was why there wasn’t a (then) Fosters employee on our Board. I explained that we have a democratic system of representation to our Board and that Fosters needed to have a candidate popular enough to get elected. Their other idea was about “rationalising” overheads across regional associations. After listening to their concerns, I asked that if consolidating overheads was such a good idea, how come Fosters / TWE had lost 4+ billion dollars employing exactly that strategy in their own business?

The net of this tale is that every grower and producer in McLaren Vale agreed to pay the same levy rate to market the McLaren Vale brand worldwide bar one – Fosters/Treasury. In a country that worships the “fair go” and hates tall poppies, this is disappointing stuff.

Who is the “parasite” in this collective marketing effort Wolf?

The “non-majors”?

As my much more intimidating mother would say to you, “you should be ashamed of yourself.” And, you would cringe, old boy.

This is also the case in Wolf’s beloved Barossa. There the gap between total theoretical financial obligations and the “cap” is enormous for a number of companies including Treasury and Orlando. I don’t know if the big companies have “caps” with any of the other levy funded bodies but nearly every levy, export charge and rule etc. is somehow tilted against the little guy or tilted in favour of the “majors” that Wolf Blass seems to think provide so much unrequited generosity.

But, for Wolf, the “non-majors” are the parasites.

Given his cavalier disregard for these facts, will the results of Wolf’s “gift” to fund an investment bank run review of the national industry be any surprise? It will be used to give air support to the softening up barrage that Dearie and now Blass have already delivered. Expect the recommendations to be almost exactly what Dearie and Blass have been saying for some time now.

Expect WET tax “reform” to benefit large wineries with high value products while simultaneously hurting small wineries with high value products, demolishing those with only low value fruit and wine, encouragement to consolidate multiple “brands” into fewer companies, “rationalizing” whatever levy and body they feel like rationalising, more Wine Australia funding support for the “generic” brands at the big end of the town, etc.

One final coincidence – the South Australian Wine Industry Association is currently asking for submissions regarding the WET tax closing 30 August 2013. According to Wine Australia, Stuart McNab, Chief Supply Officer of Global Wine Production at TWE has been the President of SAWIA since 2009.

Best of all, there will be lots of “transactions” for investment bankers (such as those who wrote the report) between newly impoverished small producers with high value brands and you know who. Given Treasury’s cash heavy and debt free balance sheet, the only way they can improve their key operating ratios for investors will be to employ debt to leverage their balance sheet. While this is just the nature of markets, is it any wonder TWE has held off splurging so far when the pickings are about to get so much better? And, just as good, if they don’t get better soon, TWE will be none the worse off. It’s a “heads I win, tails you lose” bet against the rest of us. You can expect this.

I, on the other hand, can expect a call (or two) from Treasury. And, there will likely be calls for me to step down from the Board of the MVGWTA and all manner of things. But there will be no libel charges. I’m just connecting existing dots and past behaviour and guessing at the future. The majors have worked for years to deliver the hammer blow they seem to hope for from this report during this federal election. They will not back off sheepishly.

Most wine growers, wine writers and, even, relevant government departments live in abject terror of the major wine companies.  Most winemakers just try to stay out of their way while the “major” print media firms would find scratching by that much harder than it already is if they come out against these big advertisers. In fact, it’s nearly a perfect storm – virtually everyone with interests different to the major wine companies are nearly out of business, about to get tossed out of office or hurting badly.

The Blass report will only be about obtaining comparative advantage for large incumbents who believe the pie to be shrinking. It will not be about baking a bigger pie for the Australian wine industry through better thinking, better positioning, better grapes, better wine, telling better stories about ourselves or leveraging Australia’s regional brands requisite to marketplace success worldwide. It will be about shifting the remaining resources they don’t already control into their control. It will be for all the marbles they want in their bag.

While it is obviously a lot more fun for “major” wine company executives to work on takeover deals with investment bankers buying weak competitors than it is to figure out how to tell the world hundreds of interesting new stories about Australia’s great wine regions, amazing personalities and interesting differences, a few executives’ “need for speed” is no way to run an industry.

It bears repeating that the wine consumers that Australia needs to connect with worldwide are highly educated people who presently don’t think much of the generic wine brand Australia. “Generic” campaigns will do nothing to draw them in to a brand they think poorly of. But they will buy quality products with authentic and engaging stories from “somewhere” (not just a country) readily. This means investing in many differentiated regional stories and bodies to promote them, not rationalised top down corporate strategies led by investment bankers and accountants. We’ve already tried that once before. It led us to where we are today.

Treasury’s great Australian stories are Max Schubert and Ray Beckwith. Some considered Wolf Blass one before he revealed himself to be so much less last week.

Stay tuned and get involved. Or, if you are a wine or grape producer with quality assets, start counting how many sleeps are left before the wolf comes to your door.

The Wine Rules – The Degree of Difficulty

In my pre-teen years it seemed that if it wasn’t the about the fastest, highest, strongest, furthest, it just wasn’t sport. I think it was Olga Korbut that first caused me to have some doubt about this and perhaps Dorothy Hamill that crushed the thought forever.

Simply put, there are sports and events that require judging to establish the “best.” The most common method they have for doing this involves requiring a compulsory set of things the athlete must do – the minimum standard for that level of competition  – as well as a scoring system for the stuff that exceeds that standard.

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In diving, there is a calculus for each dive called the “degree of difficulty” whereby a very good but very difficult dive can trump an excellent but technically easier dive. The converse is also true which makes an athlete gamble with self-knowledge rather than with the judges. Moreover there are some statistical “fail safes” put in place where there are frequently five to seven judges scoring and the highest and lowest scores get thrown out and that sort of thing.

It’s a process that has been debated, refined, studied and statistically analyzed for favoritism and accuracy over thousand of events over many decades. No one seriously objects to this state of affairs. It doesn’t make everyone happy every day but it makes sense and largely works.

Louganis

Now imagine a slightly different state of affairs where a few judges passed in scores on each contestant based on just three physical qualities or properties. And, that there was no weight given to the difficulty of the performance.  What about an event where a single judge just writes a few sentences describing the dive or performance and hands out a score out of 10?

To me, the former scenario sounds more like Australian Idol or MasterChef, and the latter more like a film review rather than a properly judged event. Dare we suggest that the former is also a bit like a wine show and the latter a bit like a wine critic?

My point is not to cane wine shows or critics. There are very good reasons for both to exist, continue and improve. There are also very good reasons to scrutinize both – and for both to welcome the same scrutiny they offer to wine – without fear or favor in either direction.

Without debating the merits of each (for the record – between the two I tend to prefer better critics mostly because they advance a wider discussion about particular wines of merit than shows), I think we can all accept that they are often mutually reinforcing institutions for both good and bad principally due to the overlap of those performing the judging.

Operating from the following premises, we can conclude certain things:

Premise #1 – Variability of prices and qualities of wine are high as well as a large number of brands, varieties, etc. In short, there is too much information for the consumer to process objectively in order to definitively avoid bad or potentially embarrassing purchases. Conversely, they are not always able to make good choices with assurance.

Premise #2 – Most wine buyers like to find high quality wines at various price points. Wine show winners and high scores provide some assurance to do so. As a result, there is a significant premium (either in assurance or price) for producers obtained by wine show trophies and high scores.

Premise #3 Judges and critics can only be expected to judge entrants or submissions, not non-entrants or non-submitters. Many wineries choose not to submit / enter. As a result, incomplete data sets and imperfect benchmarks for judges / critics are the norm.

Premise #4 Due to seeming or actual randomness of results inherent in shows and reviews, certain unintended behavior is consequential for entrants.

Premise #5 Most wine critics are (were) paid by media companies. Most wine judges are not paid despite often being the same people.

judges

Conclusion #1 The potential reward for a wine of lower quality or of relatively lesser expense getting lucky at a wine show far exceeds the entry fee and / or the risk of not getting lucky because the producer already knows (or should know) the unhappy truth about the wine’s merits.

Conclusion #2 The risk of economic or brand damage to a very good or very expensive wine getting poor marks at a wine show  far exceeds the entry fee.

Conclusion #3 Because the number of undistinguished entrants naturally far exceed the distinguished, and wine shows charge fairly hefty entrance fees, most wine shows are unlikely to go out of business for any reason unless a significant portion of entrants believe that shows offer them no potential credibility. In short, the wine show game will keep spinning pretty much without respect to  its relative rigor, credibility or transparency.

Conclusion #4 Professional wine journalists / critics, on the other hand, have a problem. Media companies are shedding every cost they can at the same time that free wine blogs erode the market for paid wine journalism. In the parlance, critics have a “business model problem” if they do not have a subscription revenue stream to underpin their independence.

Conclusion #5 While wine shows are big (and still growing) money makers for many organisers, most are steadily losing the credibility sweepstakes for reasons such published research suggesting they are little more than guessing games.

glasses and classes

The capital city wine shows are big money spinners typically owned by the royal societies or fairgrounds. While this is the same for regional shows, the regional shows tend to plow the money back into regional wine promotion, education and the like. How the substantial profits of the capital city shows are used to benefit the wine industry is less clear. This near total lack of financial transparency does little to add to the optics.

The solution of employing newly starving critics as professional wine show judges has merit but there are cultural issues to manage such as the “getting eagles to fly in formation” problem. Traditional critics are not necessarily attuned to consensus decisions or acceding to senior judges. The bigger problem seems to currently be that paying judges could raise show costs and thereby fees which could decrease revenues through lower participation.

So how else could we resolve the tensions in these unintended consequences? On one hand, the wine shows could find a way to make shows more appealing to their current high-end non-entrants to raise revenues. On the other hand, a too rigorous show might discourage entrants who are only “hoping to get lucky.” Given trade-off effects like this, it is understandable how shows got in the pickle they are in.

wine show bottlesMy modest proposal is that if wine shows wish to be taken as seriously as it seems they wish to be as well as maintaining the serious cash streams that pour through them, they should incorporate systems similar to those employed in athletics to provide additional rigor and logic to what is ultimately a subjective and contextual process.

In tennis – even at the major championship level – the umpires and line judges were amateurs up until maybe thirty years ago. That head umpire that McEnroe was screaming at the US Open was likely to be a stockbroker or doctor he knew from the Forest Hill Tennis Club.

McEnroe

Once tennis professionalized officiating, quality improved dramatically. Once professionals started getting judged against videotape of matches, quality improved again. With the Hawkeye system, it has improved still more. Is more rigor what wine evaluation needs? Despite the “in or out?” binary / digital nature of line calls not being akin to the multifactor / analog nature of wine evaluation, the professional standards that tennis officials are held to offer much to learn from. Moreover, the streams of data that emerge have created instant feedback loops that change how the game is played in realtime.

tennis

From the “scored” sports, what if we borrowed something similar to the “degree of difficulty” concept? For example, wines from difficult vintages / regions that stand out could be recognized as such. Similarly, single variety and / or single vineyard wines are much less forgiving to make than blends of either and should be acknowledged for same.  Ditto for wines certified organic or biodynamic.

scoresheet

Another proposal would be to include a few controlled groups of samples in each show with all results sent to one statistician or economist for analysis. Enough data from enough shows would provide a great area of study for a statistician or wine economist to study over long periods of time and could be relatively inexpensive as a result. In fact, it could be an entire career in a much more interesting field than the ones many statisticians toil in.

That some judges view the multi-year statistical work done at wine shows in California as a “gotcha” bit of tricky business rather than an embedded step of a long-term quality improvement process seems out of step with embracing the bits that science does well. Were a tested data driven approach systematically embraced, the effects could be profoundly positive for the industry as a whole.

For instance, judges could have a career “report card” that assesses their scoring both in relation to the other judges from each show as well their consistency against the control group wines both on the day and over time.  The data would change over time offering insights into the judges’ capabilities and professional development. It could throw out the high and low scores to get better long-term readings, etc.

This approach would allow individual judges’ variances to be assessed at multiple shows with an annual assessment or rating as with sports officials. It would provide a platform for assuring entrants of the relative merits of each show, individual judges’ development, a rated field to work with in assembling the best judges for shows, the basis for a pricing system for shows and judges, etc. While it could be as revolutionary for wine shows as “Moneyball” was for baseball, who  is prepared to be the wine industry’s Billy Beane? (If it is any encouragement to the timid, Brad Pitt played Beane in the movie…)

BillyBeane

Pitt

With transparent and higher quality assessment comes the opportunity for value creation at shows currently unimagined. For instance, specialization around quality, region, variety etc. could all be big (think global) revenue opportunities for judges and shows that create more value for brands and consumers with higher levels of assurance and interest.

My question is whether judges are willing to receive the level of assessment and scrutiny they regularly apply to wine to get to a brave new world where the show system can afford for them to be professionals? To do so, they would have to let the wine (and the data) rule.

My opinion is that we are currently only scratching the surface of industry value creation and are letting tradition function as an imperfect proxy for excellence. Media, critics and wine shows still have a lot of competing and collaborating to do to transcend the current approaches and create the value and interest that the consumer craves.

Let the innovation begin.

What do you think?

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