The Wine Rules

WET – Can We All Agree on This?

The Australian Federal Government has requested submissions regarding its proposed policy changes on the Wine Equalisation Tax (a 29% value added on at the wholesale level) Rebate. The rebate provides for the first $500,000 in WET tax collected be rebated to all ‘winemakers’ who pay the tax regardless of the type or packaging of the wine. The proposal can be viewed here:

http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2016/Wine%20equalisation%20tax%20rebate/Key%20Documents/PDF/WET-Rebate-Implementation-Paper.ashx

The purpose of the rebate is to support rural communities regardless of where the winemaker, lives, works, employs people, makes wine, etc. The government is proposing to reduce the $500,000 rebate to $290,000 over the next few years, limit the rebate only to “branded” wine (e.g. no bulk or cleanskin sales apply) and possibly add some “asset tests” such as owning or leasing a winery or vineyard, etc.

The potential effects of these reforms have been modeled inasmuch as the government believes that it will increase tax collections by $300 million. As a bit of grease, the government is giving $50 million dollars to Wine Australia to re-start the Australian export engine over the next few years. There is no evidence that these proposals have been modeled as far the short or long-term effects that these proposed reforms will have on the industry.

So, while this proposed reforms will protect the smallest (sub $1 million per year in sales) wineries, reducing the rebate will seriously impact the wineries that sell between $2-$5 million of wine per year most. $2 million businesses will effectively losing $210,000 per year in the change or, over 10% of their revenues. A $5 million dollar wine business will lose the same $210,000 dollars in benefit but only about 4% of its revenues. It is not a tax change designed to bite evenly. That behemoths like Treasury Wine Estates, Accolade, Australian Vintage and Cassella will still collect $290,000 in rebates seems perverse.

The asset tests that seem most controversial are perhaps most interesting. While the law needs to be applied evenly, it is a clear case of established companies trying to squash innovative, high quality competitors before they grow. On the other hand, for ‘asset free’ or ‘asset light’ wine businesses to contend they make an equal contribution to rural economies as those with significant capital investments, or that they compete on a level playing field with those businesses, is simply false. They don’t. They benefit from inefficiencies created by over-supply and over-investment caused by poor government policy. To the extent that they take up some slack in the system, they are of marginal positive net benefit economically. From an innovation point of view, they are priceless.

With respect to eliminating the rebate on bulk and unbranded wine sales, there seems to be near universal agreement that this is a good place to start.

The torturous road to this policy “place” started out years ago as a quest to end the persistent oversupply of grapes that is bleeding almost everyone in the industry dry. In every instance since the implementation of WET in the 1990’s, tax policies have had political origins rather than policy origins. The Winemakers Federation of Australia and the largest individual companies have lobbied for, and obtained these policies with disastrous long term outcomes. Historically, those companies are Treasury Wine Estates (Penfolds, Lindemann’s, Wolf Blass), Accolade (Hardy’s), and Pernod Ricard (Jacob’s Creek, Orlando). In the 80’s and 90’s they were called the PLO.

So it is this time. The net effect of these changes will be to reduce grape prices and competition (eg the number of wine companies, particularly regional ‘smallish’ family owned ones or highly innovative asset light ones) significantly without hurting large and medium wine companies at all. In fact, these changes will force grape growers back into the clutches of the large companies who, by and large, operate with very little competition on a region by region basis with the advantage of perishability to control prices paid to growers. Moreover, the low priced grape door will be opened for the large retailers to make an enormous push into the market wreaking havoc that may never be unwound.

While these policies will inevitably, finally, reduce supply somewhere, it will reduce the supply of those that can’t afford the step change rather than the lowest value producers who cause the overwhelming majority of the oversupply while weakening growers in all other regions and sectors. In short, its an unguided missile launched by the biggest companies and the WFA (whose members only constitute 20% of winemakers and 25% of the national grape crop) to do maximum harm to everyone else.

So, in the long-term interest of the industry and not just the big boys, I have a modest proposal:

  • Eliminate the rebate on bulk and unbranded wine. Almost everyone agrees.
  • Ensure that large retailers are not the beneficiaries of the change by implementing rules to ensure that winemakers own all ‘brands’ receiving rebates and that all wine brands receiving rebates are freely available in the marketplace and not simply captives of the large retailers.
  • Start a policy driven review process of the tax arrangements for the industry conducted by non-political policy makers in government to model various policies and scenarios of outcomes of those policies (understanding worldwide competition, currency, etc) to be completed within 12 months with recommendations to be made in the long-term interests for the industry and country alike on a triple bottom line basis. Only the government has access to enough data to model these.

Then, we have this conversation.

The proposed changes are a power grab made without proper information, modeling or consideration of their long term outcomes. The support of the WFA should be a warning to all – they haven’t made a policy call that worked out well in the long term for 25 years.

And like all, consultation processes, very little is likely to change from the proposals except to remove a few onerous bits to show that the pollies “listened.” Don’t blame the party in power. This is how they all do.

We need a dynamic, innovative and profitable industry for growers and wineries alike.

The least we can do is agree to what we agree to and demand serious modelling and analysis, not political back room dealing. So, lets give this on-line democracy thing a whirl…

If you agree, have a thick hide, skin in the game and an Aussie accent, you can start an online petition. You only have until the closing of submissions on 7 October 2016 to make a difference. If you do, I will happily publicise your effort as will most of the Australian wine media. See below to get started…

www.petitiononlineaustralia.com/

https://www.change.org/en-AU/guides/start-your-onlinepetition

Please get out in front on this. We have your back.

 

Hack the System

In an effort to head off ten more years of federal wine industry policy that delivers the wrong result(s), The Wine Rules is proposing a wine community “hack” of the new rules that the government has proposed. The goal here is to identify the holes in the hull and to make suggestions as to where the mines in the harbor might be before we set sail.

For instance, one goal here is to keep “Colesworths” from profiting from the WET Rebate. Another is to make sure folks have real “skin in the game” in the wine industry. Moreover, the new rules suggest that there be some sort of winery ownership or lease documentation test to be considered a winery.

Given this, why couldn’t the following scenario start occurring 1 July?

Large grocery approaches a grape grower with the following deal:

  • Grocery leases rights to a grocery owned “brand” to a grape grower
  • In exchange, grower agrees to sell x cases of y wines using aforementioned grocery owned, winery leased branding on bottles to said grocery at an agreed price.
  • Grower takes grocery contract to bank for finance
  • Grower purchases or leases some winery equipment and / or winery space to produce the contracted quantity of wine
  • Grower hires a winemaker pre-approved by the grocery customer to see wine through production
  • Grower bottles and sells wines to grocery and collects WET Rebate.
  • Grower gets paid by grocery. Rinse. Repeat.

Would there be anything that would be wrong or illegal about this arrangement?

Does this arrangement achieve what the government intended?

And, do you think that the grocery factored in the WET Rebate that the grower would receive when it calculated the price it offered the grower knowing that the grower had no where else to sell their fruit?

In other words, is the grower any better off?

Is the “branded” wine industry any better off?

Did the grocery profit from the WET Rebate or not?

How could the government ensure this didn’t happen?

In my view, this arrangement would be totally legal. And, totally wrong. For everyone. Perhaps even, the grower.

If you think companies and people could rip-off the new system, how would they do it? Who would do it? And, what unintended consequences could result from the proposed rules?

We’ve all whinged enough – let’s do something positive for the industry and the government and “hack” the system before the industry, and a lot of good people, get buggered again.

The Wine Rules will publish any sensible letter sent to us that does one these things (identify rip-offs, unintended consequences, who would benefit and how the government could ensure it didn’t happen) over the coming weeks. We will collect all responses (published or not) that we receive and provide them to the incoming government (and to the general public on our site) for their consideration in a few weeks time.

Last, if there are any people or organizations that wish to offer up some prizes for the best answers, we’d be happy to reward the smartest and (and funniest) wine hackers out there.

Have a hack by replying to this post using the buttons at the bottom. Or, email me at thewinerules@gmail.com if you prefer.

If you do not wish your name to be used, we will keep it confidential at all times provided you indicate in writing that this is your wish. Or, just don’t provide it…:)

Hack away!

Dudley

Below are the rules announced by the government going forward:

Changes to the WET Rebate

As a first step, the Turnbull Government will introduce amendments to strengthen the associated producer rules in the WET legislation. The intent is to stop multiple claims for the WET rebate by complex structures of associated businesses.

From 1 July 2017, the WET rebate cap will be reduced from $500,000 to $350,000 and from 1 July 2018 to $290,000. Tightened eligibility criteria will apply from

1 July 2019. Around nine out of ten current claims are for less than $290,000.

A phased reduction of the cap will help affected winemakers transition to the new arrangements.

Under the tightened eligibility criteria, a wine producer must own an interest in a winery and sell packaged, branded wine domestically.

The requirement to own an interest in a winery ensures that the rebate can only be accessed by wine producers who have a stake in the wine industry. This approach addresses stakeholder concerns about ‘virtual winemakers’ accessing the rebate.

Restricting the rebate to packaged, branded wine would implement the recommendation from the wine industry’s peak body, the Winemakers’ Federation of Australia. It addresses the wine industry’s concern that bulk and unbranded wine product contributes to structured arrangements that exploit the rebate.

The Government will undertake consultation to settle final details on the tightened eligibility criteria, including the definition of a winery.

The changes to the WET rebate will equally apply to producers of cider, perry, sake and mead. The changes will apply to New Zealand wine producers who claim the rebate under trade agreements.

Budget impact: Changes to the WET Rebate

The changes to the WET rebate are expected to raise $300m in revenue over the next four years.

http://www.budget.gov.au/2016-17/content/glossies/tax_super/downloads/FS-Tax/10-TFS-Alcohol.pdf

WET, Rebates, WFA and The Two Way Bet

Part Two – One Way Out 

Q: What do John Howard, Bill Clinton, Richard Nixon, Nelson Mandela, John Kennedy and Bob Hawke have in common? How and why are they monumentally more important to history than the office holders who immediately preceded or followed them (Paul Keating aside)?

A: Each chose to fundamentally reverse course on a long held belief or to advocate a different policy than one held by their core constituency at a critical juncture because they came to understand that the price of a particular change would dwarfed by the price of not changing. To wit: Howard – handguns, Clinton – Free Trade, Nixon – China and EPA, Mandela – violence, Kennedy – tax cuts, Hawke – floating the dollar.

Could Howard have gotten rid of handguns by asking his Liberal and National supporters what they thought first? Nixon with the Republicans about China? But, they personally committed to a strategic shift and then convinced their constituency why it was imperative. Both did so from a point of “we have to do this.” Not, “what can we do?” Leaders who are not capable of these sorts of strategic reversals are not leaders, they’re clock-watchers.

What does this have to do with the wine industry? Everything. It just lacks leadership willing to take on its most change averse core constituents.

The wine industry has to let go of its wildly unsuccessful approach to its industry wide “group think” top-down strategic planning bias of the past 20 years and accept that there are no permanent allies, only permanent interests and focus on them. Wine companies and business models come and go but regions, voters and industry reputations are pretty much forever.

The health lobby has been viewed as the enemy of the wine industry because they advocate tax increases on wine. They fought a 20+ year campaign against Big Tobacco before winning. But when they won, they won and kept winning. Looking back, it is hard to remember what the argument was about – was it smoking on airplanes, in restaurants, in elevators and advertising ciggies to children? Which of these seem like “rights” worth defending to anyone today?

Properly considered, ad valorem taxation of wine is not a tax, it is a subsidy for the manufacture of the cheapest alcohol available in the domestic market. Defenders point to the people who responsibly enjoy this cheap alcohol as a defence against all those that abuse it as though this makes it a “right.” Just as there were “responsible” occasional cigarette smokers who didn’t light up in crowded rooms, they weren’t the reason that new rules and taxes on cigarettes were required.

Without stretching this comparison too far, the cigarette industry tried to stop all change because they knew the truth about the dangers of their products. The wine industry appears to be doing the same thing for the same reasons while making the case that wine is a somehow different and better form of alcohol that should be treated differently than spirits and beer. The only possibilities in analyzing this as a strategy is that they are A) correct in all respects and standing on principle or B) to some greater or lesser extent, wrong and protecting the status quo for as long as possible to maximise profits, etc.

Without reciting a full literature review of the harmful effects of low priced wine on vulnerable parts of the population of Australia, it is safe to rule out option A as being “true.” The problem being solved isn’t a right / wrong problem. Moreover, Government, industry and lobbies are making different cases for different outcomes. Government wants maximum employment, tax revenues, regional investment and harm mitigation. Industry wants profits and to be protected from competition. The health lobby just seems to want the wine industry taxed out of business.

Everyone can’t get what he or she thinks they want in this equation. Prohibitions don’t work. Excessive taxation doesn’t work for the same reason. And, alcohol is never going away. Its been with us since at least the time man figured out that slightly rotting fruit was higher in calories and had a little euphoric kick to it. Finally, while growing tobacco isn’t an option for most people, anyone with a jug of fruit juice or a bag of sugar can make alcohol.

What is needed is sensible policy that captures the costs of the harm done, particularly to health, in the product sold. The only way to mute the prohibitionist impulse is to embrace that it is the alcohol in the wine, not the size of the price tag, that causes harm and tax it accordingly. Just because we don’t like their strident argument, it doesn’t make the health lobby completely wrong.

On the other hand, everyone needs to recognise that the wine industry is, in fact, different than the beer and spirits businesses for a number of reasons. Wine can only be made once per year and requires substantial capital investment that is inefficiently used so its cost structure is very different to beer and spirits. Wine has a very different social role – people enjoy it as part of eating and celebrating and quite a large percentage seem to enjoy it responsibly.

It is also an important regional industry in every state as well as a large export earner for Australia. Its role in tourism, employment, taxes paid etc is enormous compared to beer or spirits. Many of the regions where wine grapes are viable are, by definition, low value agricultural areas where because of inadequate rainfall or soil fertility, they will not support much else. Finally, if well managed, it is a sustainable industry for generations to come.

In short, it is reasonable to suggest that wine should be taxed somewhat differently to spirits and beer for perfectly good reasons. Moreover, a smarter industry would be advocating better tax polices to address these issues to weaken the health lobby’s opposition as opposed to blocking, uniting and encouraging it.

With respect to oversupply, it is bleeding the industry dry on a massive and broad scale, destroy(ed)ing our reputation as a fine wine country and not made anything better for anyone except those who profit from grape growers’ misery. In a free market, oversupply would be cleared by low prices and vines ripped out until supply balance is achieved. However, a subsidy exists (the rebate) that, along with a naïve belief in an interventionist government solution and sheer desperation, contributes to the persistence of oversupply.

From a government point of view, the most important lesson should be that rorting and tax avoidance would continue to occur on a scale proportional to the scale of oversupply regardless of the rules in place. Until the oversupply is wiped out entirely, the ATO and the Australia taxpayer will continue to be a victim of bad policy as well. Nibbling around the edges with still more rules for a failed policy both speeds up the vicious cycle of tax avoidance by winemakers and enforcement by the ATO.

From a winemaking industry point of view, the best policy for reducing competition isn’t new government rules but by the market charging competitors more for wine grapes than they do in an oversupplied market. Large highly efficient operators can operate in a higher cost environment far better than smaller, less efficient competitors.

With respect to the WET Rebate, it isn’t a right / wrong matter either. The free marketer in me says that all subsidies are inefficient and will distort markets in ways not entirely foreseeable or good. The farmer in me sees the market power that one or two wine companies hold in each regional market for wine grapes to make prices over a perishable commodity and see the wine industry is nothing like a free market. So, some policy around the margins to curb the worst behavior and encourage better outcomes is desirable if it is not overly intrusive.

There are perfectly good reasons for a rebate to operate on a modest scale to support very small wine businesses in regional areas. The proposed asset tests (own or lease a winery) will be difficult to administer (the words “synthetic lease” about to start trending) and probably quite unfair. However, it is also unfair for folks with no capital investment to obtain the same benefits by “free-riding” on those with significant investments. And, if it is to benefit regional Australia, should someone receiving a rebate have to live and spend his or her money in the regions as opposed to living in the city? Isn’t the small winemaker’s daily living expenditure as much a part, or more, of a sustainable regional area as any other expense?

With respect to folks who just don’t want to change, anyone looking around the industry today that believes that the existing or proposed rules will fix the industry for the long-term better is dreaming or not paying attention. And if they are not yet at a point where their fear of not changing exceeds their fear of change, they will never get there. Sadly, not changing will be more expensive than change for all involved including the government at this stage. This industry is in deep and immediate trouble without making fundamental near term changes.

So what could a sensible new regime look like?

  • Abolish ad valorem and establish a volumetric tax under the WET regime that is not set as high as spirits and beer – say one that breaks even with ad valorem between $12-15(RRP) per 750ml equivalent. Wines less than that would rise in price, those above would decline. This will end oversupply.
  • All labeling requirements to be within .5% alc/vol (as in most of the rest of the world) instead of the current 1.5%. This will ensure integrity in the system and raise revenue.
  • A rebate set to $350,000 and indexed for those (except as in item 5 below) with vineyard and/or winery assets (e.g. personal majority control only) ownership or long term (minimum three year) exclusive leases over same. Cellar doors should be considered but would have to be owned not leased because they require far less outlay and capture the pointy end of the value chain only. This will ensure continuing real investment across the grape wine and tourism value chain in regional Australia.
  • The rebate should wind back as companies grow – above $10 million in annual revenue, they should receive no benefit. As in any good progressive tax system, the wealthiest and largest should pay a bit more.
  • The rebate should be available to those without assets (as above) who live and work in a regional area for a maximum of five tax years. After that, if they have not been successful enough to persuade a bank or investor to back them in purchasing assets, they shouldn’t continue to benefit from the rebate. This will ensure the door isn’t closed to new entrants, it will help weed out the less successful and save the taxpayer some money.
  • All rebates and assets should be somehow linked or tied to an individual’s tax file number – e.g. they should not be able to operate under multiple entities or access successive rebates every five years.

While there is something here for everyone to not like, these rules would eliminate oversupply, create and sustain a market for regional investment and generational transition, create incentives to make lower alcohol wine of greater quality and replace a culture of rent-seeking with a culture of ownership and profitability for regional Australia and the Australian wine industry.

Finally, it should go without saying that there should be some government assistance, education and re-training for those economically displaced by rule changes. The changes proposed above will provide more than enough income to do so over the short run.

This could be the basis for an industry wide approach to coming to terms with what we must do. Who wants to lead this?

WET, Rebates, WFA and the Two Way Bet 

 

 

The Real Problem – Part 1

(Despite advice to tart this post up with pictures and the like, its just a wall of words because the current circumstance is a convoluted and sad new low for the Australian wine industry. But, as a tragic who follows this rabble closely and naively thinks that hope is always just around the corner, I feel the need to report the how, who, where and why of this debacle. Even very informed people are asking questions about how the hell we got to here. I hope this helps. So get your stimulant of choice, prop open your eyelids and try to stay awake. – Dudley)

The recent changes made by the federal government to the Wine Equalisation Tax Rebate to be implemented over the coming budget years are a sad consequence of a failure of governance by the Winemakers Federation of Australia (WFA) – the government recognised “peak body” for the national wine industry. WFA represents some 15-20% of Australian wineries (and about 80-90% of the wine produced) as well as about one-quarter to one-third of all the wine grapes produced (grown by their winery members).

In classical tragedy, the sad ending is a result of a personal flaw (pride, ambition, vanity, greed, etc) or some built-in characteristic (like Achilles’s unprotected heel) that can’t be escaped. The recent changes made by the government are a result of at least one of each of these.

As to the former, WFA fell for a schoolboy’s two way bet “heads I win, tails you lose” made by two of its largest members – Treasury Wine Estates and Pernod Ricard – and, as a result, has ended up throwing most of the medium and small winemakers of Australia to the wolves. In the contorted process in between these two points, it has lost any legitimate claim to its peak body status.

What ostensibly started out as an effort by industry to end the massive long-term oversupply of the Australian wine grape market ended as a successful anti-competitive power grab by Australia’s largest winemakers endorsed by a government whose main objective appears to have been increasing revenues while those not directly responsible for any of it get punished pretty much exclusively.

While the current winners and losers seem obvious enough, the question of interest at this point in this slow motion play is this: did WFA Chairman Tony D’Aloisio and the largest wine companies actually work together to this end wittingly or, was D’Aloisio completely snookered by them? In short, is he an evil genius or, just not so smart?

The WET Rebate changes – which reduce the amount of rebate from $500,000 to $290,000 over the next few years and limits access to the rebate to those who own or lease a winery – comparatively benefits WFA’s largest members; Treasury Wine Estates, Accolade, Cassella, Australian Vintage Limited, Pernod Ricard, DeBortoli, Yalumba etc. by harming their smaller competitors. All wineries will each wear a $210,000 per year income hit (small beer to the large, large beer to everyone else) while their most innovative competitors, the small “virtual” winemakers who are bringing the wine world’s interest back to Australian wine – will get shoved to the wall through new rules limiting their access to the rebate.

For the sake of transparency, none of these changes affect our family grape and wine business directly. The only dog we have in this hunt is the desire to see Australia recognised as a great wine making nation worldwide. The changes recently set out by the government will not hasten this outcome unless significant changes are undertaken.

The winemaker fury unleashed by these changes is understandable as it punishes those who did not cause the current industry mess and obscures the real problem facing the industry: long term over-supply in the Australian wine grape market.

WFA has advocated over 20+ years for policies to create and sustain conditions of surplus in the grape market to provide low and stable prices for wine grapes for its winemaking members. In fact, the only time(s) that WFA advocated for a reduction in supply has been to independent wine grape growers to reduce their crops as the surplus had grown so large it was negatively impacting WFA’s member wineries.

WFA advocated accelerated depreciation for vineyard investment to support massive planting growth in the 1990’s and early 2000’s. This policy was a result of the rapid run up of grape prices as Australian wines exploded into export markets in the low value dollar environment of the early and mid-1990’s.

The strategy was to get tax breaks (this is what industry associations exist for mostly) for WFA members to expand profitable businesses by reducing the cost of fruit through supply increases. While originally envisioned as a tax break for wineries to plant more vines, it turned into a vine planting cum raid on the ATO principally organized by the wine industry’s own employees for their personal gain both inside and outside of their day jobs.

Two common examples: wineries offering long term fixed price supply contracts to managed investment schemes managed and / or owned by their own employees (and their family members) or when winery employees would buy cheap land and sell it to a buyer with the promise of long term contract if they paid dearly and / or with a contract to employ contractors controlled by the employee or family members, etc. Many of the “great” names of the wine industry profited handsomely from this trade at the taxpayers’ expense, some even collecting gongs for their “services.”

Eventually, this got too smelly even for the winemakers who realized that the wrong sort (e.g. non-winemakers, particularly grape growers) were profiting from this scam and finally asked that it be curtailed in 2004. In order to ensure the right sort (winemakers) were looked after and that the “excess” surplus went away, WFA sought and obtained the WET rebate of $290,000 (later increased to $500,000) on wine sold thinking this would create the right incentives and reward their members.

Predictably, grape growers (and other sorts of rent seekers including retailers like Coles and Woolies) then became “winemakers” to obtain $500,000 per year in tax rebates. Winemakers of all sorts would blend and buy and sell and buy and sell the same wine multiple times to get multiple rebates. Even employees of wine makers got in on the scam by “making” and “selling” wine to their employers to get the rebate as part of their compensation package.

Another unintended consequence of long term oversupply and low prices was that a new generation of winemakers was able to start making very innovative wines with very little investment and collect rebates on their sales. Some of these wines have started to capture the world’s attention for Australian wine after a decade in the wilderness.

While legal at the time, all of this behavior reflects the questionable logic of governments endorsing peak bodies and accepting their guidance in the management of sectors of our economy. While a peak body satisfies government’s seemingly sensible request to industry to speak with “one voice,” governments are absolved from making the hard decisions between competing views of the future within an industry. When things go right, it is the politicians’ success. When it goes wrong, governments have industry to blame.

As to the latter type of tragic flaw, WFA is composed of three “colleges” (Large, Medium and Small winemakers) of which four representatives of each are represented on the Board. In turn, the WFA constitution requires the assent of 80% of the votes cast to enact policy. 80% of 12 equals 9.6 votes. Assuming that the law of rounding is applied, ten votes are required to approve smoke-o.

The tragedy is that in preventing any two colleges from running roughshod over the third, the entire body can do very little that is progressive or collective as would befit a body of governance such as WFA. This structure tends to benefit large incumbents because incumbents prefer that progress be profited from and not shared with others while the smallest fear the economic power and influence of the largest. And, it can permanently stall necessary step-change recommendations like volumetric tax that might get over the line with a simple majority.

The crux of the problem is not that WFA Board are bad or dumb, it is that the WFA Constitution is a formula for deadlock, not governance. While they can generally agree on the need for more tax breaks, less competition and that independent growers should pull out their vines, they lack a structure for fair and reasonable strategy and policy to evolve over time as industry needs change.

Keep in mind that the WFA only represent their member companies. Not the 80% of wineries who do not belong, nor the businesses of 70% of the wine grapes grown (that’s the role of the underfunded, dysfunctional and ineffective WGGA), nor the regions where grapes are grown and made into wine. Taken together, these deficiencies render WFA’s current claim to industry governance inadequate.

One of the foundational crimes of the WFA was the negotiation of a 26% “ad valorem” wholesale sales tax (WET) on wine in the 1990’s along with the depreceation scheme. At the time, the reigning companies (Penfolds, Lindemans and Orlando, or, the “PLO”) all had large, low value (bag in a box) wine businesses and supported this method.

Then WFA President Brian Croser’s recollection is this:

“On the tax issue the original 1993 Dawkins proposal was to instantly increase the sales tax on wine from 20% to 31%, which could have had dire consequences and we fought that back to a staged implementation to 26%. The large companies negotiated the vineyard depreciation offset.”

There is no record of Croser or WFA arguing against the depreceation offset publicly as far as I can find. That he was totally unaware of this side deal seems improbable, but there you are.   The parallels to Tony D’Aloisio and 2016 could not be clearer.

What the poorly conducted debate over the last year has made plain is that all sectors of the wine industry have cause for complaint and that no one set of policies will satisfy any one sector. The scenario of “why try to please everyone when everyone can’t be happy?” has opened the door to these new rules for the government.

How the present government landed on the present solution is pretty simple; the need to appear to be “doing something” expedient (e.g. before an election) that appeased those with the most access to government while the prospect of additional tax revenues trumped solving the hard (but solvable and controversial) problem of oversupply that they were meant to be solving with industry. How the problem being solved morphed from oversupply into too much competition bears recounting.

In September 2011, Treasury Wine Estates went “rogue” and announced it desire to see major tax changes. These calls went nowhere until May 2015, when TWE (Penfolds, Wolf Blass, Wynns, et al) and Pernod Ricard (Jacobs Creek) went outside the WFA tent together and announced that they would campaign with their own money to 1) get the ad valorem tax changed to a “volumetric” tax (a tax on the amount of alcohol in a bottle rather than the value of its contents) and 2) to eliminate the WET rebate altogether to get rid of distortions caused by virtual winemakers, retailers and rent seekers. Interestingly, in June 2015, Pernod publicly defended this approach by saying that “The single biggest challenge facing the Australian wine industry is the ongoing, unsustainable oversupply of lower-quality grapes and wines, which harms both its image and financial performance.”

Around that time, Australian Vintage put its membership “on hold” with WFA in order to represent its own (presumably differing) views to government. In any scenario, if the WFA lost two of its largest members, it financial capacity to continue and its claim to represent most of the industry would be wrecked. Having temporarily lost one of the largest, it appeared to believe that it was doomed to sue for peace with the other two if it was to continue as an organisation. Ever the corporate lawyer, President Tony D’Aloisio started imagining ways to paper over the differences.

What was not inevitable was what the terms of the peace would be. Would TWE and PR be happy winning just one side of the two way bet or would they demand the whole enchilada? Or, was the terror of volumetric tax only a cudgel used to obtain wider rebate reforms than WFA would agree to in order to comparatively benefit large companies at the expense of everyone else? Or, were they bluffing?

Without bluffing in response, D’Aloisio had the choice to publicly say that if TWE and PR wished to go rogue on these issues, they did so without the support of the WFA Board and that WFA would oppose these efforts. Strategically, TWE and PR only really need WFA 1) for the base of political and multi-state / community support (e.g. voters) that its other 400 members provide and 2) to make sure the industry does not cooperate in ways harmful to them. What happened instead was pathetic – D’Aloisio blinked.

Oddly, the most economically sensible (and politically difficult) solution for the entire industry was the proposal to change the taxation method to volumetric. Given that two-thirds of Australian production is for export, the taxation method is of no consequence to this portion of the market.

To the exposed one third of the industry remaining, it is clear from the research that high value grapes and regions create jobs at a rate of about 4 times per tonne to that of low value regions while employing as little as one-eighth of the water for the same value of grape output. The University of Adelaide’s Kym Anderson’s encyclopedic research on this topic “Economic Contributions and Characteristics of Grapes and Wine in Australia’s Wine Regions ” from April 2009 is unequivocal. As this research was partially underwritten by WFA, they can’t claim to not know this.

For those who claim that a volumetric tax would wreck inland communities etc, it just isn’t so. Some grape growers would exit grapes and enter another agricultural sector, some would shift to a different level of value production by changing to less water intensive and climatically appropriate varieties or quality grades, some would carry on as they have, many would add value by making wine, building cellar doors etc. and some would leave the business.

Given that these regions are currently poorly differentiated and being financially bled to death en masse, a phased in volumetric tax actually presents real opportunities for change. However, to erect new barriers to these businesses evolving and entering the value added branded wine sector would be doubly cruel policy. As to what an alternative and prosperous future looks like, The Ricca Terra Farms and Chalmers businesses are great inland success stories that should be studied and emulated. You can make money there in this business environment.

To the extent that there would be low value grape growing and winery job losses, they would be replaced by those generated from additional plantings of just one fourth of as much grape volume using one eighth of the water in high value regions. Moreover, the enormous quantities of irrigation water saved could be used to grow food, jobs and economic diversity in inland regions instead of surplus wine grapes that sell as wine for less than bottled water as at present.

By way of example, McLaren Vale has cut nearly half its grape production in the last ten years but emerged with a stronger and more successful industry by focusing on higher quality and greater diversity of grape, wine and tourism experiences. This, in turn, is attracting world-class investors who are buying and planting vineyards again. We’ve slowly learned that the only way forward is to grasp the nettle of change, not avoid it.

On the consumer side, a volumetric tax would spur demand for higher value wines (e,g. over $15 p/b) as their retail prices tumbled due to reduced taxes per bottle. Higher value wine would steal share from other drinks sectors as taste became the basis for consumption. Competition and investment in this sector would increase significantly. There is already a looming shortage of high quality fruit that is causing smart wineries (Casella (Yellow Tail), Jackson Family Estate, (USA), Delegat (NZ), Seppeltsfield (Barossa) and others) to purchase large vineyards in high value Australian regions to guarantee future supply.

On the other hand, goon bag wine would increase in price and cause consumers to contemplate which form of alcohol they preferred based on taste rather than price. But goon bags will not disappear. Not ever. Lots of people like the flavor and convenience of bag in a box wine and will pay more for it.

Numerous reviews, including the Henry Tax Review, have suggested ad valorem be changed to volumetric for many economically efficient and sensible reasons only to be ignored because of some large companies and WFA’s lobbying to maintain ad valorem. Code words used like “caring for regional Australia and inland communities” unfortunately mean “keep the surplus”, “keep the wine industry’s monopoly on low priced alcohol” and “don’t make us change.”

Most importantly, the health lobby has made legitimate points in its campaign to change tax on wine in Australia. It is a well-funded lobby that will not quit. As with the tobacco industry, what will bring them eventual victory will be the toxic equivocations of the wine industry’s leaders, not the toxicity of the wine industry’s products.

To fight to maintain a permanent large price advantage to sell alcohol in large (millions of units of 3-5 litre boxes) formats to the most vulnerable in society is to abandon the moral high ground to those who might do our industry much more serious harm than sensible self reform would entail.

The current leadership of the wine industry has somehow captured the triple crown of bad governance: economically non-adaptive, strategically wrong and morally odious. If the wine industry wishes to prosper over the long term as a respected industry in Australia, it needs to reverse all three of these positions at speed.

Without recounting the multiple industry and government initiatives including a Senate Inquiry, suffice it to say that WFA was in a fight for its own survival, not a fight for the best policy or for its 400 members.

When it put out a mad list of things that 80% of its board could agree to (including less competition and more tax breaks), the government implicitly rejected the WFA offering by establishing still another committee of industry folks (including TWE, Orlando, DeBortoli, Yalumba and others) to make recommendations to it via the Treasury instead of through Agriculture.

Instead of saying to government that “the WFA has made recommendations that its entire Board supports” and staying out of it, D’Aloisio joined this new committee when invited. Had he stayed out of it, he would have undermined the new group’s legitimacy and been able to make a principled case on behalf of WFA’s members against their eventual recommendations.

However, by joining, he lent WFA’s imprimatur to the new group’s authority and allowed his own small and medium members to ultimately get the shaft. While we can only speculate why he made such a poor decision for his membership, it is a reflection of his failure to play the two way bet from a position of principles or courage in the first place.

This committee’s findings, combined with the Senate Inquiry, gave the government scope to back policies preferred by the big end of town. Given that the Government’s prime short-term concern is revenue, this was a seemingly expedient and reasonable solution. However, these new rules will prove to be not only bad policy and bad politics, they will be a nightmare to enforce.

Had WFA lost on ad valorem, it would have lost its other large members – AVL, Casella and, perhaps, Accolade. Instead, it got to keep all its big members (despite the fact that they do not agree on the big issues of oversupply and taxation) while sacrificing its medium and small members interests.

All of which is to say that this convoluted saga served the biggest companies perfectly: everyone has forgotten what they were supposed to be doing – eliminating the long-term oversupply of grapes that is destroying the industry that was both caused and perpetuated by WFA over 20+ years.

Instead of a sensible policy emanating from those granted “peak” authority, the wrong issues have been now been settled by the government punishing the exact people and businesses who had little or nothing to do with causing the problem – small and medium winemakers – without solving, let alone addressing, the what needs solving – oversupply. At a minimum, government was not well informed by industry. As the “peak” body, only WFA and its president can be blamed for this.

It is cheap and stupid to characterise this as a purely political issue, or to demonise one political party or the other. Neither major party has implemented a broadly sensible set of policies with respect to alcohol and taxation. Nor have they declared what the tax and rebate is explicitly for and against; harm mitigation, general revenue raising, demand management, etc.

Governments are responsible for representing the country, not just one set of interests or to solve just the easy problems or to raise revenue. They alone have the resources and authority to do the job in full and at the pace required to achieve outcomes with positive long-term effects for the country.

I have spoken with enough people in the bureaucracy and the (present and former) government(s) to know that they know this has not been “solved” as long as oversupply remains and that there is a lot of work remaining. They also know that WFA is a shambles but are not sure what to do about it.

In classical Greek mythology and tragedy, the punishment after the downfall was often agonizing and repetitive – like Sisyphus pushing his rock or Prometheus’s eyes being continually attacked by birds. Without major reform like a volumetric tax to put the Australian wine industry on a different trajectory, the industry’s future will likely be equally awful and repetitive. Or maybe the dollar will drop to 50 cents USD and we’ll forget all about this. Again.

For what it is worth, my prediction is that as the reforms bite and the competition quickly disappears, the grape supply will not contract by much, if at all.

What will happen is that these large wine companies will renew their decades long race to the bottom of the price, margin and quality barrel (notice after years of “luxury”, “premiumisation” and “masstige” talk that TWE is introducing its Yellowtail priced Blossom Hill range to Australia right now?) and keep grape growers on the knife edge of survival. Meanwhile governments will justifiably say “how did this happen, we did what industry asked” whenthe complaining grows louder.

Oh, and where the $50 million “from the government” to be devoted to marketing Australian wine the next four years came from that no one is talking about and no one knows how it will be spent? One guess.

Your options:

  • Cancel your WFA membership. Now.
  • Care enough to complain. Loudly.
  • Its election season – call, write and post on social media to candidates and tell them these reforms harm the wrong people and don’t address the problems of over supply – you will be surprised how much they listen once every three years. WFA, Treasury and Pernod Ricard are betting you won’t. List of candidates here.
  • Demand that WFA lose its federal peak body status until its current President stands down and new rules in its Constitution are put in place for 51% of its Board to make decisions and its Board members to be elected by their entire membership.
  • Or, do nothing. Other professions beckon.

Part 2 to follow in the coming days.

HISTORIC FIRST: WINEMAKERS FEDERATION UNITES WINE INDUSTRY

In a thrilling and concise “8 Point Plan” the Winemakers Federation of Australia claims to have united the famously fractious wine industry around the proposition that other people should pay to fix WFA’s 20+ year run of disastrous policy ideas by creating a “demand led recovery.”

Among the key points to achieve their vision is to ‘keep the WET rebate (a 100% tax break on alcohol tax for most producers) for branded wine because it continues to deliver on the original policy intent’ while simultaneously ignoring the actual original policy of only benefitting the smallest wineries.

In another crazy brave act of thought leadership, WFA also proposed to nullify an international treaty by keeping foreigners (Kiwis this time) from accessing the WET Rebate scheme despite them doing so legally and calling it a “level playing field” idea (despite its tilt).

WFA also announced that they have agreed that a federal government sanctioned body – the marketing friendly named AGWA – should receive $40+ million dollars in to ‘grow export demand’ for Australian wine despite AGWA overseeing 10 years of steadily declining international market share and falling prices paid or Australian wine in overseas markets.

Most importantly, the WFA proposes that nothing at all should change for their members in order to fix the Australian wine industry “before the 2016 vintage” aside from winemakers receiving a new tax break to encourage industry “consolidation.”

In a historic demonstration of industry unity, WFA also obtained the support of the national grape growing organization WGGA behind the proposition that WGGA’s grape grower members should lose all WET rebate tax benefits for making unbranded “bulk” wine and cleanskins from their grapes and selling it to companies such as industry duopolists (duopsonists for the pedantic reader) Coles and Woolworths.

The WGGA, headed by former long time Wine Australia employee Lawrie Stanford, did not answer TheWineRules questions in writing when asked about WGGA accepting financial sponsorship from key bulk wine buyer Woolworths.

When questioned why WFA didn’t propose a different tax system to discourage production of oversupplied low value wine and laws to protect consumers from otherwise regulated and dangerous substances like wine with no labels, WFA CEO Paul Evans replied: “politics is the art of the possible.”

In other politics news, the federal government has set up its own group to look into taxation arrangements in the wine industry in spite of the 8 Point Plan. Meanwhile, it can be reported that there has been generational grumbling that the top secret VOMIT (Very Old Men In Tweed) organization is “running things”.

Exclusive photo of VOMIT Leadership Meeting

Exclusive photo of VOMIT Leadership Meeting

The Kangaroo Court and the Reign of Error

The Kangaroo Court and The Reign of Error

All together now

Tie me kangaroo down, sport

Tie me kangaroo down

Tie me kangaroo down, sport

Tie me kangaroo down

 Tan me hide when I’m dead, Fred

Tan me hide when I’m dead

So we tanned his hide when he died, Clyde

And that’s it hanging on the shed

– Rolf Harris

 A kangaroo court is a judicial tribunal or assembly that blatantly disregards recognized standards of law or justice, and often carries little or no official standing in the territory within which it resides. Merriam-Webster defines it as “a mock court in which the principles of law and justice are disregarded or perverted“.[1]

 A kangaroo court is often held by a group or a community to give the appearance of a fair and just trial, even though the verdict has in reality already been decided before the trial has begun. Such courts typically take place in rural areas where legitimate law enforcement may be limited. The term may also apply to a court held by a legitimate judicial authority who intentionally disregards the court’s legal or ethical obligations. – Wikipedia

The problem with “rock bottom” moments in life is that the inevitable consolation offered is “it can’t get worse than this.” The problem with this is that it almost always does get worse. So, after ten horror years in the Australian wine industry, I won’t say, “it can’t get worse than this” here. It just might.

Last week, the Winemakers Federation of Australia released the much-awaited “Bleby Report” about the documents that WFA redacted and represented as complete to the McLaren Vale Grape Wine and Tourism Association (MV). (Anyone who is unfamiliar with this matter can refer to the post on this site named WoofaGate and Entwined leadership ).

There are two notable things about this – that WFA accepted Hon. Bleby’s report as complete and the report’s stunning deficiencies.

After 16 pages of breathless reportage about bureaucratic derring-do, the retired Hon. David Bleby concluded this about WFA’s conduct:

“the fact that the information conveyed purported to be in the form of a copy of the letter, when it was not, thereby constituting misleading and deceptive conduct.” (italics mine)

To think it could have just ended here with an apology from WFA and a sacking or polite resignation or two was one of those false rock bottom moments. We all wish this would end.

Tony D'Aloisio

Tony D’Aloisio

Tony D’Aloisio, President of the WFA, chose to give a miss to the opportunity for WFA to assert its integrity in this matter and instead released an occasionally bizarre and combative statement meant to be the final word on the matter (in his opinion anyhow).

One of his surreal conclusions from this statement was:

“Importantly there was no finding by Mr Bleby of unethical conduct or dishonesty or fraud on the part of any of those involved. Nor was there any finding that or that there were systemic issues within WFA or WINEC that needed to be addressed.”

Understood in two parts, this conclusion gets even weirder. “Misleading and deceptive conduct” is by definition “unethical” and “dishonest.” (Seriously, why would WFA be implementing honesty counselling unless the problem being remedied was “dishonesty”?) Orwell would have loved this guy.

The second part is that there was no finding of “systemic issues within WFA or WINEC that need to be addressed.” Of course there wasn’t. The judge wasn’t asked to investigate this. Hon. Bleby himself says “a belief that WINEC was only acting in the interests of larger wineries or other or a combination of factors is not for me to judge.” (italics mine) Mr. D’Aloisio must think that we are unable to read.

Taken together, Mr. D’Aloisio’s statement is, at best, nonsense to deflect blame away from WFA for an offense committed by at least one WFA employee and committee Chair – both established and admitted to –  prior to Hon. Bleby being hired.

This is the beauty of hiring your own judge. You can conclude whatever you want regardless of what they conclude.

kangaroo court

To avoid distraction as to blame in this matter, WFA paid for, accepted and published Hon. Bleby’s report. In doing so, this report became WFA’s report. They now wholly own it, its deficiencies and its potential liabilities.

The terms of reference that Mr. D’Aloisio and WFA publicly established for the Hon. David Bleby in investigating this matter were:

“In relation to the covering letter to the Aus-Qual report prepared for WINEC: Examine the events relating to the provision of the covering letter and differences between the original and copy provided; Speak to those involved and as he deems necessary to others; and make all such other enquiries as he sees fit.”

In all things legal, especially between two formidable lawyers such as D’Aloisio and Bleby, words matter. This remit does not provide Hon. Bleby discretion with respect to whom he speaks to – he is required to “speak to those involved.” He may then speak to others “as he sees fit.”

I am not a lawyer but English is my mother tongue. Whether witness, suspect or Good Samaritan, the person discovering and reporting a potential crime or offense, civil or criminal, is, by definition, “involved.”

In his 18-page report, Hon. Bleby makes reference to Dr. Irina Santiago-Brown, by my count, at least 24 times. (For the sake of absolute clarity for the reader, Dr. Santiago-Brown is married to your correspondent. She has reviewed this post and commented on it for purposes of accuracy.) Dr. Santiago-Brown both discovered and reported the misleading conduct at the source of this matter.

Dr. Santiago-Brown was not contacted at any point in Hon. Bleby’s investigation of this matter while the rest of those “involved” were contacted and / or interviewed, some numerous times.

The omission of Dr. Santiago-Brown’s testimony creates such awkward gaps in the evidence presented that at one point Hon. Bleby is forced to confess that “A copy of the letter was produced to me at my request. While it may have raised some concerns to some growers, its relevance to the matter in hand was unclear to me.” This confession of lack of understanding by Hon. Bleby is the hinge on which this entire report swings.

The letter referred to is a letter from Treasury Wine Estates (TWE) advising grape growers that they needed to enrol in Entwine by 30 September 2014. Participation in MV’s Sustainable Australia Winegrowing (SAW) system had been accepted by TWE as proof of Entwine compliance in prior years. In 2014, this was no longer to be accepted by TWE despite the fact that WINEC Chair (and TWE employee) Ms. Gioia Small was responsible for administering an ongoing third-party assessment of equivalence between the two programs whose results were received by both WFA and her on 5 August 2014, nearly eight weeks prior to this deadline.

Ms. Small’s own LinkedIn bio describes her role thus: ‘Regional Manager Sustainability Treasury Wine Estates 2002 – Present (12 years)Adelaide, Australia Responsible for the strategic direction and overall management of environment for wineries, vineyards and packaging centres in Australia. Leadership and management of a national technical team servicing vineyards, wineries and Grower Relations teams. Encouraging innovation and adoption in a commercial environment.” (italics mine)

 

Gioia Small

Gioia Small

In Hon. Bleby’s report, Ms. Small claimed she was unaware of this letter from TWE.

This entire kerfuffle was (originally) about this timing – Mr. Griffante and Ms. Small appeared to be dragging the chain and proposing a possible equivalence announcement perhaps as late as November 2014 using the rationale that a lengthy process of WINEC evaluation and recommendation and then WFA Board evaluation and acceptance was still required despite both parties understanding that Aus-Qual was the relevant authority to make this assessment.

According to Dr. Santiago-Brown, Ms. Small explained that this lengthy (and previously un-articulated) process was required as WINEC was not up to speed on the Aus-Qual process to establish equivalency between the programs and the importance of “due process.” It was in response to Ms. Small and Mr. Griffante’s inability to even recall the names of the WINEC members that Dr. Santiago-Brown used her phone to identify the committee members on the WFA web page as referenced by Hon. Bleby in his report.

(As a reference point with respect to timelines, expectations, chain dragging and entwined interests that apparently escaped Hon. Bleby’s reportage and timeline, Mr. Griffante forwarded a letter on 31 July 2012 on behalf of TWE Grower Relations Manager Hamish Franks in which Mr. Franks states: “TWE has concluded that there is a relatively short (- 6 months) within which the MV program and its 3rd party audit system is likely to receive sign off by WFA.” I am curious what Mr. Franks’ reporting structure looks like at TWE and if Mr. Griffante was forwarding similar emails for other winery members using Entwine in McLaren Vale.)

Damien Griffante WFA

Damien Griffante WFA

Anyhow, MV levy payers had contacted MV in 2014 indicating that they wished to remain in SAW but needed assurance that it was equivalent to Entwine prior to the 30 September 2014 cut-off date set by WFA or risk being unable to sell their fruit to TWE in the coming season. For many growers, to ignore this warning from TWE was to potentially face financial ruin. Hence, MV’s request to release the results of the Aus-Qual report on or before 30 September was to protect its levy payers from serious harm or needless duplication of effort resulting from a deadline established by TWE and WFA / Entwine. This entire matter can not be understood without understanding the relevance of this deadline and how it came to be.

That WFA’s CEO Paul Evans, WFA’s Manager Damien Griffante and / or WINEC Chair Gioia Small did not communicate the context of this salient fact to the Hon. Bleby in at least seven reported separate conversations (plus email) is now clear.

WFA CEO Paul Evans

WFA CEO Paul Evans

That this is the standard of communication offered to the Hon. Bleby by WFA in an investigation entered into and paid for by WFA members is emblematic of this current mob. They must have adopted the “shortest possible truthful answer” and “CYA” strategy of defense attorneys everywhere.

Had Hon. Bleby interviewed Dr. Santiago-Brown, he would have had no doubt about the significance, relevance, timing or urgency of the TWE letter or the ensuing events. Instead, he chose to blithely report that the letter’s relevance was “unclear” to him.

Had Hon. Bleby understood the context of just this one letter, his entire report would have been different. For the first 16 pages, he seems to be trying to turn simple tale of apparently inept bureaucrats overwhelmed with the prospect of the embarrassment that they might be revealed as inept bureaucrats into a potboiler of conflict and intrigue.

Hon. Bleby’s report attempts to build up a dramatic parallel story line to the factual one whose relevance was unclear to him. In this narrative, WFA is riven with “tensions” in an environment of “suspicion and distrust” about what could happen if WFA showed MV the auditor’s covering letter that expressed exactly what MV had been telling WFA for three years – that Entwine may not yield continuous improvement because of its structure.

In the Analysis and Commentary pages of his report, Hon. Bleby goes as far as to breathlessly report a meeting held on 5 September thus: “hostile, tense and unpleasant, as indicated by the opening apparently irrelevant salvo concerning the alleged TWE letter and the failure to provide a copy of whatever other documents had accompanied the comparison table.” This is the same TWE letter that Hon. Bleby has already reported that he has seen and does not understand the relevance of is now “alleged” and discussion of it is “apparently irrelevant?” Really?

Moreover, Hon. Bleby refers to a “history of adverse media” and that “there had been mainstream and industry media reporting which was critical of Entwine” and a belief that these “public criticisms were inspired by MV.” These statements are reported as credible and made without reference to any documentation supporting the existence of these beliefs let alone MV’s responsibility for it. This is fantastical stuff for any sceptical reader to accept without any supporting documentation, references, footnotes, etc.

Excepting one article written by wine author and columnist for The Australian Max Allen in 2009 (get over it!), I cannot recall any negative media reports about Entwine. And, I cannot ever recall a public comment by anyone from MV, which disparaged Entwine or WFA.

Again, the judge’s narrative angle would have been badly undercut by Dr. Santiago’s testimony. In short, the build up of tensions reported by Hon. Bleby would be seen for something quite different; a smokescreen created after the fact by those already found to have misled to justify their calculated deception, attempted cover-up and chain dragging designed to benefit WFA at MV’s expense. But, not having met Dr. Santiago-Brown, the judge sails along to his thrilling conclusions without investigating the matter wholly or enquiring as to possible other motivations for deception.

What is clear from Hon. Bleby’s report is that Ms. Small had decided as early as 5 August 2014 that the “to be redacted” paragraph was not for public consumption and that Mr. Griffante was aware of her thoughts. Another point made is that Mr. Griffante redacted a second document (the ‘questions’ document sent to Aus-Qual) before transmitting it to MV as well.

The previously admitted misleading conduct appears not to have been a ‘heat of the moment’ error of judgment in an atmosphere of “tension” but the result of a premeditated effort where an additional document was also redacted and transmitted to MV to cover up the initial redaction. Mr. D’Aloisio failed to mention this as well in his denial of wrongdoing.

Dr. Irina Santiago-Brown. Sustainability Officer, Sustainable Australia Winegrowing.

Dr. Irina Santiago-Brown. Sustainability Officer, Sustainable Australia Winegrowing.

Setting aside the repeated discourtesy Hon. Bleby shows Dr. Santiago-Brown by not once addressing her by her formal title (he prefers Ms. Santiago-Brown, Irina Santiago-Brown and “Irina” while always addressing all other participants by their proper names), he also incorrectly describes her role at the outset as “Member of MV and actively involved in the formulation of MV Program.” Oddly, Hon. Bleby never neglects to refer to himself by his own honorific title.

By contrast, Hon. Bleby describes the admitted source of redaction, Ms. Small, as “Member of WINEC since 2007 and Chair of WINEC since late 2013; Regional Manager Sustainability, Treasury Wine Estates (“TWE”), having worked in environmental sustainability for TWE and one of its predecessors (Southcorp) since 2002.”

Hon. Bleby neglects to mention that Dr. Santiago-Brown has been employed by MV since 2011 as the Program Manager managing the Sustainable Australia Winegrowing (SAW) system (Hon. Bleby gets that name wrong as well) who has both personally compiled the SAW program and is the only person in Australia to hold a PhD in Sustainability in Viticulture.

That her PhD thesis – a survey of all the assessment systems for sustainability in viticulture in the “New World” wine producing countries – makes her perhaps the most qualified person anywhere on this subject is conveniently not reported by the judge. Moreover, SAW’s six different chapters have been successfully peer-reviewed by relevant world experts. No other remotely similar system in Australia, including Entwine, can claim this level of rigor or academic qualification.

Another gaping omission is the redacted letter from Aus-Qual. Considering that this letter, and its subsequent redaction, is the subject of the investigation, how strange is it to not include this letter, including its redacted passage, in the report?

Despite his best efforts to polish this pile and roll it in glitter, Hon Bleby still finds that the acts already admitted to being wrong as still being wrong. Unfortunately, in doing so he seems to accept and propagate the “emotionally charged” smokescreen purported by Mr. Griffante, Ms. Small and Mr. Evans without fully investigating it by interviewing Dr. Santiago-Brown. This smokescreen version is the reality distortion field needed by Mr. D’Aloisio to come to his own shape shifting conclusions and pronouncements.

Despite all of this (there’s more), the real question in this matter comes down to the terms of reference established by WFA: Was Dr. Santiago-Brown “involved” in this matter or not?

If Dr. Santiago-Brown was “involved”, why wasn’t she “spoken to” as everyone else was and as Hon. Bleby’s terms of reference require? Why wasn’t she given the opportunity to speak to the events everyone else had the opportunity to speak to? Why wasn’t she given the opportunity to explain the substance and context of meetings and emails as reported by Hon. Bleby as others were? Why did Hon. Bleby not provide her the right of reply? What happened to a “fair go”?

If Dr. Santiago-Brown was not involved, why is she mentioned 20+ times, her behaviour and her work allowed to be freely characterised by third parties and editorialised upon without the right of input or reply? If she was not involved, she should not appear in this report except peripherally and purely in factually based terms.

In either scenario, this report can only be understood as deeply flawed and an effort to paint Dr. Santiago-Brown in an unfavourable light. Why would WFA’s Board accept such an obviously deficient and mean-spirited document and publish it? What sort of people are these? What are they going to such lengths to protect?

(courtesy smh.com)

(courtesy smh.com)

In accepting and publishing this report, Mr. D’Aloisio and the WFA Board have both committed and compounded an error of governance that has created a needless liability for the entire WFA membership. This report must be formally and publicly withdrawn immediately.

All those responsible for this perversion from the initial redaction to Mr. D’Aloisio’s bizarre conclusions must accept responsibility and resign or be removed from positions of responsibility as a matter of decency and integrity for the benefit of the entire Australian wine industry.

Finally, WFA must issue Dr. Santiago-Brown a public apology for the indecent treatment she has experienced at the hands of those who should know better.

It serves the entire Australian wine industry’s worldwide reputation poorly to have admitted wrongdoers who have also been found to have done wrong by a third-party to be absolved of all wrongdoing by the President of the WFA. Simply put, WFA’s behaviour isn’t good enough. WFA’s near 400 members deserve better. That the other 2000+ non-members also get besmirched by this conduct is a pity.

It is up to WFA members (including WINEC committee members) and Board members to decide that enough is enough and demand immediate change.

If you want this matter to go away, make yourself heard. Email a board member, post a comment, write a letter.

Please do your bit to adjourn this kangaroo court and bring an end to this reign of error.

Or, maybe we’re not at rock bottom yet.

WoofaGate and Entwined Leadership

“It was worse than a crime. It was a mistake.” – Talleyrand

re·dact verb \ri-ˈdakt\

1:  to put in writing :  frame

2:  to select or adapt (as by obscuring or removing sensitive information) for publication or release; broadly :  edit

3:  to obscure or remove (text) from a document prior to publication or release

– Merriam-Webster

Don’t let it bring you down, It’s only castles burning – Neil Young

This is the blog I haven’t been able to write for three years. My wife wouldn’t let me write about her. Or her research. Or her system. But even she has had enough.

Having said that, TheWineRules is my blog, my outlet for digging into and understanding the contradictions of the written and unwritten rules of the wine industry. As with all miners, I often wonder if the seam I am working will just peter out one day. Instead, the thin yellow line I started excavating a few years ago just grows. I’ve never thought it a Comstock Lode type find but it has proven perversely dependable.

The recent revelation by Anthony Madigan, Editor of Wine Business Monthly in his weekly online column, TWTW, that a Winemakers Federation of Australia (WFA) employee redacted an auditors report on the instructions of WFA’s Wine Industry National Environment Committee (WINEC) Chair before sending it via email to employees of the McLaren Vale Grape Wine and Tourism Association leaves me thinking I’m going to need a bigger shovel. If you are unfamiliar with Madigan’s article, I suggest you read it before continuing with this.

Anthony Madigan

Anthony Madigan

I have been involved at first or second-hand with the effort by McLaren Vale’s Grape, Wine and Tourism Association (GWT) to obtain accreditation for its sustainability system by the WFA’s environmental assurance reporting system Entwine since day dot. The first hand experience was as the Chair of GWT when it started this process and as a Board Member of GWT for the past few years. My second-hand experience has been as partner and husband to Dr. Irina Santiago-Brown.

Irina was hired by GWT in January 2011 as a part-time employee to develop GWT’s then named Generational Farming environmental sustainability system for viticulture into a world’s best triple bottom line sustainability system for viticulture. Our mutual personal interest was established when she interviewed me while researching the origins of our system. Thus, in addition to my Board capacity, I have heard, second-hand, the goings on of her efforts to achieve accreditation over the past 44 months in the same way any couple discusses their day at the office. As with any dutiful spouse, my job is to listen, not take notes!

Since Max Allen compared Entwine unfavorably with Generational Farming in an article in The Australian in 2009, the relationship between the two bodies governing these systems has been generally tepid despite significant efforts by GWT to improve them. WFA’s prior CEO, Stephen Strachan and I had many vigorous and professional conversations on this subject among others.

I respect Stephen for his ability to argue and disagree in a productive and professional manner that is sadly lacking with most of those in leadership positions in our industry. We both appreciate the value of open debate in finding the best answers. Stephen and I shared the view that the Entwine and Generational Farming were not competitors but were rather cooperating systems that should ‘nest’ like high school and university. Current WFA Director Andrew Kay was a GWT Director when Stephen met with our Board and shared this viewpoint.

Former WFA CEO Stephen Strachan

Former WFA CEO Stephen Strachan

The Generational Farming story began as a small un-named and un-funded project in 2004 and grew in fits and starts from then as a community based effort to define and score best practice sustainability for vineyards. It was a logical next step for a region that had invested nearly $2 million in ‘best practice’ grower education over the preceding 10 years.

As a matter of good governance, GWT recognized that the need to be able to both quantify and share outcomes from that investment if we were to continue to collect and spend levy funds collected from growers responsibly. (WFA and other peak bodies would do well to take note of the logic employed here by our little regional association in their own undertakings.)

With the advent of Entwine as a new national system, we sought to ensure that our system did not cause our members any duplication of effort with respect to paper work. Thus, the good opinion of Entwine became a very high priority for Generational Farming.

When we first enquired in 2009, we understood that a formal and objective process for accreditation of other systems had not yet been documented by WFA and that there would be a bit of understandable to-ing and fro-ing while both systems found their feet. Five years later, the McLaren Vale system has still not received documentation from WFA that spells out exactly what is accredit-able, how to get accredited and what the expected outcomes are. Presumably, this continuing lack of an objective process is the reason that WFA employed an auditor to compare the two systems for equivalence.

After GWT’s first request for accreditation, an “Initial equivalence assessment” document prepared by independent firm TQA Australia (representing WFA) in August of 2009 concluded that “The requirements of the MVGWTA program were found to exceed the requirements of the Entwine Australia equivalence criteria, particularly in the areas of biodiversity management, training and education and IPM (integrated pest management).” It also said “Overall, the alignment of the MVGWTA is good, with the exception of the requirement for an independent audit, and the subsequent system requirements of the Entwine Australia criteria, such as documents and records, internal audits and corrective actions, and independent certification.”

From that first productive interaction, MVGWTA subsequently sought the advice of auditors as to how to best make Generational Farming auditable and implemented all of the other recommendations to finalize accreditation by WFA.

The process went slowly after that. In 2011, Mr. Strachan became aware that WFA’s WINEC Committee and employees appeared to be dragging the chain with respect to the accreditation process. Mr. Strachan made changes in the following months that he believed would improve things for WFA and Entwine’s ability to accredit other programs including ours. Not long after, Stephen moved on to seek his fortune in the commercial world. We had a long Christmas lunch at Fino to wish him well. These were the good days.

Since Stephen’s departure, and after Paul Evans’ appointment as CEO of WFA, progress has been glacial. What an engaged executive could have easily resolved in a few weeks dragged on through numerous rounds of hair-splitting argument, indecision and obstructionist behavior over years without progressing anywhere. Much of the hair-splitting related to definitional matters involving concepts like continuous improvement, ISO standards and the philosophical underpinnings of different types of environmental assessment.

When Mr. Evans chose to get personally involved in this matter in the past year, I was assured as a GWT Board member that GWT employees informed Mr. Evans of this pattern of obstructionist behavior. That this was necessary is a bitter irony after Mr. Evans had said “Our focus is not on the need to change but the way to change if we are to establish a platform for success and sustainability across the sector.” in 2012.

Despite its lofty representation of itself as a “peak body”, WFA is not a large organization. Its website lists 11 total employees including the CEO, three General Managers, three Managers and two administrative assistants. While it claims to represent over 90% of the Australian wine industry due to the size of its members’ production, it really represents something closer to 15% of actual winemaking businesses.

The self-described “voluntary” Entwine program has some 700+ participants out of an approximate 7000 vineyard businesses and about 2500 winery businesses in Australia. A large portion of these participants are businesses that sell wine grapes to WFA’s largest member, Treasury Wine Estates (TWE). TWE requires growers who sell them grapes to participate in the Entwine system. Ms. Gioia Small is the Regional Manager for Sustainability for TWE. Ms. Small is also the Chair of WINEC. The WFA (presumably Evans with Board approval) appointed her to this role.

Gioia Small, Regional Manager Sustainability, TWE. Chair, WINEC of WFA. SAWIA Environment Committee Member and past Chair.

Gioia Small, Regional Manager Sustainability, TWE. Chair, WINEC of WFA. SAWIA Environment Committee Member and past Chair.

A few things stick out about Entwine. One is that WFA has been quite adamant that their method for implementing an environmental record-keeping program based on ISO14001 and HACCP (a system developed for other horticulture markets called Freshcare) principles is the appropriate standard and method for environmental continuous improvement and assessment for the viticulture industry. Freshcare is an important standard for fresh food quality and safety for horticulture. It is not a sustainability program. Despite overlaps there are significant differences.

Another is that ISO standards demand that participation in ISO compliant systems be voluntary in nature because coerced behavior is unlikely to lead to meaningful or lasting improvement. This renders the distinction between ‘voluntary’ at Entwine and ‘mandatory’ with member’s suppliers somewhat irrelevant from systemic integrity point of view.

Another is that Entwine is not contextually situated. Sustainability is a concept that is best understood and applied within the context of the participant. For example, what is sustainable best practice in a region with significant disease pressure is very different from dry and windy McLaren Vale. While this insight is obvious to any farmer, it might seem less relevant to a head office viticulturist.

Another is that it Entwine is not a peer-reviewed system. A few weeks ago, Mr. Evans publicly dismissed some alarming alcohol abuse research by saying “not a peer review in sight.” He obviously considered that to be damning enough to dismiss its relevance entirely.

Irina’s peer-reviewed and published research on the use of ISO based systems in viticulture is revealing in its analysis of the appropriateness of numerous approaches:

Process-based assessments are usually based on the International Organisation for Standardization Standards (ISO) standards. In agricultural assessments, a typical example is the implementation of environmental management systems (EMS) through the ISO14001 standard or through ISO-based locally developed guidelines. The greatest shortcoming of process-based assessment is that it does not ensure performance outcomes. The practical outcome of process-based methods is the production of written documentation (e.g. management plans). Furthermore, the ISO family of standards were developed mainly to provide a model for large enterprises to set and operate a management system. The ISO 14001 is a challenging and costly task for small and medium organisations.”

So, to interpret in a grape grower’s language – size matters. A lot.

Dr. Irina Santiago-Brown. Sustainability Officer, Sustainable Australia Winegrowing.

Dr. Irina Santiago-Brown. Sustainability Officer, Sustainable Australia Winegrowing.

Aside from being paper work intensive, not able to assure actual on farm outcomes and only being good for large organisations, why is Entwine’s approach appropriate for the near 7000 small and medium grape growers of Australia? Who benefits if not them? Why was this approach chosen? Who chose it? I can only speculate that it wasn’t the small or medium-sized members of WFA.

One of the conclusions Irina came to in developing the McLaren Vale system was that only a combination of approaches was useful for creating meaningful outcomes for all stakeholders. As such, it employs a mix of process-based, best practiced-based, indicator-based, criterion-based and compliance-based methods to achieve an easy to use system that provides outcomes, actions, pathways for improvement and meaningful data to both participants and the community.

After just three years of Irina’s involvement, the McLaren Vale System is a truly voluntary system with membership of about 25% of growers who grow about 50% of the fruit (15-20,000 tonnes) from McLaren Vale. If Entwine had similar results, it would have 1700 growers and 800,000 tonnes of fruit involved.

The now re-named “Sustainable Australia Winegrowing – McLaren Vale” (SAW-MV) was founded on the open source principle. Open source means that GWT borrowed ideas freely from other systems that permitted it to do so and that it freely shares with others in turn. This is the essence of sustainability – freely learning and educating about principles that should productively benefit man and his environment.Sustainable Australian WineGrowingThis is also the logic that underpins GWT’s offer to gift the SAW system to the rest of Australia from this week and to re-name the system. Now any region or state can append their name to the end of the program after they have modified the system for their particular context. Or, individual growers anywhere can just sign up to use the system to get benefit from it and still comply with Entwine.

When we started on this project in earnest, local chili and grape grower Jock Harvey enrolled thought leaders in our community to develop individual chapters for grower self-assessment of best viticulture practices including topics like Pest and Disease, Irrigation, Waste Management, Employee Relations, Soil Health and Nutrition and Biodiversity. When Irina came on board, she improved these chapters to a higher standard based on the research she was doing at the University of Adelaide as a PhD candidate.

Jock Harvey. Take three.1998.

Jock Harvey. Take three.1998.

Irina’s story is that she came to Australia in 2009 as a mature student with extensive work experience in government and trade from Brazil to undertake a Masters of Science program in Viticulture at the University of Adelaide at her own (considerable) expense. Her thesis researched cost comparisons between organic, biodynamic and conventional viticulture systems.

She was subsequently encouraged to apply for a PhD program and a University scholarship. She was one of a small number of scholars at the University to be awarded a full scholarship that year.

Her masters’ research had sparked an interest in audited systems of viticulture including sustainability. She had noted the Australia, alone (with the exception of Chile at the time) among New World wine countries, lacked a major sustainability program. At about the same time as her admission to her PhD program, she coincidentally started employment working on McLaren Vale’s sustainability program on a part-time basis. Her University Dean had to approve this mutually beneficial arrangement and did so noting that she would be held to the same expectations as any full-time student on a scholarship. e.g. no slack given.

Irina then applied for research funding with the GWRDC as her research required significant travel to investigate other sustainability systems. She was one of only a few applicants to receive full funding from the GWRDC that year. The one conclusion to be drawn from this is that the University of Adelaide and the GWRDC both saw great value for our industry in having someone with a deep understanding of these subject domains in Australia.

Fast-forward three and a half years. Irina lifted the McLaren Vale system to a standard where it was successfully peer-reviewed by noted world experts. She obtained funding from the State of South Australia to have a successful and easy to use web-based GPS driven data collection and reporting system built that gives growers analytical and decision making capabilities they have never had before. It also provides reams of aggregated data that informs both regional development and academic research.

She finished her PhD in exactly three years despite only having three work days per week to work on it. Two of the three articles that comprise her thesis have been published in leading international peer-reviewed academic journals including the journal Sustainability. (The third is pending approval for publication). Her thesis has been reviewed by world experts and accepted “without comment.” That means they had nothing to add or disagree with. Both recommended her for Dean’s commendation – the highest honor. Not a bad result for someone with no science background prior to 2009 working in a second language. She graduates this Wednesday.

The only things that Irina has not been able to achieve have been accreditation for the McLaren Vale system by Entwine (until last week’s unusual events) and acknowledgement by the industry of the quality and scale of her contribution to the Australian grape and wine industry.

To whit, Irina has not even been invited (let alone to speak) to the upcoming Australian Wine Industry Environment Conference. The South Australian Wine Industry Association (SAWIA), not WFA, sponsors the conference. No matter, according to the SAWIA website, Gioia Small is on the Environment Committee there with TWE’s Stuart McNab (reprising his Director’s role on WFA’s Board) serving for many years on the Executive Committee at SAWIA. I’m assuming the SAWIA Environment Committee has something to do with the SAWIA Environment conference but that may be drawing a long bow.

In any case, it’s a small world when you’re on the outer in the Australian wine industry.

Stuart McNab. Chief Supply Officer - Global Wine Production, TWE. Director, WFA. Executive Committee, SAWIA. Former President SAWIA.

Stuart McNab. Chief Supply Officer – Global Wine Production, TWE. Director, WFA. Executive Committee, SAWIA. Former President SAWIA.

Incredibly, this conference will have a presentation called “International perspectives on environmental management in the wine industry” by a reasonable sounding bloke who got a Churchill Scholarship to study this topic. Irina has just spent three years researching and publishing the definitive peer-reviewed research on this topic with the sponsorship of the entire Australian wine industry and all Australian tax payers. But the Australian wine industry won’t be hearing about this research with SAWIA’s help. Another session, “Refreshing Entwine,” is to be presented by the redactor in question.

That others in the industry are left to infer that Irina’s extraordinarily relevant and state of the art research is not important or valuable to the Australian grape and wine industry is implicit in the choices made by SAWIA. By contrast, The International Organisation of Vine and Wine (OIV) certified VITEFF conference flew Irina to France to speak in 2013 because of their interest in her work in McLaren Vale. This was before she had even published her research.

Certification systems like “Organic” or “Sustainable” are trust marks by which the integrity of both the product and producer are conveyed to a distant consumer. Their economic value is wholly dependent on their systemic integrity and the integrity of those who develop, maintain and audit them. For Entwine and WFA to communicate such a lack of integrity by their recent actions debases the value of their mark and all those associated with it.

In this instance, Freshcare, the McLaren Vale system, the auditor Aus-qual, Entwine’s participants, WINEC committee members and WFA’s members have all suffered some diminishment of reputation by being associated with Entwine’s inappropriate behavior. And, as the default “national” system, the entire Australian wine industry’s reputation suffers by default worldwide.

What those with the power to make these subjective and poorly informed decisions appear to insufficiently value is the real harm done to many people’s reputations. It’s a bad look for a country and industry that prides itself as a place where there is a fair go for all.

As a not disinterested observer, the entire matter of WFA’s behavior over the past few years is, to me, both short-sighted and small-minded. That extraordinary results are possible with just a change of attitude seems lost upon them.

Instead of viewing the McLaren Vale system as a cooperating system that extended Entwine’s membership reach, credibility and acceptance, the WFA viewed it as a competitor.

Instead of sensing the worldwide marketing possibilities of having a sustainability system of the highest standard for Australia (finally), it tried to starve the one it had of credibility by not accrediting it for five years. New Zealand, Chile and even South Africa sailed right past Australia in global sustainability awareness in the wine market and reaped the marketing benefits of doing so during this period.

 

The seal on every bottle of sustainable South African wine

The seal on every bottle of sustainable South African wine

Chile Seal

Chile Sustainability Seal

California Sustainable logo

California Sustainable logo

Oregon and Washington State Sustainability Seal

Oregon and Washington State Sustainability Seal

 

New Zealand Sustainable logo

New Zealand Sustainable logo

Instead of simply listening to Irina’s repeated efforts to educate them about the standards of best practice assessment methods she had learned in research paid for by the Australian grape and wine industry for its benefit, they chose to block her (including shouting her down in meetings) at every turn. That this is exactly what the redacted paragraph alludes to is no coincidence. No disinterested third-party viewing this potted history would be able to accept WFA’s behavior as being in the best interests of the entire Australian wine industry.

This behavior does raise the question of whose interests are being served however. That no one has been fired (or even kicked off a committee) immediately for committing or abetting an offense is damning. Why is the CEO of WFA protecting the employee and committee person? What consequences, and from whom, does he fear by doing so? Or, worse, does he fear no consequences himself? Is this the real motivator – that the WFA Board accepts and / or endorses this sort of behavior? Is this even possible in 2014?

WFA CEO Paul Evans

WFA CEO Paul Evans

This redaction wasn’t a mistake.  To remove the letterhead and a conclusive paragraph from a report by an auditor (presumably the report was a pdf file and required some work to do so) after sitting on it for five weeks is not an accident either. Mr. Evans’ explanation and apparently implicit endorsement of the behavior is that it was redacted deliberately because “it was deemed inappropriate and a subjective opinion that did not reflect what both organisations were looking for  in the assessment, that is, an independent and rigorous review of both programs based on solid evidence.” Parsing this alarming sentence is required.

What the Committee Chair (and by inference Mr. Evans) appears unable to comprehend or accept is that the result is the considered and informed opinion of an independent expert (McLaren Vale apparently had no say over the terms of reference for the engagement although WFA did) qualified to provide such opinions (this is what auditors do and why WFA hired Aus-qual) that reflects current best practice based on the evidence provided and that it is not a “subjective opinion.”

Further, the WINEC Chair is not legally permitted to make personal judgements upon an auditor’s professional opinion by ordering it to be redacted in providing that report to a third-party.

Lets assume that even if there was a finding in court that the Committee Chair’s judgement about the auditor’s opinion was correct, her actions would still be considered wrong. It is an indefensible position for anyone to take.

You don’t need to speculate to guess that what GWT employees were “looking for” was exactly this sort of rigorous professional opinion after five years of being stuffed around by a WINEC Committee and WFA employee who did not have an “objective” process to follow to become accredited by WINEC to Entwine.

Finally, the WINEC Chair in no way speaks for GWT and has not been authorized to do so as far as I am aware. Her remarks are intellectually contemptuous and offensive.

The presumption and arrogance presented by Small and Evans in this dismissive non-apology are precisely what is wrong in this five year saga of peak body mediocrity.

Another theory for this redaction is that perhaps WFA and WINEC do not also want anyone to know of Entwine’s potential shortcomings after the substantial amount of member and taxpayer money invested to date in a program that does not appear to have much uptake or acceptance across its 390 or so winery members.

That the WFA is willing to risk so much just to obscure what it had already been told already by Irina (and should be baseline knowledge to its employee,  Committee Chair and CEO) – that Entwine could be better (and why) – is just not good enough.

Mr. Evans is the CEO of WFA. Simply put, either his employees and committee members know that unethical or illegal behavior is a termination offense or they do not. If they do not know this standard, the buck has to stop with the CEO because he presents an unmeasurable liability to his members. If the employee did know this standard, why did he take orders from a non-employee to do so and not consult Mr. Evans prior to doing so? And, finally, why are WFA employees taking orders from non-employees? Is this the real problem here? Who do they work for?

The mistake here was the attitudinal failure by much of leadership of the industry to choose greatness by grasping the opportunity to showcase great and original research being done in Australia, paid for by Australian grape and wine industry and then apply it to make its national system a world recognized, peer-reviewed system of sustainability and excellence for viticulture.

It’s been 11 days since this matter came to light. The employee is still employed, the committee chair is still in the Chair (and employed) and Evans is still CEO. SSDD.

Leadership like this is just not sustainable for Australia. It’s time to change.

What do you think?

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.

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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.

CasellaWineRules

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.

LincolnWineRules

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.)

GrantWineRules

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.

KateHarveyWineRules

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?

Wine Tax Hacks – Part 2

One submission to The Wine Rules suggests that to prevent future rorting of the new wine tax rules, wine producers should be able to demonstrate that their brands be freely available in the marketplace and not “captive” brands of one retailer in order to access the WET rebate.

If a brand is “captive” to one retail customer – or multiple customers owned by one company –  then the rebate will be used not support investment in regional Australia (as is intended) but, instead, will keep sucking equity out of regional Australia and onto big retailers’ balance sheets. Moreover, it will prevent the big retailers from setting up lots of little wine producers that only sell to them.

There are numerous cases where the retail duopsony (where two buyers control a market) have taken over the distribution of entire brands or “layer(s)” of a brand exclusively through their retail outlets. They can do this legally by offering to do so as long as they never make direct threats as part of the negotiation.

As more than one brand owner has told me “the threat is pretty clear as to what will happen if you don’t play along.” Because the retailers already have a huge portion of that brands distribution, if they start buying less or going harder on pricing, wineries can be driven to the wall pretty quickly. Worse, no producer in their right mind would report these stand over tactics.

When there is only one retail buyer for a brands products, the buyer very quickly factors in the value of the WET Rebate in determining what they are willing to pay for the wineries products. In a fair world, the buyer and the seller would split the value of the (up to $500,000) subsidy between them.

However, when the buyer exclusively distributes the product or makes up such a large share of the wineries’  sales that the seller has no serious recourse, the retailer prices their purchases so that they obtain the full value of the rebate and not the winery.

So, how would you prevent this? One way could be to put threshold rules in place for retailers (for instance, saying that no more than 50% of a particular brand is sold through their distribution and retail system) – punishable by very large fines – that they do not engage in these sorts of relationships and put the compliance onus on them to ensure that their suppliers products are freely available in the Australian market place.

Given that there is proof that there has been a large margin shift directly from producers to retailers over the last decade and with the implication that a large portion of that is funded by WET Rebates, the additional costs of compliance should be borne by the retailers than struggling producers.

In The Wine Rules opinion, this type of rule would be a big step to restoring some balance to the buyer / seller relationship while simultaneously cutting off the most obvious wine tax rort of all – retailers rorting wine producers of a well meant subsidy.

Seeing how hard the retailers fight this sort of rule would be the ultimate proof of its rightness.

What do you think?

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