AUSTRALIAN WINE MAKING INDUSTRY

The wine industry in Australia commenced in 1790 around the coastal areas of Sydney. The industry was further expanded in the mid-1800s with more grape wines planted across the Eastern coast of Australia. By the early 20^th century, Australia was producing enough wine to export to the United Kingdom. The industry experienced significant growth at the end of World War II, aided by an influx of migrants from Europe who brought with them their knowledge and taste for wine.

In 2019, the winemaking industry had total revenue of $6.985 billion and contributed 6.34% to the global wine market from only 1.9% of the total vine planting area. As a result, Australia is now the 5^th largest producer of wine and 3^rd largest wine exporter. The growth in the industry has been created by innovative practices in grape cultivation and wine processing technology with Australian technology and production skills highly sought after internationally. The Australian winemaking industry is at a mature stage and continues to seek new international markets. Despite major growth, there are signs of slowing export and domestic consumption, prices are declined making it hard for small and medium sized producers to compete with larger producers who benefit from economies of scale. Supply is greater than demand putting further pressure on prices.

Demand Trends

Consumer preferences have been instrumental in the growth of the industry. This growth has been fuelled by an increase in dining out, demographic and sociological factors (greater participation of women in the workforce and ageing population) and more awareness on health and social responsibility.

In 1975, Australian domestic consumption was 2 litres per person per year. Of that, 82% consisted of fortified wines such as ports and sherries. Four decades later the consumption of wine has increased dramatically to 25 litres per person per year. In comparison to the rest of the world, Australian consumption is still considered low, with France and Italy consuming 57.6 and 54.6 litres respectively. Wine is now a mainstream alcoholic beverage. It is no longer only purchased when dining out but frequently forms part of a meal at home. However, tightening driving laws have imposed restrictions on consumption.

Market research indicates wine is often purchased based on the brand and label design. The research has also found that consistent quality and continued support for a brand over time is essential to ongoing market success. Medical research also supports the health benefits of regular consumption of wine, as it has been found to reduce the risk of cardiovascular disease and extend life expectancy for people who consumed red wine.

Trends

The following factors summarise the trends that will impact the industry in the future:

• The demand for wine is relatively price elastic.
• The effects of substitution between wine and other alcoholic beverages (beer and spirits) is yet to be ascertained.
• Wine consumption has experienced favourable conditions as the price difference between beer and wine is negligible.
• Growth in income and increased living standards has enabled more households to purchase wine.
• Demand for wine is income elastic.
• Consumer tastes and an increase in disposable income have changed over the last 10 to 15 years. As such, premium products are favoured more, including premium wines.
• The heavy reliance of wine being exported has placed an increasing significance on exchange rates, overseas income and the general economic condition in the overseas market.

Key Success Factors

The future success of the wine industry, according to experts, is dependent upon:

• An ability to switch between wine varieties as consumers have an ever-changing taste for different wine varieties. Accordingly producers need to be able to a secure supply of different types of grape and be able to change production and blending process quickly to adapt to taste changes.
• Assurance that grape supplies can be sourced from different geographic areas.
• Supply contracts for raw materials such as yeast and packaging materials
• The development of export markets and distribution channels are crucial as the domestic market is relatively small and mature.
• Strong branding and relationships with wine merchants are required.

Competition

Competition in the wine industry is high for both domestic and export markets. The basis of competition is listed below:

• Price the low to mid-price range has the highest level of competition.
• Marketing and brands consumer selection is very much based on brand and label design.
• Distribution channels Large retailers tend to deal with large suppliers while smaller wineries sell through their cellar door and mail orders.
• Quality Consumer tastes have become more refined and therefore demand has increased for premium quality wine.

OAKEY WINES LIMITED

Oakey Wines Limited was established in the 1860s by one of the founding winemaker's Clarence Oakey from Rutherglen, in North East of Victoria. The company was listed on the Australian Stock Exchange in 1995. Today, the company is ranked 10^th among the Australian wine producing companies and makes only high-quality premium fortified wines for both the domestic and export market. The wide range of soils and micro-climates within North East Victoria has enabled Oakey Wines to produce a unique range of fortified wines and to a lesser extent white and red table wines. The current managing director, Caroline (Carrie) Oakey, is a sixth-generation winemaker and is highly regarded in the wine industry.

The last 5 years have been turbulent for the company. In December 2018, the company fended off a hostile takeover bid from the leading Australian winemaker, Ritzy Wines Limited. Carrie Oakey spoke out strongly against the takeover and called for all shareholders to reject the takeover bid. She argued that Oakey wines hold a strong position in the market place as an independent family-owned wine company and if the takeover went ahead the familys strong heritage would be swallowed up by the corporate giant. Carrie was able to sway a few small shareholders to vote against the takeover. This was not well received by the institutional shareholders who were attracted to the 20% premium offered on the shares.

Business strategy

The vision for Oakey Wines Limited is to be Australias most prominent winemaker and be in the top 3 wine companies by 2027. To achieve this vision, Oakey Wines believes that the following strategic goals will guide them:

• Produce only superior quality wines.
• Expand the distribution base to create wines that are suited for the domestic and export markets.
• Purchase only quality grapes from grape growers and expand current vineyards by purchasing land in diverse regions.
• Increase return to shareholders as well as have sufficient funds to further expansion plans.

Operations

Oakey Wines sources grapes from approximately 160 growers who are spread over 650 vineyards. Many of the growers are 3^rd and 4^th generation farmers and have supplied to Oakey Wines for all of that time. There is a unique relationship between the grape growers and Oakey Wines and Oakey Wines believes that it is their duty to protect the livelihoods of the growers and the northeast region. It is due to this unique relationship that Oakey Wines made a choice not to purchase vineyards in the northeastern region, thereby supporting local grape growers.

Wine production is carried out at a single location located in the northeast. Oakey Wines uses a combination of American and Italian oak barrels to age and enhance the flavour and richness of the wines, while stainless steel tanks are used for lower quality wine. Oakey Wines has the capacity to crush 40,000 tonnes of grape per season. Bottling is done through a local filling station that attaches the relevant label and packs them for either the domestic or export market.

Oakey Wines implemented a Hazard Analysis Critical Control Points (HACCP) plan for the production of the wine and were the first one to do so in the region. This has proved to be a competitive advantage for Oakey Wines as retailers are more likely to choose their brand over others. Oakey Wines also implemented policies to conserve water, energy and chemical use. These policies have since been found to be ineffective with a recent claim against the company for incorrect use of chemicals resulting in a neighbouring vineyard suffering significant damage from spray drift.

Distribution

Oakey Wines uses their strong relationships with several wine merchants to distribute wine to large retailers, restaurants and special events both domestically and internationally. Various targeted promotions throughout the year have enabled Oakey Wines to expand into boutique markets they would have otherwise not supplied to.

A cellar door club and mail-order sales have proven to be very successful for Oakey Wines with customers signing up to receive selected bottles of wine four times a year. The club also offers special discounts and offers on new release varieties.

The cellar door, located at Rutherglen provides wine tasting and sales to the general public. These sales contribute approximately 8% of all of Oakey sales. The cellar door includes a caf where light meals are served and local produce can also be purchased.

Management

The culture of Oakey Wines has changed over the years as people have joined and left the team. Carrie recognises and celebrates employees loyalty, hard work and talents every year and has a clear promotional pathway for team members to move up the ranks.

The current team is made up of:

• Winemakers who are instrumental in the winemaking from the selection of grapes to the ageing of the wine. This team is involved in all the major decisions and works closely with the operation manager.
• Finance and administration team, located at Rutherglen, are responsible for the financial management, communication and customer service. Their role includes liaising with the winemakers and operations team.
• The production team are in charge of batching of grapes to the bottling.
• Research and development team is made of speciality chemists whose role is to develop and test new wines and ways to improve efficiency in producing the wine.

Current Situation Jan 2021

The Cellar Club has received significant success in the domestic market and is now considering implementing a direct sales model across all states. By taking such an approach, this would strengthen pressure from major supermarkets to reduce the sales margin. The marketing manager has already held several prestigious events in exclusive hotels around Australia with great success. Customers reactions were very positive, as evidenced by the number of emailed and online orders received.

The marketing manager recently attended the annual winemaking industry symposium. The theme was Growing Australia Wine in an uncertain world. The closing panel summarised the future state on the industry by stating: The Australian wine industry is one of the largest wine exporters in the world, behind France, Italy and Spain but well ahead of any immediate competitors. The challenge for the future will be to continue to stay ahead. Positive outcomes will only be achieved by maintaining a competitive advantage and the availability of competitive products.

Question 3 Simulation

The success of the Cellar Door has resulted in more customers visiting the winery on Saturdays and Sundays. The cellar door manager would like you to simulate if there are sufficient sales assistants rostered on during these peak days. The manager does not want the customers waiting any more than 5 minutes. The tables below show summarises the current service.

Service Time
Service Time (min)	Probability
0	0
2	0.15
4	0.45
6	0.25
8	0.15

Customer arrivals
Time between arrivals	Probability
0	0.05
2	0.1
5	0.45
6	0.25
8	0.1
10	0.05

Required:

1. Create a table to simulate the above information from 10am to 2pm.
2. Explain if the current service level meets the managers requirements.

Note: The Excel table must include random number and Vlookup functions. The Excel spreadsheet is to be submitted with the Word document.