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Published:  23 July, 2008

By Neil Beckett ...... reporting from Australia

The Australian wine industry has experienced falling profitability due to increased competition resulting from expansion, globalisation and over-supply, key figures warned at the opening session of the Eleventh Australian Wine Industry Technical Conference in Adelaide this week. Paul van der Lee, a chief architect of Strategy 2025 and Australia 2010: The Marketing Decade, said it was "a certainty that some of the new plantings will not meet expectations", in terms of quality or return. Supply will be "well above market demand, exacerbating the emerging surplus". There is "a need to look beyond the emotional appeal to the business realities," he said. Stephen Strachan, policy director of the Winemakers' Federation of Australia, agreed that "good news stories and growth have masked the actual competitive environment". Although available data is "sketchy", a recent Deloitte study of 191 wineries shows that average operating profits (Earnings Before Tax/Total Revenue) fell year on year from 1997 to 2000, to 10.4%. Among 16 broad industry sectors, wine fell from fourth in 1997 to eighth in 2000. Returns on assets (Earnings Before Tax/Total Assets) also slipped, from 7.3% in 1997 to 5.4% in 2000. A 1999 Deloitte study of 33 wineries highlights the difficulties faced by those on a smaller scale. Among wineries with an annual production of more than 75,000 cases, average operating profits were 12.7% and return on assets 6.3%. Wineries producing less than 75,000 cases averaged 10.4% and 3.9% respectively. Strachan and van der Lee both stressed that overall prospects are sound, but that wineries need to focus more sharply on marketing and financial management. High quality is no longer a sufficient condition for success, they said, and differentiation, which is often secured through brands, will be ever more vital. Many small wineries are also over-capitalised. The concerns echo those expressed by analysts in the UK and US regarding the high share prices of the largest publicly-quoted companies, which may be overvalued as a result of recent takeovers.