Value-Chain Analysis of the

Australian Wine Industry

Prepared for

Prof. Ming Ding

(KBS Melbourne Campus)

Prepared by

Chariss Garcia
(student ID 121213)

29 May 2015
 TABLE OF CONTENTS

1.0 Value Chain Analysis 1

1.1 Research Objectives 1
1.2 Scope and Limitations 1-2
1.3 Methodology 2
1.4 Discussion 2
1.4.1 Key Stakeholders 2
1.4.2 Consumer Value 2-3
1.4.3 Material Flow 3
1.4.4 Information Flow 3-4
1.4.5 Relationships 4
2.0 Industry Analysis 4
2.1 Australian Wine Industry Background 4-5
2.2 PESTLE Analysis 5
2.2.1 Political 6
2.2.2 Economic 6
2.2.3 Social 6-7
2.2.4 Technological 7
2.2.5 Legal 7-8
2.2.6 Environmental 8
2.2 Porter’s Five Competitive Forces 8-9
3.0 Conclusion and Recommendations 9-10
3.1 Internal 10-11
3.2 External 11-13
References 14-15
 LIST OF FIGURES

Figure 1 Wine Production per Country (1980-2009) 4

Figure 2 Australian Wine Production Regions 5

Figure 3 Total Alcohol Consumption in Australia 7

Figure 4 Porter’s Five Forces Applied in the Australian Wine Industry 8

Figure 5 Australian Wine Industry Value Chain 9

Figure 6 Critical Success Factors in Value Chain Management 12

Figure 7 SCOR Performance Metrics 13

 VALUE CHAIN ANALYSIS OF THE
AUSTRALIAN WINE INDUSTRY

1.0 Value Chain Analysis

Businesses exist by creating value for their customers. To understand what their
customers need, they perform a Value Chain Analysis (VCA). VCA is a multi-dimensional
strategic tool that assesses the performance of value-creating activities of the firm through
examination of product flows, information flows, and management and control of the chain
(Taylor, 2005). The value chain starts from procurement of basic raw materials from suppliers
culminating in the consumption, disposal, and recycling of end-use products by final consumers
(Shank and Govindarajan, 1993). The purpose of VCA is to determine the firm’s overall
competitive advantage, which is the difference between the value it offers to customers and the
cost of delivering that value (IMA, 1996).
Fearne et al. (2009) conducted a sustainable value chain analysis of Oxford Landing wine
using a combination of VCA and life cycle analysis (LCA). LCA focuses on the intensity of
resource utilisation (e.g. energy, water) and the environmental impact of outputs (e.g. CO2
emissions). In this section, I shall focus on VCA only and skip the discussion on emissions as it
will be part of the industry analysis.

1.1 Research Objectives

Their report aimed to explore the value of Sustainable Value Chain Analysis (SVCA) as a
diagnostic tool in identifying the misalignment between resource allocation, environmental
management and consumer value. They sought for opportunities to improve the competitiveness
and sustainability of the Oxford Landing value chain. They wanted to demonstrate the benefits of
working collaboratively across the whole value chain.

1.2 Scope and Limitations

They have selected the Oxford Landing – Tesco value chain. Oxford Landing Estate is
located in South Australia, which is the largest wine producing state in Australia. Meanwhile,
Tesco is a multinational retailer in UK, which serves as the largest consumer of Australian wine.

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 Since SVCA is an intensive, time-consuming and expensive methodology, they have
limited their research to Australia and UK, even though Oxford Landing is being exported to
other countries as well. Furthermore, they measured CO2 emissions only for LCA.

1.3 Methodology
They conducted 6 focus group discussions, a survey of 1,100 supermarket shoppers, and
38 semi-structured interviews with 57 people in 12 organisations. They use focus group
discussions and interviews to determine consumer attitudes and perceptions towards the product,
and how their purchase decisions are made. Surveys, on the other hand, quantify the value that
shoppers attach to different product attributes of wine they purchase.

1.4 Discussion
They chose the wine industry because at the time of the study, this industry is struggling
to compete on a global scale with quality wines becoming more accessible to the mass market,
thereby making competing wines from Chile, Argentina and South Africa more attractive to wine
drinkers in UK (Cranitch, 2009). Consequently, its stakeholders recognised the need for change,
such as greater attention to customer needs and wants, more effective communication to forecast
data accurately, more efficient distribution channels, and more sustainable use of resources
(Fearne et al. 2009).

1.4.1 Key Stakeholders

 Grape growers in South Australia
 Yalumba, Australia’s oldest family-owned winery
 Amcor, packaging supplier
 Tarac Technologies, company invested in technologies for wine-making processes
 Tesco UK, biggest customer of Oxford Landing wine, and is responsible for 25% of its sales
 UK supermarket shoppers (consumers)

1.4.2 Consumer Value

There are two striking issues here. First, consumers seem to have a poor understanding
about the concept of sustainability. Very few UK shoppers value sustainability in the products

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they buy, and most of them associate it with bottle recycling alone. They do not consider
sustainability in production and packaging. They dismiss eco-friendly packaging of wines as
unappealing and suitable only for outdoor drinking.
Second, there appears to be a degree of commodisation of Oxford Landing. Although
Oxford Landing was perceived as reliable, good quality, good value, fresh, crisp and fruity, they
do not consider it special. It was described as a ‘typical’ Australian wine, albeit more expensive
than others of similar quality.

1.4.3 Material Flow

Their conduct of VCA in the Oxford Landing-Tesco (OLT) finds that there exist
necessary but non-value-adding activities in the value chain. For example, the weight and bottle
design in the front label is considered irrelevant by consumers, so Oxford Landing should
consider minimising cost here. Other examples cited are the use of rootstock, fertilisers,
chemicals, and trellising.
They also highlighted wasteful activities, such as the trans-shipment of wine from Oxford
Landing to Yalumba Angaston for bottling. Researchers noted that this causes excessive motion
and double handling. The quality check performed by the Australian Wine and Brandy
Corporation (AWBC) is also wasteful, because it involves sending fortnightly samples that
causes delay in export and only adds to financial costs. Researchers advised that the wineries and
retailers be accountable for quality assurance instead. Storage of differentiated goods Yalumba
Angaston is also wasteful and costly. Lastly, reliance on Tesco’s promotions increases
uncertainty in forecasting, which potentially creates waste of value upstream.

1.4.4 Information Flow

Researchers found a mixture of strong and weak information flows between and within
organisations in the OLT value chain. General information flow is strong, whereas inter-
departmental information flow exhibits some weak points. For instance, there is little information
shared between growers and input suppliers, since their relationship is mainly transactional, and
growers only receive advice from Yalumba. Within Yalumba itself, there was a reported
informality of information as well, which leaves certain individuals within the organisation
under-informed. Moreover, Yalumba is yet to take advantage of information Tesco collects from

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its customers through their loyalty card (Clubcard). They could have used it to gain insight into
customers’ wants and needs for more effective decision-making, particularly upstream.

1.4.5 Relationships
Relationships in the OTL value chain (particularly upstream) are strong, with very
minimal dysfunctional conflict or opportunistic behaviour. Furthermore, there is also evidence of
trust, cooperation and commitment. Yalumba is widely respected both as a customer, employer
and supplier. Tesco highly rates Yalumba for its good quality wine, long history of family
ownership, and sustainability credentials. Consumers also like Oxford Landing, however they do
not seem to show brand loyalty for this wine.
Overall, OLT value chain is characterised by efficient material flow, reasonable
information flows and strong relationships. However to keep up with its competitors, Oxford
Landing still needs to supplement their wine-making competence with a more comprehensive
understanding of shopper behaviour and consumer preference (Fearne et al., 2009).

2 Industry Analysis
We now proceed to the identification and analysis of changes in the external environment
the Australian wine industry operates.

2.4 Australian Wine Industry Background

Wine production has long been dominated by Western Europe. However, in the past two
decades, Australia was able to enter this market thereby joining the ranks of “New World” wine
regions, along with France, Germany and Italy (Alonso and Northcote, 2009).

Figure 1: Wine Production per Country (1980-2009)

(Mathews, 2011)

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 In 2008, Australia was recognised as the 4th largest exporter of wine with UK and USA as
its primary importers. Wine grape production is concentrated in south-eastern states with South
Australian accounting for nearly half of Australia’s total vine area, followed by NSW (27%) and
Victoria (17%) (Mathews, 2011). 21% of Australian vineyard estate is owned by wine
companies, with the remaining 79% owned privately often by families. Australian vineyards
directly employ more than 15,000 people and thousands more in the service and supply
industries (Kiri-ganai Research, 2006). The wine industry has been an important contributor to
the Australian economy in terms of production, export and employment.

Figure 2: Australian Wine Production Regions

(Mathews, 2011)
However, recent statistics show that the export growth of Australian wine is losing its
momentum. In 2014, total wine-grape intake decreased to 1.7 million tonnes (-7.0% change),
while beverage wine production decreased to 1,202 million litres (-2.4% change) (Winebiz,
2014). To identify the factors contributing to this decline, I shall conduct a PESTLE analysis and
Porter’s Five Competitive Forces analysis of the Australian wine industry.

2.5 PESTLE Analysis

PESTLE analysis is a popular evaluation framework that helps to identify features of the
macro-environment that may influence competition in the industry, as well as opportunities for
organisational growth and profitability. These elements affect the organisation, but are not part
of its normal operations or of its industries (Grant et al., 2014, pp. 115-117).

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2.5.1 Political
The Australian government tries to improve the competitiveness and adaptation of
industries to the international environment by implementing tariff reductions, deregulation,
micro-economic reforms, and investment in innovation (Kiri-ganai Research, 2006). It also
partners with research and development institutions, such as The Australian Wine Research
Institute (AWRI, 2015) and Australian Grape and Wine Authority (AGWA, n.d.a), in developing
tools and practices to improve its sustainability.
Australia also has industry bodies that represent the interest of wine producers and wine
grape growers. For wine producers, it has the Winemakers’ Federation of Australia (WFA, n.d.);
for grape growers, it has the Wine Grape Growers Australia (WGGA, 2014).

2.5.2 Economic
Since the industry is an exporter, it is vulnerable to fluctuations in Australian Dollar
(AUD) value. Since the value of AUD declined last year, Australia’s bulk wine export volume
grew by 8% to 402 million litres, comprising approximately 10% of export volumes. John Hart, a
partner consultant of Ferrier Hodson, noted that the benefit of the falling AUD is higher profit
margins. To capitalise on this, he suggested that the industry change its export market, and focus
more on premium, high-value bottled wine over cheaper, bulk wine. He advised that the industry
needs to focus on produce better quality wine and less on volume. This is because the low-value
portion of the industry is saturated by low cost producers, such as France, Italy, Spain, Chile and
Argentina (McAloon, 2015).
Furthermore, Australia has also signed free-trade agreements with other countries
including the EU-Australia Wine Agreement, World Wine Trade Group Agreement on
Oenological Practices, World Wine Trade Group Labelling Agreement, and IP Protection in
China (Wine Australia, 2014).

2.5.3 Social
Alcohol-consumption is part of Australian culture. Drinking beer, wine or spirits is not
just an individual activity, but also a social one. Consumption of alcohol reflects Australia’s
cultural taste (Germov and McIntyre, 2013). In fact, according to Mathews (2011), total alcohol

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consumption in Australia has grown by 1% per annum over the past 35 years. Australians
consume mostly beer followed by wine (mostly white wine), then spirits.

Figure 3: Total Alcohol Consumption in Australia

(Mathews, 2011)
2.5.4 Technological
A number of consumer wine apps have already been developed to identify consumers’
wine preference. Among them are Fiasco (an app that determines taste profile of user and match
it with a specific bottle recommendation), Find My Wine (another app that match wines with
occasions, foods, people and moments), and Drync (a free app that allows users to scan, track,
share and purchase wine). Aside from these, engineers have also developed Vintank, a
technology that monitors critical social media channels to help businesses identify who they’re
serving, what they’re like, and where they are (Huyghe 2014).
Winemakers also attend the Australian Wine Industry Trade Exhibition (AWITE).
AWITE is an annual trade information event that gathers winemakers, grape-growers and other
wine industry professionals to showcase the latest innovative wine technology, equipment and
services. It also allows attendees to network with potential suppliers, customers and partners in
the industry (Reed Exhibitions, n.d.).

2.5.5 Legal
The Australian Grape and Wine Authority (AGWA) oversees the compliance of wine
industry with the Food Standards Code (sets guidelines on how wine is produced) and the
Australian Grape and Wine Authority Act (monitors the Label Integrity Program and the Export

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Controls). Aside from regulating, AGWA also assist wine exporters by publishing guides to wine
production and labelling requirements of the international market (AGWA, n.d.b).

2.5.6 Environmental
Wine grape growing depends on the suitability of soil, typography, water availability and
climate (Kiri-ganai Research, 2009). Among these, climate change is the biggest problem being
faced by the industry. Dr. Leanne Web of the Commonwealth Scientific and Industrial Research
Organisation (CSIRO) predicted that temperature will rise 0.3°C – 1.7°C by 2030. As a result of
this temperature rise, the average ripening creep of wine had quickened to 1.7 days a year in the
period 1993-2009 compared to 0.8 days a year from 1985-2009. This presents a problem in
producing sparkling and pinot noir, which requires cool temperature to grow well. Warming will
reduce the quality of these wines. The wine industry needs to adapt to this, but this will entail
higher cost in production (Burton-Bradley, 2011).

2.6 Porter’s Five Competitive Forces

Figure 4: Porter’s Five Forces Applied in the Australian Wine Industry

Suppliers
(LOW)
due to excessive
fragmentation
among grape
growers

Barriers to Entry:
Competitors Substitute
(HIGH)
Products:
Financial Barrier Rivalry
Technical Knowledge (HIGH)
Control of Natural (HIGH) Beer
Resources
Oxford Landing has to
Customer Loyalty compete with wines Fruit Juice
Supplier Agreements from other countries Softdrinks

Buyers
(HIGH)
due to
information
availability

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 Porter’s five competitive forces model presents all the significant micro external
environmental factors that interact to create the industry conditions. These five forces include
three sources of horizontal competition (competition from substitutes, from new entrants, and
from established rivals) and two sources of vertical competition (bargaining power of suppliers
and of customers) (Grant et al., 2014, pp.121-130).

3 Conclusion and Recommendations

The Australian wine industry is currently facing a sustainability issue. Fearne et al.
(2009) noted that various stakeholders of the industry have poor understanding of its value chain
principles. Internal gaps within its value chain and external competition presents a growing
challenge to its profitability and sustainability. Collaborative relationship between suppliers,
consumers and the government is necessary to facilitate effective flow of information that will
enable rational decision-making and effective resource management. We need a paradigm shift
to change our view of this value chain from supply push to demand pull.

Figure 5: Australian Wine Industry Value Chain

(Drew, 2008)

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 To facilitate this change of mindset, I shall present recommendations, and divide them
into internal (within the supply chain) and external (macro-environment). The internal
recommendations are controllable factors within the supply chain, whereas external
recommendations are the uncontrollable factors. The wine industry will need to form a strategic
alliance with third-parties, such as the government, regulators, research agencies, and
community, in order to successfully implement these proposals.

3.4 Internal
The winemaking firms should perform an internal cost analysis to determine their sources
of profitability and the relative cost positions of every value-creating processes. The goal is to
minimise transaction costs between components of the value chain and improve productivity of
each component of the chain.
 Consumer value
1. Identify the value proposition of their product by understanding what the consumer
values in their products and services.
2. Use market intelligence to determine consumer insight.
3. Increase consumer awareness about the sustainability practices of the industry in
production and packaging through marketing.
4. Identify the unique selling point of Oxford Landing wine to differentiate it from its local
and international substitutes.
 Material flow
1. Minimise the cost of non-value adding activities, such as the use of rootstock, fertilisers,
chemicals and treselling.
2. Cluster wine grape farms with wine processing plants and packaging plants to lessen
transportation cost and improve operational efficiency. Apply product layout.
3. Establish a quality control team within the manufacturing plant instead of sending
fortnightly samples to AWBC.
 Information flow
1. Use Enterprise Resource Planning (ERP) to ensure that all businesses within the supply
chain receive accurate and timely information.

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 2. Coordinate more closely with Tesco to create a more accurate forecast of product demand
using surveys and information from their customer loyalty cards.
3. Encourage feedback from its customers by leaving Oxford Landing’s contact details as
part of bottle packaging.
 Relationships
1. Organise an inter-company event (e.g. conferences, symposiums, forums) where
employees of companies within the supply chain can mingle and engage with each other.
2. Appoint a well-known brand ambassador.
3. Establish a customer loyalty reward system.
4. Take advantage of social media (Facebook, Twitter, Instagram, etc.) to ask consumers to
refer it to others.

3.5 External
The wine industry value chain is affected by an array of macro-economic factors –
political economy, social environment, technological development, legal factors and biophysical
environment. It must seek help from outside organisations to provide incentives for the industry
to align its commercial interest with environmental sustainability.
 Government
1. Ask the government to address public interest issues, including water availability,
unemployment, inflation, public health, environmental sustainability, climate change, and
food security.
2. Encourage the government to support education and training for the wine industry by
offering grants and funding scholarships to interested trainees.
3. Lobby for infrastructure development in irrigation to ensure water availability even
during drought.
4. Help the state government to promote Australian vineyards as part of local tourism.
 Regulators
1. Comply with environmental regulations to reduce carbon emissions, water use, and
wastes from the value chain. Implement ISO 14000.
2. Ensure awareness and compliance with industry standards.
3. Pay taxes, fees and levies mandated by law.

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 Research Agencies
1. Invest in global market intelligence to fully understand the micro- and macro-
environment of the wine industry.
2. Collaborate with research agencies to build the capacity to absorb and incorporate new
knowledge in wine production and processing.
3. Refine industry data collection of supply and demand for Oxford Landing wine.
4. Establish and cultivate a culture of continuous improvement and innovation to maintain a
competitive edge.
 Community
1. Proactively involve the community in protecting the environment.
2. Support local community projects to promote goodwill for the company.
3. Provide job opportunities to community members.
To deliver these recommendations, Fearne (2009) identified four key ingredients:
strategic alignment, transparency, relationship integrity and consumer insight. Below is a
diagram showing how these critical success factors form a synergy for co-innovation.

Figure 6: Critical Success Factors in Value Chain Management

(Fearne, 2009)
Finally, to evaluate the performance of the supply chain, Oxford Landing should adopt
the Supply Chain Operations Reference (SCOR) model. Below is the SCOR Performance
Metrics (Russell and Taylor, 2014):

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Figure 7: SCOR Performance Metrics

(Russell and Taylor, 2014)

The future of the Australian wine industry will depend on how well it can align its
commercial interest with consumer demands and environmental sustainability of its resource
allocation. An effective value-driven supply chain should provide the right products as expected
by their consumers at a manageable cost.

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