Winemakers feel bullied by big retail

Winemakers want Woolworths and Wesfarmers to stop pinching their profit.

Justin Loiseau

Justin Loiseau hails from the great united state of North Carolina, where he started his first business at the ripe age of five: melting crayons into candles. With the infamous Crayola Crash of 1994, Justin moved on to study economics and environmental studies as a Morehead-Cain Scholar at the University of North Carolina. He has worked in a variety of sectors across the globe, from management consulting to the United Nations, and once spent three months examining invasive snails in Vietnam. Justin discovered The Motley Fool in 2012 and it’s been love ever since. Creativity, contrarianism, kerfuffling… what more could one want? When he’s not playing the Fool, you can find Justin at the University of Auckland, where he is pursuing a Masters in Economics as a Rotary Ambassadorial Scholar. Justin finds biogas digesters fascinating and can unicycle a mile in seven minutes.

Published December 16, 2013 4:53 am AEDT

Winemakers are fed up with falling profits. The Winemakers Federation of Australia (WFA) revealed a 43-point plan earlier this week to whip the wine industry into shape, but its main strife comes from retail sales.

The Federation claims that "big retail" like Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) are taking too much of the margin out of wine. The WFA estimates that winemakers incur a loss on around 70% of their production. They have proposed an industry code of conduct to put a stop to this retailer racket. At the same time as winemakers are planning their own vertical integration, the WFA plans to "establish a process with retailers and producers to confidentially highlight concerns regarding retailer conduct that they believe could be an abuse of market power."

Whining and dining

Winemakers like Treasury Wine Estates (ASX: TWE) and Australian Vintage (ASX: AVG) have recently hit hard times. Treasury Wine shares hit a 52-week low at the end of September when the company announced it would have to destroy $160 million of old inventory in the U.S., and Australian Vintage's chairman has blamed oversupply and an expensive Aussie dollar for his company's troubles.

With trouble abroad, the WFA seems to want to solidify its profits back home in the only market where an expensive Aussie dollar doesn't directly impact sales. A similar code of conduct was recently signed by the Australian Food and Grocery Council. According to The Australian, Coles is amenable to adding winemakers to its current food and grocery code, while a Woolworths spokeswoman noted the support her corporation already has for the Australian wine sector.

Foolish takeaway

The details of the WFA's 43-point plan, as well as the specifics of any code of conduct, are far from solidified. With Woolworths and Wesfarmers' Coles accounting for 77% of domestic wine sales, the future relationship with these companies matters – a lot. But the WFA may have the most luck with its push for revised tax codes and inquiries with the Australian Competition & Consumer Commission. The lesson is big retail will do what's best for big retail, which doesn't always include big wine.

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