Bottom's Up at Fosters

An article in today's (9/27/07) Wall Street Journal suggests that the era of wine surpluses, both in the world and especially in Australia (see previous blog entry below) may be coming to an end. The world's second largest winemaker has started to raise prices on its premium wine after a long period of discounting and drastic bulk sales. Maybe this market cycle has finally hit bottom and prices are on their way up.

Most people I talk to assume that Gallo is the world's largest winemaker and have no firm notion of who could be number two. But in this era of growing brand power the #1 winemaker is Constellation Brands and Foster's is number two. Fosters makes a lot of wine, but it is really a "drinks" company more than a wine company (to use a distinction that Craggy Range winemaker Steve Smith once explained to me). Fosters manages a long list of brands, only a small sample of which are shown in this photo. They sell branded wines, beers, spirits and even Oragina soft drinks and various juices and sparkling waters. If you are thirsty and want a drink, Foster's is ready to serve your needs.

Foster's lager beer is the brand you might most obviously associate with this company, but its list of wine brands is long and includes Australian wines such as Penfolds, Rosemount Estate, Wolf Blass and the Little Penguin as well as Beringer and Stag's Leap from the U.S., Matua Valley from New Zealand and Fonsecca Port and Gabbiano Chianti. More than 60 wine brands are distributed internationally, reaching from the budget bottom shelves of the wine display clear to the top.

The WSJ article reports that Foster's raised its wine prices by between 4% and 11% in August and the higher prices have stuck -- they haven't hit strong consumer resistance or been undercut by competitors. I think it might be too early for Foster's to declare victory, but rising prices do suggest that the wine glut has come to an end and some shortages may be emerging.

Foster's has apparently finished selling off its inventory of surplus unbranded wine stocks, which are called "cleanskins" in Australia in reference to an international espionage term for an agent of unknown origin. (See this website for an example of Australian cleanskins marketing.) These discount sales dragged down Foster's earnings.

Now, with the prospect of a drought-reduced 2008 vintage following drought problems in 2007, the trend of falling prices may finally be coming to an end. I am skeptical, however, because it seems to me that Australian wines face a lot of competition around the world and it may be difficult to raise prices in this market environment, with surplus stocks still available, for now at least, from other parts of the wine world.