Grape and Wine Sector Regulatory Impact Analysis

22 October 2024

Hon Dr Craig Emerson
Grape and Wine Sector Regulatory Impact Analysis Lead
Department of Agriculture, Fisheries and Forestry
GPO Box 858 Canberra ACT 2601

By email: winepolicy@aff.gov.au

Endeavour Group: Submission to the Grape and Wine Sector Regulatory Impact Inquiry

Dear Dr Emerson,

Thank you for the opportunity to make a submission to the Commonwealth Government’s Grape and Wine
Sector Regulatory Impact Analysis. Endeavour Group is a passionate supporter of the Australian wine industry across the entire value chain.

Executive Summary
The Australian wine and grape sector has been developed over many decades and via a number of interconnected State and Federal Government policy decisions, trade strategies and industry incentives.
There has been considerable effort to create and position Australia’s wine sector as a significant export industry, which has been largely successful.

However, against the backdrop of this industry policy, key macro trends have also developed, highlighted by the ongoing structural decline in alcohol consumption and the repositioning of the wine segment to having a greater focus on premium wine products as opposed to a sector previously focused on commercial/high volume production. These elements, combined with widening consumer choices on alcoholic beverage types, are placing acute pressure on the most at-risk section of the value chain; that being growers.

We support strengthening the Industry Code of Conduct for Grape Purchasing, including key elements such as mutually agreed pricing and tenure of supply to bring basic guarantees to growers across vintages.

This submission outlines the role Endeavour Group plays in supporting the Australian wine industry and identifies potential areas to improve the sector to help make it a more sustainable sector for participants.

About Endeavour Group
Endeavour Group formally demerged from the Woolworths Group in June 2021, and was independently listed on the ASX at that time (ASX: EDV). We’re among the newest, large Australian enterprises and the country’s largest liquor and hospitality business employing 30,000 people. We operate around 1,700 retail stores including BWS and Dan Murphy’s. Our hotels group, ALH, consists of 350 hotels in regional and metro communities throughout Australia. We also own Langton’s - a fine wine marketplace, comprising a specialist auction house, a brokerage and an online merchant.
Another key part of Endeavour Group is our Pinnacle Drinks (Pinnacle) business, which partners with winemakers, growers, brewers and distillers to deliver leading brands across the wine, beer and spirits categories.

Our Pinnacle business

Pinnacle Drinks (Pinnacle) is a collection of businesses that were brought together under the same banner in 2012, but many components have long histories in servicing different parts of the industry. Our
Pinnacle business employs 720 team members total, with the majority (circa 500) based in the Barossa
Valley. Pinnacle’s operations include:
1. Vinpac International. A bottling and packaging business founded in 1975 that supports 350
small and medium independent wineries in bringing their wines to numerous customer channels
including export.
2. Partnerships with independent producers. Pinnacle sources products locally and internationally
for ranging in the Endeavour retail network and beyond. These relationships are often for single
product lines or single ranges, with independent producers accessing numerous other customer
channels - including outside of Endeavour businesses - with other lines.
3. Viticulture and winemaking. We have a very small number of owned vineyards, leased vineyards
and a collection of premium wineries with cellar doors. We also operate a winery in the Barossa
(Dorrien), for which we source grapes through a range of arrangements with growers.

On the viticulture and winemaking front, Pinnacle creates wine through two complementary approaches:
● Paragon Wine Estates: We own five wineries located in Australia's most prestigious wine regions
and one in New Zealand. Our Australian Wineries include; Josef Chromy in the Tamar Valley;
Cape Mentelle in the Margaret River; Oakridge in the Yarra Valley; Chapel Hill and Shingleback in
McLaren Vale, Krondorf in the Barossa Valley and Riddoch in the Coonawarra.
● Dorrien Estate Winery: This five-star James Halliday rated winery produces benchmark wines by
exclusively partnering with leading winemakers and sourcing from some of Australia's most
celebrated regions.

In the 2024 Financial Year, Pinnacle’s domestic wine business invested approximately $60m1 in the
Australian wine sector. This was highlighted by a $30m investment across 2024 financial year in our
Dorrien Estate winery facility to drive production efficiencies and lower grape- to-bottle conversion costs while maintaining quality and value for customers.

In 2024 we crushed about 18,000 tonnes of grapes for our Pinnacle wine products, with 16,500 tonnes of this crush occurring at our Dorrien Estate facility. For context, this represented less than 1.5% of the 2024 national crush.

Across our Pinnacle portfolio we have 22 winemakers and 14 viticulturists who manage 550 hectares of owned and leased vineyards, while also working closely with the growers we purchase grapes from. As a grape grower, we grow fruit on our own vineyards; we grow fruit on vineyards we lease; we also contract suppliers to grow fruit on our behalf and purchase fruit via grower contracts in addition to purchasing bulk wine.

1
Comprising winery, vineyard and packaging
Our portfolio of vineyards equates to 398 hectares of vineyard and 142 leased hectares which we actively manage. We do not own or lease commercial vineyards (<$10 per bottle). Of our total crush, we own production on only 4% while the remaining 96% of the crush is contracted from other growers. The majority of these other growers for the 2024 season were situated in McLaren Vale (31) and the Barossa
Valley (50).

Pinnacle range makes up less than 15% of our total wine range offered across our retail network2, with the vast majority of what we make available for sale to Australian consumers through our retail network coming from other winemakers. It is important to note that more than 65% of Pinnacle’s wine portfolio is in the Luxury (+$25) and Premium ($10-$25) segments, as our overall aim is to assist in the long-held industry objectives of “premiumisation” for the category.

In regard to grape sourcing, Endeavour’s contractual arrangements have provided stability for many growers over the 12 years that Endeavour has owned Dorrien Estate. Every grape contract we sign has these features:
● Mutually agreed price stipulated ahead of vintage
● Mutually agreed quality specifications
● Details of our trade policies and our dispute resolution mechanism
We understand this standard of contract is higher than most operators in the industry. We work with suppliers very early in the growth cycle to assist with the grapes meeting the agreed standard, providing much needed security for these growers by considerably limiting occurrences of grape rejection.

We are a signatory to the current voluntary the Australian Grape and Wine Code of Conduct (Code), but the above contract additions go over and above the existing Code drafting.

We support the Code being strengthened with the above elements, and for the Code to become mandatory.

We pride ourselves on the positive relationships we have with grape growers across various regions and would be happy to provide additional insights on request.

Australian Wine Consumption
While we are a participant in the viticulture and winemaking end of the value chain, Endeavour also plays a key role in connecting the wine industry to consumers through our retail (Dan Murphy’s, BWS,
Langtons) and hotels (ALH Hotels) portfolio.

It’s important to note the consumer sector in which we operate is discretionary and non-essential.
Alcoholic drinks are enjoyed responsibly as part of occasions and help enable socialising, enjoyment and entertainment. Our products are not considered a necessity and generally not considered a part of the weekly staple shopping basket for most households. Moreover, Governments at all levels regulate, tax and licence our sectors with health and community safety objectives in mind.

2
Percentage of Pinnacle products on offer in a particular store in our retail network may vary due to factors such as store size and location.
The other important customer and consumer factor to consider is price dynamics, significant and robust competition and the impact cost of living and inflation can have on purchasing habits.

Most importantly, the range of drink products in our stores is constantly changing to reflect the changing consumer tastes and drinking occasions. Our retail business is essentially a reflection of customer preferences and trends and the macro trend indicates Australians are consuming a lower volume of alcohol each year, often choosing to reduce the quantity of their consumption in favour of a lesser volume of higher quality products.

The amount of alcohol each Australian drinks every year has been steadily decreasing over time – with consumption falling for almost 50 years. Alcohol consumption in Australia peaked at 13.1 litres of pure alcohol per person in 1974-75. By 2017-18, consumption had fallen by 25 per cent to 9.51 litres per capita in 2017-183. The average number of standard drinks consumed by a person on their most recent drinking occasion is 3.44. That is within the National Health and Medical Research Council’s (NHMRC) recommended limit of 4 standard drinks (for single occasion drinking).

This macro trend is viewed as positive by a wide range of policy makers, including civil society organisations and Governments, as it demonstrates positive progress in Australia’s drinking culture and the move towards more premium consumption for enjoyment while lowering of overall alcohol volume intake.

From a wine-specific perspective, consumption is down especially among young adults. Consumers between 18-25 are increasingly choosing ready-to-drink and premix spirits over wine. This is compounded by the growing trend of premiumisation across all demographics - as consumers shift towards more expensive wines (see image below), which impacts total volumes across the value chain.

Support for trade suppliers and their businesses

3
ABS, Apparent Consumption of Alcohol, 2017-2018)
4
AIHW, National Drug Strategy Household Survey 2019
We are proud of the level of data, insights and trading terms we offer to our suppliers. Many of these new features listed below are part of our strategy to increase the number of small suppliers we stock, as this is what customers are looking for. We have more than 2000 suppliers and have doubled the number of small suppliers we range in our bottle shops with since 2018. Now 90 percent of what we range is sourced from independent, small suppliers. We have very experienced, well-resourced category teams that help producers understand how they can maximise their performance within our channels. In the wine space in particular, we made a decision around 5 years ago to create a dedicated team - the Fine Wine team - to face exclusively into our small and medium sized proprietary wine suppliers to help make working with us easier and to broaden the exposure of great Australian wines for our customers.

In an effort to support our suppliers we focus on two key areas; fair and transparent agreements and additional data and insights.

Key elements of our fair and transparent agreements
● Public Trade Supplier Charter: This sets principles for fair conduct and partnership with all
suppliers, to which we can be held to account. Our Trade Supplier Charter can be found here
● Transparent range review process: We conduct annual range reviews across all beer, wine and
spirit categories which involves an extensive consultation process with our suppliers. The
process is as follows:
1. Suppliers are notified of the upcoming range review and invited to make submissions
2. Specific guidance is documented on the product characteristics Endeavour is seeking
(e.g recently we have sought more products with lighter alcohol content, or zero alcohol
content)
3. Metrics used to evaluate the existing range are documented and shared well in advance
4. Timelines are documented in any supplier communications regarding range reviews
● Fair contract drafting: We always negotiate in good faith. Our goal is to reach simple, clear and
mutually beneficial agreements that support our suppliers, our customers, and our business.
● Anonymous surveys: We seek feedback via annual Voice of Supplier programmes; these are
anonymous surveys that help to identify issues and opportunities for us to improve; in FY24,
more than three quarters of our respondents said they would recommend Endeavour as a
strategic retail partner.
● Dispute resolution: As with any industry, suppliers do raise concerns from time to time and our
team engages directly with suppliers aiming to resolve issues swiftly on a case by case basis. We
have a number of ways our suppliers can work with our team to resolve issues:
1.Directly with our team; our category managers have direct relationships with each
supplier and are generally the first point of contact should an issue arise.
2. Directly with management; we provide links online to enable escalation of issues with a
manager.
3. Anonymously; Endeavour Whistleblowing is a service provided by Deloitte and covers
suppliers as well as team members.
● Market-leading payments terms: 14-day payment terms for our retail small suppliers
● Supplier Summit: We hold an annual supplier summit that clearly and transparently articulates
how producers can best partner with us to achieve mutual outcomes. The Summit also highlights
and celebrates the achievements of the supplier community each year.
● Robust governance: Our internal supplier governance includes Responsible Sourcing Program
Supplier Guidelines, Responsible Sourcing Policy; a supplier training package and a detailed
grievance process.

Key elements of providing data and insights
● Dedicated supplier communications that aim to share high level consumer insights from our
customer data with our suppliers to aid in new product development and growth.
● We release a quarterly publication (Distilled Magazine)
● We hold online and in-person seminars that include free access to data and consumer teams of
Endeavour Group
● In September, it was announced suppliers will be given access to an industry-first data tool for
suppliers called Complete Liquor, established by data and insights company Circana. This is in
response to growing demand for greater data and insights transparency in the retail liquor
industry.

Growing our supplier base
We're passionate about discovering and enabling new suppliers. Throughout the year we open up
Engagement Windows to provide a dedicated opportunity for prospective suppliers to showcase their innovations to our Category Managers. These windows are designed to facilitate meaningful discussions about product availability and suitable in-store dates.

While the Engagement Windows offer a structured timeline, our agile review process allows us to bring exciting products to market swiftly, independent of these dates. We encourage suppliers to continuously share their most promising creations, even outside the scheduled windows, by completing our New
Product Submission form. If we believe a supplier and their products align with our values and customer needs, we'll extend a personalised invitation to complete a supplier registration.

Unfortunately, we don’t have unlimited floor space, so to assist suppliers with an additional avenue to market we created Dan Murphy’s Marketplace. This is an online retail shop that enables producers to showcase their products for sale and once a customer places an order with Dan Murphy’s Marketplace, the supplier is informed of the order placed and they ship directly to the customer. Dan Murphy's
Marketplace currently lists about 18,000 products.

Summary
Endeavour is heavily invested in the Australian wine sector and committed to playing our part in the long-term viability of the industry. While our focus revolves around the domestic wine industry, we commend the efforts of the Commonwealth Government to establish Free Trade Agreements with new and emerging wine markets while reopening major export markets such as China. This will play a critical role in growing demand for Australian wine.

We want to play our part to ensure domestic wine demand and consumption also increases - noting this is a discretionary product in an increasingly competitive market. We are committed to providing our suppliers with consumer insights from our customer data to help ensure the products they develop, meet customer needs and attract new customers into the category. Additionally, we are working closely with
Wine Australia to develop new promotional campaigns to advocate for Australian wine to domestic
customers. Ultimately, customers' choices will determine the trajectory of Australia s domestic wine

’ market.

As a participant across the value chain we are keen to provide our insights and have accordingly provided the following recommendations for consideration:

● Make the voluntary Code mandatory
● Add to the Code that a grape price needs to be listed in supply agreements and/or at a minimum
a base price with market price variation above the base price.
● If the code has a market pricing mechanism, Code clause 4.1(c) the current notification date of
the second Wednesday of December should be moved to the second Wednesday of September.
● Market price from each wine business needs to submit their market price to the Code panel, a
regional association or whoever this review deems appropriate for public release by the time
frame above.
● Ensure there are no remaining unilateral termination rights under supply agreements
● Have a protection mechanism for growers to ensure they get paid for their grapes
● Create an independent arbiter who can monitor compliance with the code and act as an
independent dispute resolution mechanism

We are always happy to discuss this submission and other matters in person and if you have any questions or require further information please don t hesitate to contact me directly at
’
or Rob Malinauskas, GM Policy Public Affairs and Industry Relations on
.

Regards,

Dan Holland
Director - Corporate Affairs and Sustainability
Endeavour Group