Globalized wine markets: the New Worlds expanding role Kym Anderson Wine Economics Research Centre University of Adelaide International Wine Forum Mendoza,

Globalized wine markets: the New World’s expanding role

Kym Anderson Wine Economics Research Centre

University of Adelaide

International Wine ForumMendoza, Argentina, 2 September 2010

Thanks are due to GWRDC (Project Number UA08/04) and the University of Adelaide’s Wine2030 Research Network for financial support. The views expressed are the author’s alone and not necessarily

those of the funders.

No shortage of challenges facing the world’s wine producers

Short/medium-term: Fall in US and EU wine demand in 2008-09 due to recessions each side of North AtlanticSurge in stocks following 1990s planting boom in Australia, NZ and elsewhere

Medium/longer-term: Policy induced chronic oversupply of non-premium winegrapes in EuropeGrowth in competition among New World exporters Climate change: effects differ across regions & varietiesSupermarkets: increasing concentration in many countries

Today’s situation is very different from even just one generation ago

Globalization of wine markets (and of overall economy) since mid-1980s offers far more opportunities for fast adjustment to a downturn

Co-location of cons’m & prod’n now less common

• Exports = 34% global production now (was <15% pre-1990)

Previously small European markets have grownNew markets are emerging, esp. in Asia

Outline

What has emerged over the past 2+ decades

Changes in Australia and elsewhere since the mid-1980s

What is in prospect for the next decade or so

What producers need to/will do to sharpen their competitive edge and raise profitability

Framework for thinking about recent and prospective trends

At risk of over-simplifying, think of the global marketplace as involving:3 regions (Old World, New World, Rest of World) 3 quality categories (non-premium, commercial premium, super premium still wine) 3 types of producers (growers, a few very large listed wineries, the many small/medium wineries) 3 paths to consumers (direct to consumer, via wholesaler, or direct to supermarket)

1. Anatomy of changes in global wine markets since the mid-1980s

Changes since mid-1980s for 3 regions

Old World 5 (France, Italy, Spain, Portugal and Germany)

New World 6 (USA, plus 5 in Southern Hemisphere: Argentina, Australia, Chile, New Zealand and South Africa)

Rest of World

Old and New World’s shares of global wine production volume (%)

1980-84 2009

Old World 5 58 53New World 6 18 26Rest of world 34 21TOTAL WORLD

(World total, mhl

100

334

100

266)

Old and New World’s shares of global wine consumption volume (%)

1980-84 2009

Old World 5 53 38New World 6 19 21Rest of world 28 41TOTAL WORLD

(World total, mhl100

272

100

237)

Old and New World’s shares of global wine export volume (%)

1980-84 2009

Old World 5 76 60New World 6 2 31Rest of world 22 9TOTAL WORLD

(World total, mhl100

48

100

86)

Old and New World’s wine exports as % of production volume

1980-84 2009

Old World 5 18 37New World 6 2 23Rest of world 11 13

TOTAL WORLD 14 34

Aust. shares of global wine markets (%)

1980-84

2009

Vine area 0.7 2.3Wine prod’n 1.2 4.4Wine cons’m 1.1 2.1Wine exports 0.2 8.8Exports/prod’nImports/cons’m

2%0%

66%14%

Changes since mid-1980s for three categories of wine

Non-premium (unbranded, bulk or large containers, <US$2.50/l wholesale pre-tax)

Commercial premium (branded commodity wine in 750ml bottles, between $2.50 and $7.50/litre wholesale pre-tax)

Super premium (all finer bottled wine, >US$7.50/litre wholesale pre-tax)

Changes since mid-1980s for wine as a trio of categories

Shares of world:

Prod’n Cons’m Exports

NP CP

SP NP CP SP CP SP

OWx

OWm

NW

ROW (CEEFSU)

Three types of producers

Winegrape growers (selling under contract, or on spot market)

Large wineries (MNCs growing through buying co-ops or other firms & dependent on contracted growers or grape spot market)

Small and medium wineries (Co-ops; or, increasingly, private unlisted firms growing most of the grapes they crush)

• Helped in Aust and NZ by rebate of 29% wholesale tax

Share of four largest wineries in domestic sales (%), New World

(Source: Euromonitor 2010)

Ar

g

Aust

.

Chil

e

NZ S.Afric

a

US

1st

firm

27 23 31 24 34 21

2nd-4th 32 39 51 24 4 35

Rest 41 38 18 52 62 44

Share of four largest wineries in domestic sales (%), Old World

(Source: Euromonitor 2010)

France

Germ. Italy Portugal

Spain

1st firm

11 1 6 62 11

2nd-4th 5 3 4 23 10Rest 84 96 90 15 79

2. What is in prospect for the next decade or so?

Three pathways to wine consumersDirect sales to final consumers at cellar door (wine tourism), followed up via mail/internet/twitter

Far more important for small/medium wineries than for large wineries

Sales to wholesalers/importers who in turn distribute to restaurants and retailers

Sales directly to supermarkets Crucial for large wineries who have much greater power than small ones to dominate retail shelf space

• But for which margins nonetheless are small, hence the need to capture economies of large scale

Consequences of concentration of wineries and retail outlets

Wineries have to get ever-bigger if they are to match the increasing buying power of supermarketsCommercial premium branded wine (either winery’s or supermarket’s brand) is gradually replacing non-premium wine globally …

… with location of grape production becoming less relevant than consistent style and value for moneyHence region and even country of grape origin may become less important for commercial premium wines

Thus small and medium wineries will increasingly have to focus on super premium wines

And growers of lesser quality grapes will face increasing int’l competition as suppliers to large multinational wineries

Names of four largest wineries, New World (Source: Euromonitor 2010)

Arg. Aust.

Chile

NZ SAfr.

US

1st Penaflor

Constell’n

Concha Pernot R

Distell Gallo

2nd FeCoVitA

Foster’s S. Rita Constell’n

GDB Wine Gr.

3rd RDB Pernot R CCU V. Maria CWP Constell’n

4th Garbin McGuigan

Foster’s Kelder Foster’s

Some symptoms of current challenges in AustraliaProfits of many wineries halved last year, or worse

=> fire sales of some winery and vineyard assets

Winegrape prices in Aust irrigated areas fell 30% in 2009, and were down nearly another 30% in 201040% of exports were sold in bulk in 2009, compared with 15% in 1996-2003 (For NZ, 20%, up from 3%)

Causing a big drop in unit value of exports

Import share of domestic wine sales has risen from 3% in 2001 to >14% and still rising (NZ Sav. Blanc)

The latest is Australia’s 5th boom

Wine booms in Aust:

No. of boom (flat) years

Vine area

growth(%pa)

Wine export growth

(%pa)

Share of

prodn exporte

d (%)

1854-71

17(10) 16 14 2

1881-96

15(19) 10 23 10

1915-25

10(43) 7 5 9

1968-75

7(12) 3 -1 3

1987-04

17(??) 18 22 32(now>65%

)

Domestic and export sales of Aust wine, 1947 to 2007

Aust av. export price peaked in 2001

Aust. exports: slowing in all but lowest f.o.b. prices

Value of exports, 1993-2009 (US$m)

Special recent challenges for Australian wineriesExchange rate appreciation (mining boom)Surge in domestic wine stocks, hence the need to revert to bulk exports

Although partly a result of supermarket own-brand developments and re-location of bottling to the importing country to reduce carbon footprint, etc. (loss of value added by domestic firms)

Major reforms to water & (maybe) wine tax policies

which, with climate change, harms hot irrigated areas most

But, positive signs are emerging for Australian & other exporters

Cautious signs of economic recovery in EU and USMasked by on-going nervousness in financial markets

Offer to pay growers in EU-27 to grub vines by 2011Expected to reduce vine area by 5% and wine prod’n by 3%

Asian market promises to grow steadilyIncomes rising rapidly, as is adult middle-class populationJoint venture options in China and India, plus direct importsWine from grapes currently accounts for just 2% of volume of China’s alcohol consumption, but for 8% of valueDomestic grape production is growing slower than consumption, esp. for premium wines

3. What producers need to do to raise their competitive edge & profitability

Australian producers are well-placed to meet current challenges

Water reforms are advancing, making access to and prices of that resource less uncertainR&D is well under way in response to climate change

Australians are quick to take up worthy new technologiesPotential to draw on currently minor varieties suited to hot, dry conditions (e.g. from Southern Europe)

Historically its exports have been concentrated in just four English-speaking markets (>75% to UK, US, Can. and NZ)Still <5% of global wine prodn and only 9% of world exportsDominant supplier of Shiraz (>25% of global Sh. vine area)

Adjustments already under way in marketing Australian wine

First Families of Winewww.australiasfirstfamiliesofwine.com.au

AWBC: Brand Champions, Regional Heroes; and its new website allowing fine wine producers to tell their story

www.australiaplus.comAust already has 6 of the world’s top 15 most-recognized still wine labels (Intangible Business 2010), some of which are adding a regional reserve range

Higher quality, more-differentiated wines of place, including by large wineriesGreater emphasis too on environmental stewardship at all stages along the value chain (anticipating buyer demand)

Marketing in Asia is rapidly being stepped upAust now a close 2nd to France as importer into China & India

Aust wine exports to East AsiaShare of

Australian export value (& ranking),

2008-09

Unit valueof exports(US$ per

litre), 2008-09

% change in value of exports,

2005-06 to 2008-09

China (mainland) 5.7 (4th) 2.65 350

Hong Kong 2.0 (9th) 6.00 72

Japan 2.1 (8th) 3.95 20

Malaysia 1.0 (14th) 7.45 13

Singapore 1.8 (11th) 6.70 9

All five E. Asians 12.6 4.38 72Four key markets (UK, US, Can., NZ) 70.2 2.38 -20

Strategic options include:Expanded R&D investment (how best funded?)

Including the use of new biotechnology (GM?)More collaboration internationally (2-way spillovers)Needed even more with climate change, variable water prices/availability, and increasing buyer interest in sustainable practices

Expanded generic promotion (how funded? what focus?)

Move from ‘Brand Australia’ to ‘Regional Heroes’, etc.Old World also doing it now (eg Bordeaux; new EU funds)

Savvy re-positioning by firmsMoving more toward finer wines in cooler parts of Australia as other Sthn. Hemisphere out-competes Australian irrigatorsAdapting to new marketing tools (eg social networking?)

Thanks!

[email protected]

www.adelaide.edu.au/wine-econ

Names of four largest wineries, Old World (Source: Euromonitor 2010)

France

Germ. Italy Port Spain

1st Castel LVMH CAVIRO LVMH Garcia

2nd Grands Chais

Boizel Coltiva Pernot Pernot

3rd Domaines Listel

Vranken GIV Gardet Felix

4th Freixenet

Remy CAVIT Allied D

M Torres

Wine production, New World (ML) (& China: should it be 700, or 1500ML?)

Grape and wine research publications(relative to wine production, world = 1.0)

1992-96 1997-01 2002-06

Australia 2.8 1.6 1.5

France 0.7 0.7 0.6

Germany 1.3 1.5 1.4

Italy 0.5 0.6 0.7

Portugal 1.0 1.6 1.8

Spain 1.4 1.2 1.2

United States 3.9 2.7 2.2