June 19th, 2011
in Op Ed
by Elliott Morss
In my last article on wine, I noted the growing market shares of Southern Hemisphere countries (Argentina, Australia, Chile, New Zealand, and South Africa). Below, I look at global wine markets and the prospects for Southern Hemisphere (SH) countries. Follow up:
As Table 1 indicates, the SH’s aggregate export share (29%) is still less than half of the share (66%) of Europe’s “big five” (Italy, Spain, France, Germany and Portugal) plus the US. However, SH wine is now “good enough”, and with lower land and labor costs than Europe, SH’s market share should continue to grow.
What do I mean by “good enough”? As I have documented in an earlier article, taste is not a key determinant in wine selection. So if wines are “good enough”, and SH wines are, marketing strategies will make all the difference. But rest assured, the European vintners are not sitting on their hands.
As Table 2 indicates, Germany is the largest importer of wines. Germany’s import total exceeds that of all EU countries (1,300 hl.). This is indicative of just how much wine trading goes on between EU countries. The US is the second leading wine importer, and its import growth has been more than twice that of Germany. However, as will be documented below, the US market has become increasingly competitive. In the meantime, the rapidly growing markets of China and Russia beckon.
Bulk Wine Exports
It is important to recognize that a significant percentage of international wine shipments are made in bulk form, i.e., not in bottles. This is a far cheaper shipping method, and import duties are generally much lower for bulk than bottled wines. How important are bulk shipments? The following table provides my estimates of bulk export shares by country/region.
The bulk export share can change quite dramatically, depending on a country’s supply/demand circumstances. And the price differential is significant. For example, the US on average paid $5.61 for .75 liter bottles of imported wine in 2008 and only $1.02 for the bulk import equivalent.
The US Market
The US market is not growing nearly as rapidly as Asian markets. However, what happens in the US market is probably a precursor for what will happen in the rest of the world. Consider first imports. As Table 4 indicates, European imports have slumped while SH imports have grown 30% since 2007.
Consider now wine import prices. In Table 5, prices are calculated by dividing import value data by .75 liter bottle equivalents (note this is not literally accurate because of bulk shipments). France continues to maintain its significant price edge over all other countries, while New Zealand has the highest prices among SH countries. But look at the prices of the other SH countries: very low. Chile’s prices are strongly influenced by bulk shipments sine it has been successful in placing a number of high priced brands in the US.
The low import prices of wines from the SH countries are significant contributor to their US sales growth.
US Retail Prices
I do not have any comprehensive data on US retail prices by country. The Shanken News Daily reports the average .75 liter bottle price at $9, but prices are much lower in major market outlets. The Symphony/IRI group collects data on food market/drug/convenience store wine sales. These sales are significant – they constitute approximately 30% of US retail sales.
There are several interesting features to this table:
· Barefoot is owned by Gallo. Altogether, that means Gallo is selling $206 million through this venue.
· There are only three foreign entrants on this list: Yellow Tail, Cavit, and Cupcake.
· With all the problems Australia is having with its wine industry, Yellow Tail has found a niche that works in the US wine market.
· Kendall Jackson and Clos du Bois have done a great job in maintaining high prices in these highly competitive venues.
· Nobody is selling .75 liter bottles at less than $2/bottle. The Vella, Franzia, and Gallo wines are being sold in larger bottles.
· As indicated by the two right hand columns in Table 6, some very good wines are being sold in these markets. Wine Spectator ratings of 88 or more are generally very good wines.
In the following sections, I take a closer look at the wine marketing efforts of each SH country.
Specialized Varietal vs. Multiple Varietal Countries
When looking at marketing strategies, it is useful to break SH wine exporters into two groups. Three of the five were launched by a single varietal: Argentina (Malbec), Australia (Shiraz), and New Zealand (Sauvignon Blanc). The challenge for these countries is to use their primary varietal to help them diversify their offerings. The challenge for Chile and South Africa has been to find some other “handle” to get them launched.
Launched by Malbec, Argentina is working to diversify with blends and other wines. “We’re now seeing more Malbec blends, and that’s being done to stretch the juice further,” says Jim Galtieri, President of Pasternak Wine Imports (as reported in Shanken News Daily). Among others, Pasternak markets Rutini brands that sell up and down the price scale. Some Argentine vintners are hoping the white varietal Torrontes will help them diversify their export offerings. According to IMPACT DATA, Argentina sold 44% of its wine in 2010 into North American markets.
A DISASTER. A decade back, before Malbec and Pinot Noir came “in vogue”, it was Shiraz. OK, in vogue varietals change, but Australia had established Shiraz (and blends) at decent prices. According to Mike Veseth writing in the Wine Economist: “Australia has an accumulated surplus of 100 million cases of wine that will double in the next two years if current trends continue. The annual surplus is huge – equal to all UK export sales and there is no clear prospect of finding additional demand, either domestic or foreign, to fill this gap.” So Australia is dumping wine – note its bulk shipments share of 46%, higher than any wine exporting country. Yellow Tail is doing well in the US. IMPACT DATA reports Yellow Tail sold 8.4 million cases, or about half of all Australian wine sold in the US in 2010. But according to Symphony/IRI, the average price of Australian wine in food and drug stores is $5.99—below that of wines from Italy, Argentina, Spain, Germany and New Zealand.
A possible silver lining for Australia – the rapidly growing wine markets of its Asian neighbors.
New Zealand has done an excellent job marketing its Sauvignon Blanc varietal. In the US, Sauvignon Blanc from New Zealand is considered the best. And it has done a great job in keeping its price up. It is also working on diversification. Jay Wright, the President of Constellation Wines North America reports that New Zealand Pinot Noir and Pinot Grigio are on the rise, with sales advancing by 42% and 8% last year, respectively (Shanken News Daily).
Chile has not had a single varietal to launch its marketing efforts, but as the leading exporter among the SH countries, it has done very well. Chile has been exporting wine for decades, but it has recently started to establish some of its wine brands at higher price points.
Concha y Toro dominates the Chilean wine exports: in 2010, it export share exceeded 60%. It has wines up and down the price scale. Frontera is its big seller: 80% in the US market retailing at about $5/bottle. The closest equivalent Chile has to a unique varietal is Carmenère.
South Africa has been producing excellent wines for as long as Chile, but its marketing has not gone well. Global trade restrictions during Apartheid really hurt, and when it ended, South African vintners made a fundamental mistake by pricing their wines to high to make significant inroads into Western markets. Now, their vintners are trying to expand market share by coming in at very low prices via Sebeka and Two Oceans.
My view? South Africa has great set of diverse wines. It should develop a marketing strategy to launch them at higher prices. What could they do? Get liquor stores to hold tastings where customers could compare their wines against others in the $9-$15 category.
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