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Where is the Global Wine Industry Headed?

by Elliott Morss

Editor’s note: This paper will be presented Thursday 07 June 2012 to American Association of Wine Economists, Princeton, NJ.

Introduction

It is hard to project the future, but I enjoy trying. And I am not alone. George Taber has written a great book that presages what is coming and Mike Viseth has just completed a 3-article series on it as well. One thing I have learned: history tends to repeat itself. So it is worth looking back before looking ahead.

Then – Circa 1970 – 1980

When I was growing up, we drank Mateus, Snapple, Lancers Sparkling Rosé or Chianti in straw bottles. On special occasions, we spent more for Bordeaux or Burgundies. Consequently, I can today tell the difference between Burgundies and Chardonnays from elsewhere. Do I like the French ones better?  They are good; I grew up thinking they were the best.  But there are others I enjoy, e.g. the full bodied McManis Chardonnay from California ($12).

Then & Now – Production

Total wine production has fallen since 1980. According to the FAO (Food and Agriculture Organization, United Nations), wine production has fallen 31% between 1980 and 2010 to 26 million tonnes in 2010.  Italy has cut its production by half while French production is down 35%.

Source: FAOSTAT

Then & Now – Imports

Since 1980, Germany has remained the largest wine importer although its share is sharply lower. The UK, second largest has increased its share, as has the US. France’s share has fallen by more than half. And unlike any other country listed, the tonnage of France’s imports has fallen.

Source: FAOSTAT

Then & Now – Exports

Since 1980, wine exports have almost doubled and there have been dramatic changes export shares. As Table 2 indicates, “Old World” wines dominated exports in 1980 – 87%. And while the “Old World” export share was still more than 60% in 2009, the US, along with the “New World” countries have increased their share from 2% in 1980 to 32% in 2010.

Source: FAOSTAT

Now – Significance of Changes

The jump in the “New World” and US export share has been extremely important: now, in addition to still getting good wines from the “Old World”, we are also now getting them from the US and the “New World”. And “New World” prices are often much lower than the Bordeaux/burgundies we used to purchase from France. What has changed? Most wines are now good enough so price is not an accurate indicator of wine preferences. And Americans are getting smarter – fewer will pay high prices for a brand name.

Does this mean things are over for the “Old World” countries? There is indeed a sense that European wines, while good, are expensive. In actual fact, many European wines compete pricewise with “New World” wines. Table 4 provides data on wines priced $15 or lower that scored 89 or more by Wine Spectator tasters. And my experience is that a WS 89 rating denotes a good wine. 52% of the reds and 33% of the whites with scores of 89 or better were from Europe. That means there are plenty of good, reasonably priced European wines available.

Source: FAOSTAT

Price/Taste Relationships

Goldstein et al analyzed data from 6,000 blind tastings – a lot of blind tastings! I quote from their findings:

Individuals who are unaware of the price do not derive more enjoyment from more expensive wine. …we find that the correlation between price and overall rating is small and negative, suggesting that individuals on average enjoy more expensive wines slightly less….

Lecocq and Visser analyzed data from three data sets totaling 1387 observations on French Bordeaux’s and Burgundies. They report similar findings:

When non-experts blind-taste cheap and expensive wines they typically tend to prefer the cheaper ones.”

From another study, Goldstein et al that both trained and untrained tasters favored wine they knew in advance was higher priced.

Overall, Lecocq and Visser conclude taste has very little to do with wine prices:

“Our results indicate that characteristics that are directly revealed to the consumer upon inspection of the bottle and its label (ranking, vintage and appellation) explain the major part of price differences. Sensory variables do not appear to play an important role.”

My Unscientific Samplings

Many of the scientific surveys on wine preferences and prices have been done on Bordeaux/Burgundies. Far more should be done on “Old World” vs. “New World”. In the last 5 years, I have done about 20 informal samplings with about 10 people at each. To make comparisons meaningful, I limit the wines to be tasted to one of four categories: heavy reds, heavy whites, light reds, light whites. For example, I recently did one using heavy reds: 5 wines tasted, 4 bottles (Malbec, Shiraz, Cabernet Sauvignon, and Merlot at $11 or less), and one Malbec costing $40. 3 of the 8 participants preferred the $9 Malbec to all the others. My other tastings have yielded the same pattern: no preference for more expensive wines.

One other finding from my unscientific tests: Blends (wines with more than one primary grape, e.g., a Shiraz/Cab blend) usually do better, ceteris paribus, than wines with a single dominant grape. Good examples of successful blenders are the producers of Côtes du Rhône (usually a blend of Grenache, Syrah, and Mourvèdre).

The Market – Who Are the Buyers?

In light of what has been said, the wine market can be broken into five distinct categories. These categories currently reflect the US market but will spread globally through time.

  1. Alcoholics – Only half as many people die annually from alcoholism (2.5 million) as from smoking. But the World Health Organization has concluded that drinking is far more costly over a lifetime. In Russia and other Eastern European countries, the average alcohol consumption per adult is equivalent to what is contained in a .75 liter bottle of wine – a bottle a day. And the wine market has its share of alcoholics. They will buy cheap wine in larger bottles.
  2. Informed drinkers – As indicated above, wine drinkers are becoming better informed. They know what they like and they know it is available inexpensively.
  3. House Gifts – Always a problem for uninformed buyers and recipients. The buyers, not knowing wines, will get talked into a $20 bottle. The recipients, not knowing wines, will be upset if they get something costing less than $20.
  4. The Vanity Market – only French Bordeaux/Burgundies costing $25 and up.
  5. Other – Unique preferences hard to categorize.

In sum, we have alcoholics, informed consumers looking for the best deal, people trying to impress and everyone else.

The Future

What changes can we expect in the next decade? The globalization of information is leading to changes affecting all industries. These changes include consolidation, specialization, and new production methods. How these changes are affecting the wine industry is described below.

Consolidation

In wine, as with other alcoholic beverages, there are large economies of scale to be realized in marketing and distribution. As a consequence, there has been tremendous consolidation.

Table 5 provides just a hint on the enormity of the consolidations underway. Constellation is the largest wine company in the world, with Wine Business Monthly estimating that it sold 102 million cases globally (E&J Gallo global sales are estimated at 80 million). Note the number of brands each company has.

Click on table for larger image.Source: Wine Business Monthly

The world’s five biggest alcohol companies by market cap are listed below:

1.  Anheuser-Busch Inbev (BUD) Belgium;

  • Market cap as of March 29: $81 billion
  • Top Brands: Budweiser, the Busch and Michelob families,Natural Light,Ice.

2.  Companhia de Bebidas das Américas (AMBEV) (ABV) Brazil;

  • Market cap as of March 29: $57 billion.

3.  Diageo plc (DEO) U.K.;

  • Market cap as of March 29: $42 billion
  • Top Brands: Jamaican lager Red Stripe, Ireland’s Kilkenny red ales and Senator Keg in Africa.
  • DEO wine is sold under a range of brands, including Blossom Hill, Sterling Vineyards, Beaulieu Vineyard, Navarro Correas, Acacia Vineyard, Rosenblum Cellars, Piat d’Or, Chalone Vineyard, and Santa Rita

4.  Heineken (HINKY.PK) The Netherlands;

  • Market cap as of March 29: $25 billion
  • Top Brands: Heineken and Amstel

5.  Pernod-Ricard (PDRDF.PK) France;

  • Market cap as of March 29: $22 billion
  • Top Brands: Absolut Vodka, Jacob’s Creek, Havana Club, Martell.

While of these five, only Diageo and Pernod-Ricard are major players in the wine industry, the others could enter easily. The economies of scale are there for all alcoholic beverage marketers/distributors.

And speaking of distributors, the US market is mostly in control of a few big wholesaler/distributors. Mike Viseth described the situation in a recent piece:

“7000 brands worth $30 billion in retail sales have to squeeze through 550 distributors in 50 states on their way to 76 million wine consumers. They need to go from maker (first tier) to state-licensed distributor (second tier) to local retailer (third tier). There are only limited opportunities for producers to skip a step.  I understand that Bronco Wines, for example, can sell its Charles Shaw brand directly to Trader Joe’s in California because of a legal loophole there, but has to use an independent distributor in other states. That’s why Two-Buck Chuck costs $1.99 in L.A. but $2.99 here in Washington State.  That extra buck is the cost of the extra distribution layer.”

This is a real tragedy for specialty wine makers. Living in Massachusetts, I cannot have their wines shipped to me directly.

Consolidation could be slowed if all states were forced to allow interstate shipments of wine. Article One, Section 8 of the US Constitution gives Congress the power to regulate interstate commerce. Congress normally strikes down any actions that limit the free flow of goods among states. But not in the case of wine. Too many lobbyists working to keep things as they are.

Specialization: Grape Farmer – Wine Maker – Wine Seller

For most agricultural crops, the farmers are at the bottom of the totem pole. Their product is purchased by various middlemen before reaching the final consumer. Grape farming is a little different in that the grapes have to be converted into wine. Often, the grape farmers make the wine and even sell it – an integrated operation. In the future, I see less of this happening. Increasingly, I see the French Négociants’ system taking over with a global twist – wine makers from all over will be buying the grapes.

Innovation

New players are entering the game with innovative strategies: three cases in point – Bronco, Casella, and 90+.

As mentioned in the prior section, wine entrepreneurs are today thinking – why is grape farming any different than any other form of farming? Traditionally, grape farmers have been the vintners: they have grown grapes, made their wines and sold them. But why does this have to be? Why should a grape farmer know how to make good wine better than anyone else? So wine entrepreneurs are developing their own cadre of wine makers to scour the globe looking for grapes to make good wine.

This can perhaps best be seen in looking at what Fred Franzia of Bronco and John Casella of Yellowtail have done as described in George Taber’s recent book. Both are true revolutionaries, but their approaches are very different. Franzia gained notoriety via his Two-Buck Chuck (Charles Shaw) wines sold through Trader Joe’s. And Casella’s Yellowtail grew so rapidly that some estimate it now constitutes 50% of US wine imports from Australia.

Their differences: Consider first grape growing. As indicated above, Franzia has 32,000 acres in wine growing. How does he use these grapes? Some he sells off as grapes/grape juice, some he makes into bulk wines (and sells off), and some he uses for his own wines. Here is a Franzia quote from Taber’s book:

“People don’t understand that we’re both buyers and sellers…. We buy grapes, and we buy wine. But we also sell grapes, and sell wines. We try to sell for more than we pay. We buy at $4 and sell at $6. And we do the same thing every day.”

But with all his grape growing, Franzia says his wines only use 55-60% of his own grapes. He adds that his wines will never be 100% from his own grapes.

While Franzia is a grape farmer, Casella does very little grape growing. According to Taber, Casella grows only 5% of the grapes that go into his wines. The rest come from 650 different sources. He has 4 staffers that do nothing but buy grapes for him.

When it comes to making wine, Franzia and Casella are similar. They both have teams of wine makers. They know their success depends on them producing good wines. A famous example is a Charles Shaw Chardonnay selling for $1.99 in California that won the 2007 California State Fair blind tasting wine contest against 350 other contestants where the average price was $28.50.

Casella, realizing that US consumers were used to relatively sweet wines, had his winemakers develop sweeter wines for the US market. Critics say the Yellowtail wines are getting better. And Casella has developed a new “Reserve” line of wines that are aged in oak with suppliers from France and the US.

Neither of them has any problem selling their wines through supermarkets, drug stores, whatever. Charles Shaw is sold exclusively at Trader Joe’s but his other 110+ brands can be found in any retail outlet with a wine license. And Yellowtail can also be found just about anywhere, including Costco.

What do these two revolutionaries tell us? No need to be a grape farmer – Casella is not. If you have good wine makers, they will find grapes to make good wines. Even though Franzia is a grape farmer, he (or more specifically his wine makers) buys grapes from others for his wines. These revolutionaries are not alone. According to Wine Business Monthly, Castle Rock ranked as the 25th largest wine seller in the US, “owns no vineyard and no winery.”

And then we have 90+ Cellars. According to its web site and a recent article in the Boston Globe by Jenn Abelson (March 27, 2011), it buys excess wines with that garnered 90+ ratings from wineries that produce them. 90+ finds top-notch wine that other producers can’t sell, negotiates a bargain price, slaps its 90+Cellars label on the bottles, and offers them to customers at a steep discount. 90+Cellars, is one of a growing number of businesses taking advantage of the wine glut that resulted from the economic downturn. In less than two years, 90+Cellars, based in Boston, has generated nearly $5 million in revenue. What will happen when the wine glut ends? We will see.

Conclusions

In the above, I have sketched out certain trends that I see continuing. An increasingly sophisticated wine consumer will look for good wine at reasonable prices. Consolidation will continue that brings lower prices along with a certain homogenization. If only marketing and distribution barriers could be reduced…. But innovation will continue, and that should keep things interesting.

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  1. [...] Where is the Global Wine Industry Going? by Elliott Morss Editor's note: This paper will be presented Thursday 07 June 2012 to American Association of Wine Economists, Princeton, NJ. It is hard to project the future, but I enjoy trying. And I am not alone. George Taber has written a great … Read more on Global Economic Intersection [...]