Globalized wine markets: the New World’s expanding role

1. Globalized wine markets: the New World’s expanding role Kym Anderson Wine Economics Research Centre University of Adelaide International Wine Forum Mendoza, 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.

2. 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 Atlantic • Surge in stocks following 1990s planting boom in Australia, NZ and elsewhere • Medium/longer-term: • Policy induced chronic oversupply of non-premium winegrapes in Europe • Growth in competition among New World exporters • Climate change: effects differ across regions & varieties • Supermarkets: increasing concentration in many countries

3. 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 grown • New markets are emerging, esp. in Asia

4. 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

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

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

7. 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

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

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

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

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

12. Aust. shares of global wine markets (%)

13. 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)

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

15. 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

16. Share of four largest wineries in domestic sales (%), New World (Source: Euromonitor 2010)

17. Share of four largest wineries in domestic sales (%), Old World (Source: Euromonitor 2010)

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

19. Three pathways to wine consumers • Direct 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

20. Consequences of concentration of wineries and retail outlets • Wineries have to get ever-bigger if they are to match the increasing buying power of supermarkets • Commercial 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 money • Hence 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

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

22. Some symptoms of current challenges in Australia • Profits 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 2010 • 40% 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)

23. The latest is Australia’s 5th boom

24. Domestic and export sales of Aust wine, 1947 to 2007

25. Aust av. export price peaked in 2001

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

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

28. Special recent challenges for Australian wineries • Exchange 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

29. But, positive signs are emerging for Australian & other exporters • Cautious signs of economic recovery in EU and US • Masked by on-going nervousness in financial markets • Offer to pay growers in EU-27 to grub vines by 2011 • Expected to reduce vine area by 5% and wine prod’n by 3% • Asian market promises to grow steadily • Incomes rising rapidly, as is adult middle-class population • Joint venture options in China and India, plus direct imports • Wine from grapes currently accounts for just 2% of volume of China’s alcohol consumption, but for 8% of value • Domestic grape production is growing slower than consumption, esp. for premium wines

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

31. Australian producers are well-placed to meet current challenges • Water reforms are advancing, making access to and prices of that resource less uncertain • R&D is well under way in response to climate change • Australians are quick to take up worthy new technologies • Potential 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 exports • Dominant supplier of Shiraz (>25% of global Sh. vine area)

32. Adjustments already under way in marketing Australian wine • First Families of Wine • www.australiasfirstfamiliesofwine.com.au • AWBC: Brand Champions, Regional Heroes; and its new website allowing fine wine producers to tell their story • www.australiaplus.com • Aust 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 wineries • Greater emphasis too on environmental stewardship at all stages along the value chain (anticipating buyer demand) • Marketing in Asia is rapidly being stepped up • Aust now a close 2nd to France as importer into China & India

34. Aust wine exports to East Asia

35. 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 firms • Moving more toward finer wines in cooler parts of Australia as other Sthn. Hemisphere out-competes Australian irrigators • Adapting to new marketing tools (eg social networking?)

36. Thanks! • kym.anderson@adelaide.edu.au • www.adelaide.edu.au/wine-econ

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

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

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