Wh i h ld i hWhere in the world is thewine industry going? y g g

Tastes, technologies, taxes and terroir

Kym AndersonSchool of Economics, University of Adelaide

k d @ d l id dkym.anderson@adelaide.edu.au

World Wine Markets Conference, UC Davis, CA, 9-11 August 2007World Wine Markets Conference, UC Davis, CA, 9 11 August 2007

OutlineA. Globalization of the world’s wine markets over the past 20 yearsB. Prospects over the next 20+ yearsC. Scope for a collaborative empirical research project on where wine markets willresearch project on where wine markets will be by 2030

leading to a conference in Adelaide (late 2009/10) and an edited volume and in the processand an edited volume and, in the process,improving the Global Wine Statistical Compendium and our 47-region model of global wine markets

• Possibly requiring a workshop in Feb 2009• Possibly requiring a workshop in Feb 2009

A. Globalization of the world’s wine markets over the past 20 yearsmarkets over the past 20 years

Changes in:Consumer demand (tastes regulations)Consumer demand (tastes, regulations)Production capabilitySh f d ti t dShare of production exportedGlobal export contributions by ‘Old World’vs ‘New World’vs ‘New World’Firm size and concentration in the industry

Wine globalization is not new …

Winegrape cultivation began before 4000BC

•Spread west from Middle East from 2500BC

•Spread north from Mediterranean by 400ADSpread north from Mediterranean by 400AD

• Took another 1100 years before spreading to:South America by 1500s–South America by 1500s

–South Africa by 1655–Australia by 1788 (from Rio and Cape Town)y ( p )–California and New Zealand by 1820

but wine market globalization has… but wine market globalization has accelerated hugely since the late 1980sMost previous globalization was about technology transfer, leading to little long-distance trade growthBut since the late 1980s share of volume of productionBut since the late 1980s, share of volume of production exported has risen from <10% to almost 30%

even higher in value terms (>50%?)Europe’s share of world exports (excl intra EU) hasEurope s share of world exports (excl. intra-EU) has fallen from >70% to <50%

Shocking even Jancis Robinson to include the G-word in OCW-3‘New World’ wineries have become far more export-New World wineries have become far more export-oriented, focusing on premium (esp. low-end) bottled wine, initially exploiting retail regulation changes in UK

Australia in next slide is just one exampleAustralia in next slide is just one example

Growth of Oz wine exports, 1970-06

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800Sources: AWBC Export Approval Database, ABS Catalogue No 8504.0

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Other features of recent globalization of wine marketsglobalization of wine markets

Mergers/acquisitions of wineries especiallyMergers/acquisitions of wineries, especially cross-border

In response to IT revolution, FDI reforms, and the i i d b h k l iwineries’ need to combat the supermarket revolution

Flying vignerons enjoying 2+ vintages/yearaccelerating 2-way int’l technology transferaccelerating 2-way int l technology transfer

WTO-induced policy developmentsTax cuts (eg China, India); GI legal recognitionTax cuts (eg China, India); GI legal recognition

Private sector standardsNew World Wine Group’s mutual recognition of

d d d l b lstandards and labels

Divergent trends in tastesHalving of per capita wine consumption in Mediterranean Europe and Argentina since 1970sp gDoubling or more of per capita consumption in new markets in Europe (and Asia), and big rises t i UK (20lit/ ) d US (8 5lit/ )too in UK (20lit/cap) and US (8.5lit/cap)Big switch from dominance of super premiumand non-premium to dominance of bottledand non premium to dominance of bottled value-for-money, easy-drinking premium wine

Popular premium range is US$1 to $4/litre pre-tax h l l $ l b l l lwholesale, or US$5-10 per 750ml bottle retail incl. tax

Declines in wine consumption per capita in traditional markets, 1970 to 2000 …in traditional markets, 1970 to 2000 …

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… have continued beyond 2000 …

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… while per capita consumption keeps growing in emerging marketskeeps growing in emerging markets

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However, US and Canada’s consumption is still low rel. to Europe’s English speakers …p g p

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… while domestic consumption in Chile and Australia continue to diverge

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Chilean producers concentrate more on export quality wine,

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not jug wine

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Taste swing to beer and spirits

Birth of the cask

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A typical Australian after too much of the good stuff

Di d i d iDivergent trends in production tooWinegrape acreage expanded hugely in New World from late 1980sWorld from late 1980s

Trebled in Australia, aiming at popular premium wineFive-fold increase in New Zealand, aiming at super

i bl d th i t ipremium sav blanc and then pinot noirAcreage is stagnant or declining in Old World

EU ‘assistance’ to its industry stifles adjustment, soEU assistance to its industry stifles adjustment, so was missing out on growth in popular wine niche

However, more-innovative producers in Europe are adapting/re-positioning to capture a part ofare adapting/re positioning to capture a part of the rapidly growing mid-range market, while cutting back (although not rapidly enough) on low end non premium winelow-end non-premium wine

Big variance in export prices (US$/lit)1995 2000 2005

France 3 66 3 11 4 71France 3.66 3.11 4.71

Italy 1.11 1.22 2.34y

US 1.67 1.89 1.78

Australia 2.60 2.77 3.03

NZ 3 44 4 02 6 46NZ 3.44 4.02 6.46

Chile 1.41 2.11 2.10C e 0

Argentina 0.34 1.55 1.39

Huge growth in New World’s share of global exports

Even including intra-EU trade, New world’s share has grown fromworld s share has grown from

5% in 1990 to 11% i 199511% in 1995, 19% in 2000, and 24% i 200524% in 2005

Excluding intra-EU trade, New World has already overtaken Old Worldy

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Firm concentration is acceleratingWine was one of the least concentrated beverage industries as recently as 1998beverage industries as recently as 1998Since then, major consolidation among

i fi h b t ikiwine firms has been a striking characteristic of the new globalization

driven in part by the need to combat firm concentration at the distribution and retail ends of the value chainends of the value chain

Share of global sales by top 3 firms, 1998

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Mergers/acquisitions are continually altering the rankingscontinually altering the rankings

2000 20062000 20061. E&J Gallo 1. Constellation + BRL Hardy2 LVMH 2 Beringer Blass + Southcorp2. LVMH 2. Beringer Blass + Southcorp3. Constellation 3. LVMH4 Allied Domecq 4 Pernot Ricard + Allied Dom4. Allied Domecq 4. Pernot Ricard + Allied Dom.5. The Wine Group 5. E&J Gallo6 .Southcorp (incl R.) 6. Castel Freresp ( )7. Beringer Blass 7. The Wine Group11. Pernod Ricard18. BRL Hardy 15. Concha Y Toro

The 15 top global wine firms, 2006

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Australia dominates New World wine exports

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Great heterogeniety across countries in firm size of wineries and growersfirm size of wineries and growers

National annual average winery output, in cases varies from 5 000 (France) toin cases, varies from 5,000 (France) to 290,000 (Chile) per firmSh f 3 l t i fi ti llShare of 3 largest wine firms nationally varies from 6% (Italy) to 60-70% (US, A t li N Z l d)Australia, New Zealand)Average vineyard size varies from 1.3ha (Italy) to 21-26ha in Aust, NZ and South Africa, and to 40ha in the US

Wine production by firms, 2005Prod’n ‘000 cases % share of 3Prod n

(million hl)000 cases

/winery% share of 3 largest firms

France 52 5 13France 52 5 13Italy 51 141 6Spain 35 93 12Spain 35 93 12Germany 9 na 19U it d St t 23 131 61United States 23 131 61Argentina 15 211 39Australia 14 82 60South Africa 8 165 38Chile 8 293 34New Zealand 1 22 70

Vineyard area per grapegrower, 2005Area(‘000 ha) ha/grower

France 877 7Italy 795 1Spain 1181 6pGermany 102 3United States 213 40Argentina 217 8Australia 167 21Australia 167 21South Africa 100 23Chile 114 14Chile 114 14New Zealand 21 26

B Gl b li iB. Globalization prospectsover the next 20+ yearsover the next 20 years

What to expect in terms of changes in:

Tastes and preferencesincl. the influence of marketing strategies

Technologies and terroiro og a d oTrade, taxes and regulations

Taste changesSlowdown in population growth in OECD and China

Ageing is positive for per capita consumption? And for quality upgrading?What about for aggregate consumption?What about for aggregate consumption?

New markets emerging in AsiaWesternization of tastes in China and India?Westernization of tastes in China and India?Offsetting to what extent declining sales in traditional markets in Western and Eastern Europe/FSU?

R l f i d b d k ti ?Role for generic and brand marketing?

Oz wine exports by price range, 2002-06

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$22.50 and under'Bulk wine'

$90 plus'Specialty '

$67.50 to $99.99'Super premium'

$45 to $67.49'Premium'

$22.50 to $44.99'Pop premium' Note: labels on price points are terms of convenience only

Australian export prices affect winegrape prices

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Technology changes and terroirR&D strategies in different countriesScope for emerging markets (eg China andScope for emerging markets (eg China and India) to self-supply?

Also true as old markets rejuvenate (CEE/FSU)?• Georgia’s plan to develop a long-term strategy for exporting

to the West (advertised in The Economist, July 2007)

Climate changegHow will it affect grapegrowing conditions globally?How are R&D and plantings responding in various countries?countries?

Trade, taxes and other regulationsScope for reductions in taxes, subsidies and other trade distortions on wine relative to substitutes in production and consumptionproduction and consumptionProspective impacts of:

EU wine policy reformsSupermarket revolution including in developing countriesSupermarket revolution, including in developing countriesIrrigation water policy reforms

Will we see more convergence between Old and New World where both regions export terroir-drivenWorld, where both regions export terroir driven super-premium/icon wines alongside affordable bottles of popular premium wines, while non-premium wines continue their demise?p

C. Scope for a collaborative empirical research project on

where wine markets will be by 2030where wine markets will be by 2030

P ibl f di d b kPossible components of an edited bookLearning from history

Climate change: Karl Storchmann on little ice ageExcise taxes and trade policies: John Nye on British-French relationship in 18th-19th centuriesRecent global’n: 2004 book on World’s Wine Markets

Analyses of national market prospectsEmpirically based analytical narrativesEmpirically based analytical narratives

Comparative analyses of key issues (eg R&D)Global modeling of suggested scenariosg gg

A necessary adding-up machine, to avoid fallacy of compositionSo requires data collaboration, and sharing of modelSo requires data collaboration, and sharing of model

Among our current resources to build on:Wittwer, G. and J. Rothfield, The Global Wine Statistical Compendium, 1961 to 2005 (Australian Wine and Brandy Corporation 2006) also accessibleWine and Brandy Corporation, 2006), also accessible at www.awbc.com.au/winefacts (new version due April 2008)

Anderson, K. (ed.), The World’s Wine Markets: Globalization at Work (London: Edward Elgar, 2004)

G. Wittwer, N. Berger and K. Anderson, “A Model of the World’s Wine Markets”, Economic Modelling20(3): 487-506 May 200320(3): 487 506, May 2003

Improvements are needed to: (a) data

Production, consumption, trade, price and tax/subsidy datatax/subsidy data

Need to continually update How much more can we disaggregate all of those gg ginto wine types? Worth also splitting red and white?Needs to be mainstreamed into the Global Wine Statistical Compendium (to become biennial)Statistical Compendium (to become biennial)

• Make freely available to data contributors?• Seek collaboration by OIV? (currently has a Oz President)

Improvements are needed to: (b) model

Parameters, especially production, demand and trade elasticitiesdemand and trade elasticities

Can we differentiate better than just using Armington-type trade elasticities? g yp

Enrich the global wine model structureCurrently it’s a basic one assuming perfectly y g p ycompetitive markets, with just Armington elasticities to distinguish wines from different countriesdifferent countries

C l b l i d lCurrent global wine model structureBased on 2005 data, and projected to 2015, p j

Need to extend the base projection to 20304 categories of wine: super premium, popular premium, non-premium and sparklingnon premium, and sparkling

Need to split popular premium into two? Split red and white?2 categories of grapes (premium and multipurpose)

N d di ti f i ?Need more disaggregation of premium?47 regions: 38 countries and 9 residual country groups

Need to disaggregate Asia moreAble to decompose impacts of projections or shocks on price, quantity, welfare, etc.

e.g. from income growth, taste changes, technical changes, g g , g , g ,tax/trade policy changes, and altered trading partners

France Azerbaijan AustraliaFrance Azerbaijan AustraliaItaly Bulgaria New Zealand Portugal Croatia United States

i i dSpain Georgia CanadaAustria Hungary Argentina Belgium-Luxembourg Moldova Brazilg gDenmark Romania Chile Finland Russia Mexico Germany Ukraine UruguayGermany Ukraine UruguayGreece Uzbekistan Other Latin Amer/Carib Ireland Other Cent/East Europe South Africa Netherlands China TurkeyNetherlands China TurkeySweden Japan North Africa Switzerland Other North East Asia Other Africa U it dKi d S hE Ai Middl EUnited Kingdom South East Asia Middle EastOther Western Europe Other Asia Pacific

S f i hi h l b l iScope for enriching the global winemodel’s structureInclude different degrees of imperfect competition and economies of scale along the

l h i ?value chain?Include heterogeneous wine firms within countries? cou t esInclude firm-specific knowledge-capital owning multinational wine firms?

See Maskus and An IATRC Dec 2006See Maskus and An, IATRC, Dec 2006Add water as a marketed input?Add other beverages to get at differentialAdd other beverages to get at differential excise and import tax issues?

Moving the project forwardAdelaide soon to establish a Wine Economics Research CentreEconomics Research CentreKeen to receive expressions of interest i ll b ti h iin collaborating, such as in:

Data provisionModeling improvements Conference paper writing

What to expect in the 2030 projection?New World’s share of global wine exports has gone from <5% to >25% in the past 20 years g p y– and >50% excluding intra-EU tradeHow much larger will New World’s share be in

th 20 ?another 20 years? Which country(ies) will dominate trade?Madame Rothschild reminds us that making andMadame Rothschild reminds us that making and selling wine is easy once you learn how – it’s just the first 200 years that are difficult!j y