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 [email protected]
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
700
800Sources: AWBC Export Approval Database, ABS Catalogue No 8504.0
500
600
700
es
400
500
llion
s lit
re
Domestic sales
200
300mil
0
100
-70
-72
-74
-76
-78
-80
-82
-84
-86
-88
-90
-92
-94
-96
-98
-00
-02
-04
-06
Exports
1969
-
1971
-
1973
-
1975
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1977
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1979
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1981
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1983
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1985
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1987
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1989
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1991
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1993
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1995
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1997
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1999
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2001
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2003
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2005
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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 …
1 2 0
1 0 0
6 0
8 0
per C
apita
F ra n c e
4 0
Litr
es p
I ta l y
S p a i n
A r g e n ti n a
2 0
S p a i n
C h i l e
01 9 7 0 1 9 7 3 1 9 7 6 1 9 7 9 1 9 8 2 1 9 8 5 1 9 8 8 1 9 9 1 1 9 9 4 1 9 9 7 2 0 0 0
… have continued beyond 2000 …
60
65
France
Litres per capita
55
60
Italy
50Portugal
40
45Switzerland
35
Spain
301995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
… while per capita consumption keeps growing in emerging marketskeeps growing in emerging markets
3 5
2 5
3 0D e n m a rk
N e th e r l a n d s
2 0
er c
apita
N e th e r l a n d s
U K
1 0
1 5
Litr
es p
I r e l a n d
5
1 0
J a p a n
01 9 7 0 1 9 7 3 1 9 7 6 1 9 7 9 1 9 8 2 1 9 8 5 1 9 8 8 1 9 9 1 1 9 9 4 1 9 9 7 2 0 0 0
J a p a n
However, US and Canada’s consumption is still low rel. to Europe’s English speakers …p g p
20 UK
15
17.5
12.5
15
C d
Ireland
10
Canada
7.5USA
51995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
… while domestic consumption in Chile and Australia continue to diverge
500
ML
Drink less, drink better RBTs -
400Chile
Chilean producers concentrate more on export quality wine,
better, RBTs - , cardiovascular +
300
Australia
not jug wine
200
Taste swing to beer and spirits
Birth of the cask
0
100
01961-65 1966-70 1971-75 1976-80 1981-85 1986-90 1991-95 1996-
20002001-05
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
9 0
1 0 0
7 0
8 0
(%)
( i n c l in tra E U tra d e )
5 0
6 0
expo
rt v
alue
(
O ld W o r ld
(e x c l . i n tra -E U tra d e )
(in c l . in tra -E U tra d e )
3 0
4 0
hare
of w
orld
(e x c l . in tra -E U tra d e )
1 0
2 0
S
N e w W o r ld
01 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0
(in c l . in tra -E U tra d e )
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
80s
6070
re
p 3
firm
4050
nt s
har
es b
y to
2030
perc
enob
al s
ale
010
of g
lo
Softdrink
Spirit Tea Coffee Beer Wine Source: Centre for International Economic Studies
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
25003000
15002000
0500
1000
0
nste
llatio
n
Est
ates
e
LVM
H
Dom
eq e
J G
allo
e
tel F
rere
s
e G
roup
e
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t
de F
ranc
e
Bac
ardi
e
Hen
kell
Dia
geo
cher
heim
l Jac
kson
ha Y
Tor
o
Con
ster
s W
ine
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card
/Alli
ed
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t
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Win
e F
nds
Cha
is d B
Sch
loss
Wa
Ken
dal
Con
ch
Fos
Per
nod
Ri
Gra
n S
Source: Rabobank, 2006
Australia dominates New World wine exports
2000 0
2500.0
A t li
1500 0
2000.0 Australia
Chile
USA
1000.0
1500.0 USA
South Africa
500.0Argentina
New Zealand
0.0
0 2 4 6 8 0 2 4
19901992199419961998200020022004
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
35
40
20
25
30
case
s
Increase over prior year
10
15
20
mill
ions
c
0
5
10
-5YEJul'02
YEJul'03
YEJul'04
YEJul'05
YEJul'06
YEJul'02
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YEJul'05
YEJul'06
YEJul'02
YEJul'03
YEJul'04
YEJul'05
YEJul'06
YEJul'02
YEJul'03
YEJul'04
YEJul'05
YEJul'06
YEJul'02
YEJul'03
YEJul'04
YEJul'05
YEJul'06
$22.50 and under'Bulk wine'
$90 plus'Specialty '
$67.50 to $99.99'Super premium'
$45 to $67.49'Premium'
$22.50 to $44.99'Pop premium' Note: labels on price points are terms of convenience only
Australian export prices affect winegrape prices
900
1000
ice 6.00
7.00
e fo
b)
700
800
grap
e pr
i
5.00
ped
($/li
tre
400
500
600
onal
win
e$/
tonn
e)
3.00
4.00
ice
ship
p
200
300
400
age
natio ($
2.00
3.00
e w
ine
pri
0
100
200
Ave
ra
0 00
1.00
Ave
rage
0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
0.00
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
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