International Wine Economics Topic 1. The economics of the world wine industry Sylvie Rivot, FMA, University of Mulhouse 1

Introduction Wine ‘market’? supply and demand But: no single market characteristics non homogenous 2

1. Wine: a globalized product Appearance of the first vitis vinifera species (first wine): BC (Transcaucasia) And then Near East, Mediteranean basin and Central Asia But effective winegrowing: only with the practice of pruning (to obtain ripe grapes, ready for winemaking) Art of exploiting the wine: the Greeks. Basis for the main European producing nations (now called Old World) Europe has become the hallmark of wine production France, Italy, Spain: still the three largest wine producers. (62.3% of world production in 2012) 3

1. Wine: a globalized product European countries: the largest wine consumers both in volume and value (54.2% of the global value linked to wine sales). France and Italy: still the large-scale consumers (around 50 liters/inhabitant) but decrease in frequency and volume. 2 major changes: - First overproduction crises develops export. Europe became the leading export market (95% of world export ). - Several phases of uprooting vines, often subsidised by the Common Wine Market Organisation, lead to a decrease in volumes produced. 4

1. Wine: a globalized product But European predominance called into question with the development of globalisation. Globalisation: “phenomenon of market expansion and convergence on a global scale, announcing global firms and products on a planetary scale” (Guihon 1998) World export grew by 50% Development of export stronger than development of production. Hence: rate of internationalisation (exports/production) more than 25% for all wine markets. 5

1. Wine: a globalized product Globalisation of wine market: increased importance of the new producing countries (New World countries). Australia, New Zealand, Argentina, South Africa, Chile: different history, different structures of production than Europe Wine production is growing: Americas (USA/Argentina): 19.6% of world production Asia(especially China): 6.9% Oceania (Australia and New Zealand): 5.9% Africa (South Africa): 5.1% Wine consumption is growing too: highest demand is now out of Europe (highest export growth: North America and Asia). 6

1. Wine: a globalized product So: -no single type of supplier, no single type of wine. -no single type of consumer (can be far away geographically from producers) Wine supply is a heterogeneous whole End consumption is a great unknown 7

2. Heterogeneity of supply and ignorance of end demand (discussion focused on winemakers and not distribution networks) 1. Development of production and appearance of new type of supplier, “négociants”: - initially, wine buyers with no role in production; - But some became vineyards with their own products. 2. As a reaction, several winegrowers grouped together: cooperatives 3. Development of the sale of the wine produced by their vineyard by the winegrowers. This evolution took several centuries 8

2. Heterogeneity of supply and ignorance of end demand This evolution took several centuries in Europe but less than a century in the new producing centres: - main great multinational groups in the NW producing countries; - The NW rapidly prioritized exports, so large groups with high volume distribution capabilities. Four major groups: -Gallo (US): 3% of wine sold with 60 brands, -Constellation brand (US) : 2% with 60 brands -Wine group (US): 2% with 15 brands -Treasury Wine Estate (Australia): under 2% with 80 brands Hence: supply highly fragmented 9

2. Heterogeneity of supply and ignorance of end demand Wine differentiates itself by the type of product offered. “Wine is the beverage resulting exclusively from the partial or complete alcoholic fermentation of fresh grapes, whther crushed or not, or of grape must. Its actual alcohol content shall not be less than 8.5% vol. Nevertheless, taking into account climate, soil, vine variety, special qualitative factors or traditions specific to certain vineyards, the minimum total alcohol content may be able to be reduced to 7% vol. by legislation particular to the region considered” (OIV) 3 categories Still wines Sparkling wines Fortified wines 10

2. Heterogeneity of supply and ignorance of end demand Sales - Off-trade: distributors selling wine for consumption outside the point of sale (super- and hypermarkets, discount stores, specialist shops, wine retailers) - On-trade: distributors selling wine for consumption at the point of sale (café&restaurants, hotels, clubs) - Sales at the cellar door at the estate -Sales on the internet Sales are essentially business-to-business For large groups, sales can be control (own distribution network, brand strategy. For small producers: intermediaries. Demand from these intermediaries and not from end consumers. 11

2. Heterogeneity of supply and ignorance of end demand Wine market much more complicated than the matching of supply and demand. Supply. Variety of possible combinations of type of suppliers, types of wines, points of sale. Demand. Critical role played by intermediaries (market power, misreading of end consumption. Lack of direct communication between producers and consumers. What is the link between quality and price? 12

OIV outlook The annual statistics report’s aim is to provide numerical facts and information to a worldwide growing vitiviniculture market. Each year, the report analyzes the cases of growth in the vine and wine sectors. This report provides data on the world’s vitiviniculture situation in the year 2010 and The reason this is done is to bring a better approach of providing general and extensive knowledge about the vitiviniculture sector. In doing so, member countries are well informed, enabling them to maintain a certain quality of production. The OIV Wine & Vine outlook ( ) presents a comprehensive perspective on the global, regional and country information on vines, grapes, dried grape wine and other vine products. The purpose of this yearbook is to inform on the trend of the wine sector at a world level. 13

OIV outlook Surface areas of world vineyards The areas under vines are defined here as the total land areas planted with vines, including the areas under vines not yet in production or harvested. In 2011 the global wine surface area decreased by 76,700 ha compared with 2010,making the global area under vines to 7517 kha. This is in line with the depressing trend characterizing the evolution of global areas under vines since 2003 (when it reached 7,884,000 ha) and, more generally, since the 80s where the average global vineyards were around 8800 kha. This phenomenon is mainly due to the implementation of the new Common MarketOrganization1 14

OIV outlook Surface areas of world vineyards However the shrinkage of the EU vineyard has been partially compensated by the maintenance and in some cases the expansion of the planted surface areas in the rest of the world led by the significant growth of China and India. The EU vineyard, which accounts for almost the 60% of the world vine surface, reduced the vineyard area from 4520 kha in 2008 to 4253 kha in However the shrinkage of the EU vineyard has been partially compensated by the maintenance and in some cases the expansion of the planted surface areas in the rest of the world led by the significant growth of China and India. 15

OIV outlook

OIV outlook Surface areas of world vineyards The areas under vines are defined here as the total land areas planted with vines, including the areas under vines not yet in production or harvested. In 2011 the global wine surface area decreased by 76,700 ha compared with 2010, making the global area under vines to 7517 kha. This is in line with the depressing trend characterizing the evolution of global areas under vines since 2003 (when it reached 7,884,000 ha) and, more generally, since the 80s where the average global vineyards were around 8800 kha. This phenomenon is mainly due to the implementation of the new Common Market Organization1 However the shrinkage of the EU vineyard has been partially compensated by the maintenance and in some cases the expansion of the planted surface areas in the rest of the world led by the significant growth of China and India. (CMO) in the European Union (EU). The EU vineyard, which accounts for almost the 60% of the world vine surface, reduced the vineyard area from 4520 kha in 2008 to 4253 kha in However the shrinkage of the EU vineyard has been partially compensated by the maintenance and in some cases the expansion of the planted surface areas in the rest of the world led by the significant growth of China and India. 17

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