International Wine Trade: A Prospective Approach based on Porter’s Diamond Olivier Bargain LAREFI - Bordeaux University Jean-Marie Cardebat INSEEC Business School Raphael Chiappini Corentin Laffitte 12th Annual AAWE Conference 2018 - Ithaca, New York, USA - June 10-14, 2018

1. Context The international trade of wine: a rapidly growing market (almost 300 billions USD in 2016) Yet, the topic is poorly documented (excepted Anderson and Wittwer, 2013, 2017, 2018) Especially given the huge challenges to come in the next decades (climate change, change of consuming habits, emergence of new players, etc.) World wine export volume and value – 1995 to 2017 Source: OIV

1. Context Is Europe the immutable wine trade leader? Europe is the current leader… about 50% of the wine produced 2/3 of the exported volume Export volume (1000hl) in 1995 and 2017, with growth rate 1995 to 2017 Source: OIV

1. Context Is Europe the immutable wine international trade leader? Europe is the current leader… … but there is a catch-up phenomenon So, what to expect? Will the New World lead the international wine market in the future, following the catch-up theory? Morrison & Rabellotti (2017). Research Policy. Export volume (1000hl) – old world vs new world – 1995 to 2017 Note: old world (France, Italy, Spain), new world (USA, Argentina, New Zealand, South Africa, Chile, Australia) Source: OIV

1. Context Is Europe the immutable wine international trade leader? Europe is the current leader… … but there is a catch-up phenomenon What about the situation in 20 years? Do we have to look in new directions for finding the future wine-exporting leaders? North-Europe, Asia, America…? Export volume (1000hl) – old world vs new world – 1995 to 2017 Note: old world (France, Italy, Spain), new world (USA, Argentina, New Zealand, South Africa, Chile, Australia) Source: OIV

2. The drivers of international trade performance The Porter’s diamond… Porter (1990). The competitive advantage of nations. Harvard Business Review. The Porter’s diamond Factors conditions Firm strategy, structure, and rivalry Demand conditions Related and supporting industries

2. The drivers of international trade performance The Porter’s diamond… Porter (1990). The competitive advantage of nations. Harvard Business Review. … and the theory of international trade The Porter’s diamond Factors conditions Firm strategy, structure, and rivalry Demand conditions Related and supporting industries Ricardo, Neo-Ricardian theory (Vernon) New trade theory (differentiation) Linder’s theory Clusters theory (Marshall, Porter) HOS, Neo-factorial theory New trade theory (economies of scale), New economic geography Economic geography

3. An application of the diamond to the wine industry List of countries studied (16 countries): Old world (3) New World (6) Challengers (7) France Italy Spain Argentina Australia Chile New Zealand South-Africa USA Brazil China Georgia Germany India Portugal U-K Method: Desk research - literature search to find relevant proxies for providing a reliable trend  calculation of variables  scoring via quintiles (from -2 to +2) Google survey (wine economic experts) https://docs.google.com/forms/d/e/1FAIpQLSfbq26aSo-jfsE0ZDRS31Rtss8to3-ontUGG2j5tEXIuvhgJA/viewform?c=0&w=1

3. An application of the diamond to the wine industry The 4 factors of the Porter’s diamond: Factors conditions (6) Related industries (4) Market structure (6) Demand conditions (4) Agricultural land area, (vineyard area / agricultural area) Variations of vineyard area (over the 20 last years) Evolutions of yields Productivity level (divided by the average monthly salary) Capital intensity (number of tractors for 1000 hectares of agricultural land) Climate evolutions at a 2050 horizon Number of “wine professionals” (# of places giving level 3 awards in wine identified by the WSET (Wine and Spirit Education Trust) for 1 million inhabitants Number of wine retailers for 1000 hectares of vineyard Wine intensity of the domestic agriculture Vineyard area / agricultural land area Research in wine (# of wine related research institutions for 1000 hectares of vineyard) Number of procedures to create a firm Time in days to create a firm Firm size Number of wineries for 1000 hectares of vineyard Cooperation intensity Capacity of the domestic industry to create a competitive advantage (composed statistic based on the wines value and the volume exported)  revealed comparative advantage Annual domestic consumption per capita Its evolution between 2004 and 2014, Annual domestic consumption Its evolution between 2004 and 2014

3. An application of the diamond to the wine industry Scores by factors: Countries Factors' Conditions Related Industries Market Structure Demand conditions India 8,0 France 4,3 Georgia 6,3 Australia 2,8 New Zealand 5,0 3,7 China 2,4 Germany 3,3 USA 2,2 UK 3,0 Italy 1,8 Chile 2,7 1,6 South Africa 1,0 2,3 Spain 0,6 Brazil Portugal 1,7 0,4 0,0 1,3 Argentina 0,7 -0,2 -1,0 -0,7 0,3 -0,4 -3,0 -0,3 -0,8 -1,3 -2,0 -4,0 -2,3 -1,2 -3,7 -2,7 -4,3 -1,6 FC: climate change+land availability&price+labor cost RIindus: bias toward indus countries (research) and mature market (#retailers + pro) MStruc: Georgia because liberal (proc to create firm) & firm size; other because of the coop system and the procedure; capacity to sell at high price important volume (trade balance) DC: score could be fallacious because there is no weight for the potential market size (i.e. the demography)

3. An application of the diamond to the wine industry Global scores: expected evolution of the wine export performance

3. An application of the diamond to the wine industry Survey results: first statistics

3. An application of the diamond to the wine industry Survey results: comparison with the desk research  Spearman corr. = 0.21 (ns)

3. An application of the diamond to the wine industry Survey results: comparison with the desk research  Spearman corr. = 0.21 (ns) / 0.40 w/o Argentina (significant 14%)

4. Discussion Interpretation of the results: HOS vs Linder HOS: Factors’ conditions play a prominent role  climate change and land availability will be crucial (NZ) Linder’s theory: the main driver of trade performance is the domestic demand  large and growing market will give a significant advantage (Chinese domination? USA?) Comparison to the existing literature: (1) economic models CGEM (Anderson and Wittwer)  confirm the emergence of China and stress the role Exchange rate Macro-model (OECD-FAO, 2017; EU agri. outlook, 2017)  give interesting indications of trade evolution depending on the macroeconomic conditions  but never predict huge changes (prolong trends)

4. Discussion Interpretation of the results: HOS vs Linder HOS: Factors’ conditions are prominent  climate change and land availability will be crucial Linder: the main driver of trade performance is the domestic demand  large and growing market will have a significant advantage (Chinese domination? USA? UK?) Comparison to the existing literature: (1) economic models CGEM (Anderson and Wittwer)  confirm the emergence of China and stress the role Exchange rate Macro-model (OECD-FAO, 2017; EU agri. outlook, 2017)  give interesting indications of trade evolution depending on the macroeconomic conditions  but never predict huge changes (prolong trends) “This report presents the medium-term outlook for the major EU agricultural commodity markets and agricultural income to 2030, based on a set of coherent macroeconomic assumptions. The baseline assumes normal agronomic and climatic conditions, steady demand and yield trends, and no particular market disruption.” EU Agricultural Outlook, 2017, p8.

4. Discussion Interpretation of the results: HOS vs Linder HOS: Factors’ conditions play a prominent role  climate change and land availability will be crucial Linder: the main driver of trade performance is the domestic demand  large and growing market will have a significant advantage (Chinese domination? USA? UK?) Comparison to the existing literature: (2) Business and management literature Morrison and Rabellotti (2017): based on a thorough analysis of the trade trends They offer a complex picture of the wine industry  the challengers might become the major players in the future

4. Discussion Interest and limitation of the paper: Future research: Prospective method  seems the best approach to anticipate a breakdown Despite extensive sensitivity analysis, results are subject to personal interpretation, data availability and researchers’ choices (like for models) Future research: Extend the survey to wine professionals Refine the variables used to proxy the diamond factors Investigate the gap between the survey and the desk research (Argentina)

International Wine Trade: A Prospective Approach based on Porter’s Diamond Olivier Bargain LAREFI - Bordeaux University Jean-Marie Cardebat INSEEC Business School Raphael Chiappini Corentin Laffitte 12th Annual AAWE Conference 2018 - Ithaca, New York, USA - June 10-14, 2018