The Changing Wine World (4 July)

 

A mere two decades ago the wine world was very different to today’s wine world. Over the next twenty years the changes to the industry will be even greater and it will be unrecognisable by today's standards.

 

If we go back twenty years, the French consumed more wine per head of population than any other country. The only people that really consumed wine in the US were a small band of wine enthusiasts, and wine consumption by the middle class was virtually nonexistent. Wine consumption in China and India, the world’s two most populous nations, was nonexistent.

 

The majority of wine produced by New World producers was consumed at home, and the UK was the target export market.

 

How things have changed!

 

The countries mentioned above were not mentioned by accident. Those countries will have the greatest impact in the changing wine world for the foreseeable future, but in order to understand the future, we have to look at the past, especially in France.

 

France has been the centre of the wine universe since not long after Moses played front row forward against the Egyptian first division. Today, they are the world's most prolific wine producing nation, export more wine than any other country and they still manage to consume more wine than any other country; but that does not tell the complete story. Wine consumption in France is falling. In 1997 they managed to consume 60.1 L of wine per head of population; that's not bad when you consider that figure includes every man, woman and child in the country. Between 1997 and 2000, wine consumption in France dropped by a total of 4.28%. That may not sound like much, but when it is over such a small period of time, and the trend in declining wine consumption is still continuing today, you can see why the French wine industry is in trouble.

 

Moving on to the US market, the population of the US is just over 300 million people, and whilst that is a pimple on a nose in comparison to the population of China and India, the population of the US is critical to the wine world because of its wealth.

 

At the top end of the market, there have always been wine connoisseurs interested in buying the best the French have to offer, but now demand at the top end has grown substantially due to two reasons. Firstly, there are those who are buying top end French wine (in particular) for investment purposes.

 

In reality, there is nothing new in this philosophy. In the early 70s, I remember reading something written by Len Evans, the father of the modern Australian wine industry. Len suggested that wine connoisseurs should, if at all possible, buy two dozen of their favourite top French wines. Naturally these wines would be cellared for some time. Once the wine reached its peak drinking window, the objective was to sell a dozen, and with luck, by then the price would have doubled, so the connoisseur would be drinking their dozen for nothing. The philosophy was fine, provided you had the financial wherewithal to be able to do it.

 

I dare say Len was not the first person to have this philosophy, and it was going on for decades before he put it into print. The most significant, modern-day changes in this philosophy are twofold. Firstly, it is not just a small handful of wine connoisseurs who are buying these wines, for enjoyment and possibly a little investment. There are some that have absolutely no interest in wine who are purchasing these rare drops for investment.

 

Today, the sheer number of affluent, new wine lovers around the world buying these top French wines has skyrocketed, but supply is limited, so it is easy to see why the prices of top French wines have become stratospheric. That may be great news for the top French wine producers, but is certainly not good news for the average wine lover.

 

The US wine-consuming population is no longer strictly made up of wine connoisseurs. As of 1997 the US consumed 7.38 L of wine per head of population. To put that into perspective, that means that the average Frenchman consumed eight times more wine than their American counterparts, and even in Australia, we consumed close to three times the amount of wine per head. Generally speaking, 20 years ago the US wine market was unsophisticated. Very few people drank wine with meals and it was seen as somewhat elitist. Over the last two decades, the US market has changed and grown, and it will continue to do so. More and more people are drinking wine, and between 1997 and 2000, wine consumption actually increased by 9.63%. That's an enormous increase in a short period, and the good news for wine producers is consumption is still on the increase. Why is it so?

 

There are a number of reasons. Part of it is the natural evolution in an affluent society. According to a survey by the Wine Market Council, between 2000 and 2005 the wine drinking population in the U.S. increased by 31% among adults in households with a household income greater than $35,000.  Wine is increasingly being chosen as an accompaniment to meals in 'casual chain' restaurants, and at home when all the family dine together.

 

Part of it is the demystifying of wine, and this has been aided by many agents. At the top end, you have the likes of Robert Parker and magazines such as Wine Spectator. At the low end, there has been an ever-increasing range of inexpensive wines becoming available. Many of the “critter label” wines, like the inexpensive Yellow Tail have made a major contribution by attracting new consumers. Yellow Tail has been the most successful imported wine in the history of the US.

 

But it is not just low-cost imported wine that has helped. Five years ago a new range of wines called Charles Shaw were released in California and sold for $1.99 a bottle. They were instantly nicknamed Two Buck Chuck. In that five-year period, they have now produced three hundred million bottles of wine. In much the same way as cask wine helped build the Australian wine industry, these inexpensive bottled wines are helping to increase US wine consumption.

 

As the affluence of the US continues to grow, so will wine consumption, and that is despite many of the State governments best endeavours to make the shipping of wine ludicrously difficult.

 

The majority of people who consume low cost wines will rarely, if ever, buy anything more expensive, but a percentage of them will experiment with more costly wines, and some will move up the price chain and eventually become consistent mid range buyers. Over time, the increasing consumption of inexpensive wines will lead to an increasing consumption of midrange, and top end wines too.

 

According to the Wine Market Council chair Michaela Rodeno, "The tremendous surge in popularity for wine is coming from several sources. Young adults of the millennial generation are embracing wine in a manner not seen since the baby boomers took to wine in the 1970s."

 

The US market is building from a small base of wine consumers, but the population is wealthy and large. The growth rate in wine consumption per head in the UK between 1997 and 2000 was 18.96%, and the UK still consumes twice as much wine per head than the US, but because of the differing size of the population, the US will soon be importing and drinking more wine, in absolute terms, than the UK.

 

According to a news report I read recently, since the 1950s, the consumption of wine in France has dropped by 50%. Obviously if that trend continues, which it looks like doing, even if the rate of decline is not as great, no wonder the French growers are becoming violent. According to this news article, by 2010, Americans will be drinking more wine than the French. It is for these reasons the US market is so critical to all wine exporting nations.

 

In the future, it is not just the US that will be critical for wine exporters. Recently the media has been awash with stories about the emerging Chinese and Indian wine markets.

 

Growth of the Indian market is phenomenal, about thirty percent a year but its coming off a microscopic base. The average annual consumption per head of wine would probably not fill an eyedropper. Add to that duty of three hundred percent (which will drop to one hundred and fifty percent later this year) and whilst the potential market is huge, the Indian wine market is still in nappies and is not even crawling yet.

 

The Chinese market is more interesting from two perspectives. Firstly, the country has come from having no middle class, to having a capitalist outlook and an increasing middle class with a tidy disposable income, with a taste for the good things in life. As with the US, as affluence increases, so does sophistication, and the desire to expand ones horizons and try new things, like wine. The actual percentage of China who would qualify as middle class may be microscopic, but a microscopic percentage of billions is still a significant number.; about sixty million people to be exact. And it is estimated that there is a further one hundred and twenty million people with aspirations and are endeavouring to join the middle class. The Chinese wine market could also still be considered to be in nappies, but at least the baby is starting to crawl.

 

It won’t be long before the Chinese market is a significant consumer of wine in absolute numbers, even if the per capita number is tiny.

 

Recognising the potential, investors large and small, in a diversity of endeavours have tried to establish themselves in China. They range from a small Australian ice cream manufacturer to Australia’s richest man. Both the ice cream maker and James Packer found the cost of doing business and the bureaucratic involvement in China is expensive. The ice cream manufacturer I am referring to went broke trying to get into the Chinese market. Packers casino interests (and PBL share price) have suffered by changes to the rules that affect his existing casino in Macau, and a new casino on the mainland has a construction cost overrun of hundreds of million of dollars.

 

These examples have been used to show the difficulty to trying to gain a foothold in the Chinese market, but they are not the only problems facing wine exporters. Just as important is the difficulty that exporters and producers will face trying to make a profit from their endeavours. To put it bluntly, most of the wine the Chinese are importing is bulk, inexpensive plonk, and the less expensive the better.

 

China is a nation of red bigots with 94% of wine produced being of the non c-through variety. About 82% of wine consumed is locally produced, that’s thanks to past heavy import restrictions and taxes. About three years ago the imports restrictions and taxes eased, so the consumption of foreign wines has started to increase. However, it is interesting to note, that only about 2% of wine consumed is imported bottled wine.

 

China is a huge country with a diverse range of climatic conditions and in time, they will develop their own wine growing industry. Competing with that industry will not be easy. Cost of labour is one of the lowest in the world and at this point in time, the currency is under-valued. China is a low cost producer, and once they gain experience they will be a formidable challenger at the low cost end of the market. However, as good as the Chinese are at technology, reverse engineering and copying, it takes more than that to make great wine. It takes mature viticultural practices (amongst many other things) to make great wine. China can buy the people who have the knowledge, and in some respects this has already started. France is helping China to spend millions of dollars on a joint project. The French are providing the technical expertise, and are even supplying 100,000 vines. The objective is to make the project the benchmark for Chinese wine production.

 

However, it will take time to get it right in the vineyard, probably decades, so, China will not be making great, world class wines anytime soon. Just because China is producing “vin ordinaire” does not mean they won’t want to drink higher quality wine. As the number of wealthy and middle class people increases, demand for quality wine will slowly escalate. This is where the eventual, real opportunity for Australian producers lies.

 

Right throughout Asia and the rest of the developing world, there is a new breed of mega rich people emerging. Face, or status, is very important to certain races, and top level French wines certainly fit these buyer’s criteria, so there will be further pricing pressure on this limited resource. As time goes on, these wines will become more of a status symbol, and will be less accessible to wine lovers. First growths will become trophy, status symbols, to be enjoyed by the rich and famous.

 

The premium wine market will continue to grow, but competition will continue to increase as areas like South Africa and South America get better at producing these wines. There will continue to be a huge bun fight for the rapidly expanding bottom end of the market, a fight that some may win temporarily; but in the long run, many will wind up being burnt in this segment.

 

In the long run, in Australia, a few of the large producers, like Fosters, and possibly Jacobs Creek and  Casella (Yellow Tail), may be able to still make money from the low end of the market, but it will become increasingly difficult (and next to impossible if water restrictions in the irrigated areas remain) to do so. As a wine producing nation, the small to medium producers need to be concentrating on the low end of the premium market and higher. Naturally, the marketing strategy needs to change and be in line with this, but that’s another story.

 

 

Feel free to submit your comments!

Copyright © Ric Einstein 2007