The Changing Wine World(2)
By 2009-2-15 9:17:07
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.
From torbwine.com