Wine production relies on agriculture, a sector that has always been subject to climatic, political and economic cycles. So, it is not surprising that many professionals in this industry - a term many dislike - tend to ignore academic reports and analyses. They take it for granted that they live and work on a rollercoaster.
In today’s fast-changing world, however, where many hundreds of wine producers are going out of business, thousands of hectares of vines are being uprooted and millions of people are altering their eating and drinking patterns, the sand is not a good place in which to hide one’s head.
This, at least is the motivation behind a report entitled State of the International Wine Market in 2022: New market trends for wines require new strategies by Rafael Del Rey of the Spanish Observatory of Wine Markets and Professor Simone Loose of Geisenheim University.
This peer-reviewed Wine Economic Policy paper, published by Firenze University Press focuses most of its attention on the last 20 years or so. In particular, it looks at the shifting relationship between volume and value, and the shift in markets and styles.
More wine traded
Stretching rather further into history, though, the authors point out that “Up to the 1970s, less than 15% of total wine consumption was traded among different countries.” By 2022, that proportion had more than tripled - to around 46%. So, as they point out, “almost every second bottle of wine is now consumed in a country other than the one in which it was produced.”
It was apparently, “Italy and then France” that began to increase exports 50 years ago, followed by Spain “much later because of its late entry to the EU in 1986.” Other countries, including the New World and Eastern Europe joined in and, for the first 11 years of this century, the global wine trade enjoyed annual growth of 4.3%. Since then, this has dramatically slowed to an anemic 0.4%.
In an almost mirror image, between 2000-2010, average prices “largely remained constant”, but then they suddenly changed gear and grew by just over 4% every year - jumping from €2.32 per litre in 2011 to €3.59 last year. The combination of these factors is responsible for the value of the trade, as a whole, growing from €14bn to more than €37bn since the millennium.
No Covid or Ukraine effect
Importantly, when considering recent data, the authors have taken into account the pandemic and current conflict and found that these have had little impact on the general trend. Indeed, in 2022 “despite uncertainties caused by the Russian invasion of Ukraine, increasing deglobalisation and generalised inflation, the overall value of world trade increased by 9.3% while the volume decreased by 4.5%.”
The premiumisation reflected in these figures has not benefited all producing countries equally, however. France and Italy have gained far more than Spain where “values have almost remained constant over the last five years.” Curiously, however, there are other differences in the performance of the two stronger nations. “France’s export value seems to be most sensitive to economic conditions, showing strong depressions during both crises and steep recoveries thereafter. It grew from less than €6bn to almost €10bn in the 10-year period since 2009. Fuelled by inflation, recovery after Covid-19 has been even steeper, increasing from €8.7bn billion to more than €12bn in two years. Italy shows a more stable value increase with weaker sensitivity to economic crises.”
Shift in markets
An obvious game-changing phenomenon over the longer term has been the geographic shift in consumption. “Wine [became] fashionable in societies that had previously shown a preference for beer or other international beverages while it was losing popularity in traditional wine-producing regions… In areas where wine is not a traditional beverage, like most countries in Latin America or Africa, the value of wine imports continues to grow faster than in more traditional wine regions, such as Europe.”
However, these two ‘new’ regions represent less than 5% of the global market, so they do not begin to make up for the reduction experienced in Europe. The authors suggest that “An interesting research question is what strategies the French and Italian wine businesses used to achieve this success” but without digging too deeply, one explanation might be the strength of the former two countries’ regional brands. Spain struggles to compete with a list that would include Bordeaux, Burgundy, Côte Rôtie, Provence, Barolo, Brunello, Chianti and Etna. By comparison, North East Italy has 17,000 ha of Pinot Grigio, more than four times the area of the Albariño vineyards in Rias Baixas.
Too much wine
Wherever the wine is being consumed, over the last quarter of a century, less of it has been drunk than produced - with the exception of 2017, when production and consumption reached a point of equilibrium.
This annual surplus is a permanent feature of the industry, and shows no signs of being resolved. In the 20 years from 2002-2021, the average surplus was 28.5m hl. From 2017 to 2021 - a period that included an unusually low and a high production year - the figure was 31.8m hl.
The only change lies in the markets where the wine has been drunk. Of the top five markets by value, the UK and more spectacularly the US, have grown significantly faster since the millennium than Germany, Canada and Japan. Of the following six, Russia, Netherlands and China have been the star performers, but sales to the latter country have fallen spectacularly after peaking in 2017.
In 2022, shipments to China by value were still nearly €1.3bn higher than in 2000, but OIV preliminary estimates for 2022 suggest that Chinese consumption has dropped to 8.8bn hl, the lowest figure since 1998.
China following in US footsteps?
Has China lost its taste for wine, or is this a temporary blip? The report authors admit that “It is hard to predict the future development of wine consumption and imports to China. Current accounts from IWSR indicate increased sales of imported spirits with the reopening of on-premise consumption. As wine consumption in China has been closely tied to a positive attitude towards a Western lifestyle,
it is uncertain what effects the shift in geopolitics, deglobalisation, the development of domestic production and aging of the Chinese population will have on future wine imports to China.”
Time will tell, but industry observers with long memories will recall that, after hitting 9l (2.42 gallons) per head in 1985, US consumption fell over the following 21 years to as low as 6.3l (1.67 gallons) in 1992, before bouncing back in 2007. So, maybe the recent Chinese slowdown is not as unique a phenomenon as some might suppose.
On the other hand, according to the California Wine Institute, in 2022, disaffection among millennials and Gen Z has led to a fall in US consumption - to 10.8l (2.86 gallons), the lowest figure since 2015. Del Rey and Loose wonder “Considering the shift in wine consumption of younger generations in the USA, it is uncertain to what degree the value of wine exports to the USA can be sustained into the future.”
In terms of what people are drinking, the report states that “For a long time, “real wine” had to be red. To be highly rated, for instance, by Robert Parker’s Wine Advocate, only a few years ago, red wine had to be heavy, strong, bold and jammy. Now, we see a major shift globally towards lighter and refreshing wines.” This assertion is supported by statistics showing the rising demand for sparkling and white wines and a shrinking market generally for red.
However, it may be that their comment about ‘bold’, ‘jammy’ reds losing their appeal may reflect the authors’ and other experts’ hopes rather than reality. US sales of bourbon barrel-aged, 15% alcohol wine are booming, and they are gaining traction in the UK where the Australian Jam Shed brand whose label includes the words ‘Rich, Jammy, Smooth’ is also a best seller. The Guv’nor, a soft, jammy, slightly off-dry, Felix Solis red from Spain has also been spectacularly successful.
Easy-to-drink and cheap
More important than style may be price. The report suggests that “The small niche of [high value] premium and super-premium wines represents a limited wine volume (of possibly 10–15%)… There is a large segment of highly price-sensitive consumers who favour more popular and easy-to-drink wines (lighter, fresher, sweeter, white, rosé, sparkling, etc.) at very competitive prices. Some of these consumers have reduced their wine consumption and traded down to lower price points, increasing the price competition for producers in this large segment.”
The beneficiaries of this trend will be “Large companies with a portfolio of well-known brands” and efficient businesses that can deliver “cost-efficient, own-label products.” Producers “stuck in the middle… with costs too high for price competition but a profile too low for premium” may be forced “out of the market.”
There are implications here for those who believe in the traditional system of European PDOs. The ‘pre-sensitive’ consumers in non-producing countries are more interested in taste than these ‘objective quality indicators.’
No more PDOs?
As the report states, “PGIs - Protected Geographical Indications, former table wines with geographical indication) products and wines that are based on grape varieties, which can more flexibly react to changes in taste preferences, are less affected by the current crisis than traditional and strongly regulated PDOs, such as Bordeaux or Rioja.”
Within these PDOs, there are winners - “premium and super-premium wines… [that have] evolved very well in recent times, even increasing sales after a double-digit increase in prices” and losers: “traditional wines from the same PDOs… targeting a more popular segment of consumption [and suffering] from strong oversupply and… requesting crisis distillation from the European and national authorities.”
The weaker players “can hardly compete with wines produced in cheaper producing regions, particularly in a segment of the market for which the region of origin may not be so important and may no longer justify a higher price.”
Pigs in the middle
If this “may be” a problem for what Del Rey and Loose describe as companies “caught in the middle”, it could also be a concern for regions.
Controversially, given the eagerness of the OIV to encourage the proliferation of demarcated regions, the authors of this paper suggest that “If the segment of high-quality PDO wines is limited and not growing further, it might not be a desirable goal for each wine region to establish PDOs.”
The report concludes that “New consumers in new countries and new trends are forcing companies to adapt their structures and follow new strategies to be economically sustainable in the long run.” Small and medium-sized family businesses will have the choice between offering “either high-quality products or cost-efficient commercial products”, while large international companies may, as Gallo has done, for example, choose to have “a portfolio of products targeted to different segments… Closely following… consumers’ preferences will be a key element to succeed.”
In other words, now is the time for producers who want to survive to remove their heads from the sand.