Introduction

This article uses what is known about the sellers, buyers, marketers and distributors of wine to project where the industry is going.

Sellers

Table 1 presents volume, value and price data on bottled and bulk wine for the leading exporting countries. The countries listed represent 85% of total wine exported, and as we will see, the distinction between bottled and bulk will be of growing significance. The average price for bottled wine is $4 per liter versus only $1 per liter for bulk. Italy is the largest exporter by volume while France leads by value. Spain is the leading exporter of bulk followed by Italy. Chile, Australia, and South Africa also export a lot of bulk at very low prices. New Zealand has done an impressive job of getting the highest price for both its bottled and bulk wines, even higher than France.

Table 1. – Leading Wine Exporters, 2013

Source: UN Comtrade Database

The highlighted exporters – Australia, Argentina, and New Zealand – are known for their single varietals – Shiraz, Malbec, and Sauvignon Blanc. Some argue that this notoriety will help them with other wine exports. I side with Michael Veseth on this issue who says “This explanation is flawed in several ways.” Australia has been struggling ever since Shiraz lost its position as the “in fashion” wine. The jury is still out on what will happen to Argentina when Malbec loses its “buzz”. New Zealand could be hurt if global attention turns to Pinot Grigio or Chenin Blanc. But it benefited from having Pinot Noir to sell when it became popular.

It is interesting to look at how things have changed since 2007 (Table 2). The volume and value of bulk wines grew by 18% and 74% respectively. The experiences of Australia and South Africa are notable. In 2013, Australia got only $1 for bulk versus $4.20 for bottled while South Africa got only 80 cents for bulk versus $2.90 for bottled. Both countries’ bottle wine exports fell dramatically. In the case of Australia, this was largely due to the saturation of the global demand for Shiraz. In the case of South Africa, many exporters concluded that even at the lower bulk prices, it was easier and less costly to export bulk than bottles. In contrast, New Zealand exported 57% more bottled and 18 times more bulk. Spain, Chile, Italy, Portugal and France were also able to increase exports at higher prices.

Table 2. – Leading Wine Exporting Countries, Percent Change, 2007-13

Source: UN Comtrade Database

Coming Production Changes: The Emergence of “Urban Vinters”

A professional colleague of mine has grown coffee in Guatemala for decades. About 10 years back, he recently realized there is more money in buying and selling coffee than growing it. He is now one of largest coffee brokers in the world. He points out that there are great uncertainties in growing any crop whereas brokers get their fees year in and out.

Grape “farming” has evolved quite differently than other types of farming. We don’t know the names of the farmers that grow our potatoes, carrots, etc., but the names of many grape farmers are well known in their role as vintners. In fact, their names and stories are often an important part of the sales pitch for their wines.

But change is coming. In 2011, George Taber profiled two great innovators: Fred Franzia and John Casella. What was special about them? They both recognized you don’t have to grow grapes to be a great vintner – you can buy grape juice and make wines from it. Franzia gained notoriety via his Two-Buck Chuck (Charles Shaw) wines sold through Trader Joe’s. And Casella’s Yellowtail brand grew so rapidly that some estimate it now constitutes 50% of US wine imports from Australia.

Here is a Franzia quote from Taber’s book: “People don’t understand that we’re both buyers and sellers…. We buy grapes, and we buy wine. But we also sell grapes, and sell wines. We try to sell for more than we pay. We buy at $4 and sell at $6. And we do the same thing every day.”

While Franzia at one time had 32,000 acres (50 square miles) in wine growing, Casella grows only 5% of the grapes that go into his wines. The rest come from 650 different sources. In fact, he has a number of staffers that do nothing but buy grapes for him.

And these two revolutionaries are not alone. According to Wine Business Monthly, Castle Rock, ranked as the 25th largest wine seller in the US, owns no vineyard and no winery. So what does this tell us? No need to be a grape farmer to produce good wines. Good wine can also be made by “urban vintners” who know how to find and buy the right grape juice.

Return to the distinction made in the tables above between bottled exports and bulk. Bulk wine exports are growing far more rapidly than bottled exports. I project this growth will continue as new urban vintners gain prominence and buy more bulk for blends. And it not is just the urban vintners buying bulk. A lot of the bulk wine is surreptitiously “blended” into brands that use “local terroir” in marketing.

Buyers

a. Country Importers

The UK imports more in total volume and value than any other country, but Germany is the leading bulk importer (Table 3). Switzerland pays on average $9.7 for every liter of bottled wine that they import, far more than any other country. Russia pays the least per bottle. The Netherlands bottled import share is greater than any other country while France imports a greater share of bulk than any other country. I wonder if any of this bulk is added to any of their prestigious Bordeaux or Burgundies? And could some of the US bulk imports be getting into its vaunted Napa brands?  

Table 3. – Leading Wine Importers, 2013

Source: UN Comtrade Database

Table 4 provides data on how imports have changed since 2007. As has been widely reported, the growth of China’s bottled wines has been tremendous. The data again reflect the growth of bulk relative to bottles with volume increasing 26% for bulk and only 6% for bottles.

 Table 4. – Leading Wine Importers, Percent Change 2007-13

Source: UN Comtrade Database

b. China

The growth in China’s demand for wine has been impressive. The volume of wine imported has increased 50% since 2007 with a value increase of 512%. France has been the largest beneficiary in both volume and value. But imports from Chile, Spain, South Africa, New Zealand, and Portugal have been dramatic as well. Bottled imports have outstripped bulk imports by a wide margin.

Table 5. – China Wine Imports and Changes Since 2007

Source: UN Comtrade Database

c. Consumer Knowledge Growing

As I have suggested, wine knowledge is increasing globally. Fed by publications such as Robin Goldstein’s Wine Trials publications and Consumer Reports, people are coming to realize that they do not have to pay high prices for good wine. This should mean falling prices as more people come to understand that wines costing $10 or less might taste just as good to them as or better than wines costing $80+. 

d. The “Fashion” Effect

While wine knowledge is increasing, wine has become a “fashion” product, like watches and sun glasses. Wine’s “fashion features” include brand, size and shape of bottle, and ratings. “Fashion” purchases result from ignorance fed by energetic wine salesmen, insecurity and the resulting need to impress. It will continue. But Americans have more wine knowledge and consequently fashion is not as important as it is in Hong Kong. And these differences are reflected in the average 2013 prices paid for French wines in the United States ($10) and Hong Kong ($26).

Marketing – New Wine Categories?

In days gone by, wine farmer/vintners have used regions/terroirs and varietals as selling points. With urban vintners taking over from the farming vintners, one wonders how they will market their products. The golfer Ernie Els has become an urban vintner. It is not surprising that he has named one of his wines that includes Cabernet Sauvignon, Merlot, Petit Verdot, Malbec and Cabernet Franc simply “Stellenbosch 2005”.  

Over the years, regions have been extremely important as marketing tools. Table 6 lists the leading regions used by Wine Spectator. Using 2010 for reds and 2012 for whites, the table lists all regions that had more than 50 wines rated. Even though the US regional “brands” had more wines rated than France, there is no question that France has benefited for the longest time from its regional appellations.   

Table 6. – “Regional Brandings” by Country

Source: Wine Spectator

In recent years, varietals have increasingly been used to categorize/brand wines. In a recent study, Kym Anderson et al counted 1,300 “DNA-distinct wine grape varieties”.  Using the same procedure applied above for regions, Table 7 lists the most popular grapes/varietals rated by Wine Spectator.

Table 7. – Most Popular Varietals in Wine Spectator Rankings

Source: Wine Spectator

How will the urban vintners’ new “blends” be marketed? If they buy a blend grape juice from all over the world, they will be hard pressed to use the traditional terroirs or varietals as marketing descriptors for their wines. And what if they find that a blend of red and white wines does well in tastings….

Distribution

There are three functions international distributors perform for vintners: transport, clearing customs, and selling wine in the buying country in ways consistent with its national and local regulations. As I have documented elsewhere, these regulations can be extremely problematic. Consolidation is afoot in distribution and it will continue because of the huge economies of scale in this activity.

Mike Veseth makes the point on just how important distribution is: “Brand Australia was built upon solid global distribution channels such as the W.J. Deutsch and Yellowtail partnership that, at one time, sold more Yellowtail wine in the U.S. market than all French producers together! It is probably not an accident that two of the three top Argentinean brands in the U.S. market are distributed through the Gallo system. The high degree of international ownership and control of the New Zealand wine industry guarantees efficient global sales. Distribution drives success on the global stage.”

However, it is important to distinguish between the critical logistical role distributors play from effective marketing. With few exceptions, distributors have too many wines in their portfolios to provide marketing assistance on any of them. For example, Martignetti is one of the largest distributors in the United States. Martignetti’s “Classic” wine catalogues has 19 pages of wines that list 2,432 wines.

Conclusions

1. While the US market is large, it should hold little appeal for foreign vintners not already well-established in it. The consumers are too knowledgeable, the offerings too broad and the prices too low for new entrants to make a meaningful return on their marketing efforts.  

 2. Non-grape growing “urban vintners” will take a growing share of the market by purchasing bulk and blending it. To compete, traditional vintners are already purchasing more low-cost bulk and adding it to their home-grown grape juice.

3. The urban vintners will need to come up with new marketing categories as they buy less well-known varietals from all over the world.

4. The “fashion market” for wine is doing well. And it will be perpetuated as the growing middle classes of Asia and soon Africa will want “fashion” wines.

5. Distributors are extremely important in selling wines overseas. But distributors cannot be relied upon to market a vintner’s wines.

The bulk definition comes from the UN Comtrade Database as wine in containers holding 2 liters or more.

>> Continue to Wine Buyers, Sellers and Grape Growers, Part 2: Investment Implications