Wine as an investment in the wake of globalization

1. Wine as an investment in the wake of globalization Kym Anderson School of Economics, University of Adelaide, Australia kym.anderson@adelaide.edu.au Institute for Quantitative Investment Research Conference Chateau la Couspaude, Bordeaux, 9 October 2008

2. Investment by whom? • Wine producers • Buyers of high-quality wines

3. Why is globalization relevant? • Global dominance of long-time European wine producers is decreasing • More challenges for those producers • And more choices, lower prices, but less familiarity, for wine buyers

4. Outline • Impact of globalization on returns to investing in grape and wine production • Information required by buyers to make sound investments in iconic wines for later consumption or resale • Are there proven ways for buyers to judge the future value of an iconic wine?

5. Dramatic changes on the supply side

6. Globalization of the world’s wine markets over the past 20 years • Changes in: • Consumer demand (tastes, regulations) • Production capability • Share of production exported • Global export contributions by ‘Old World’ vs ‘New World’ • Firm size and concentration in the industry

7. Wine globalization is not new … • Winegrape cultivation began before 6000BC • Spread west from Middle East from 2500BC • Spread north from Mediterranean by 400AD • Took another 1100 years before spreading to: • South America by 1500s • South Africa by 1655 • Australia by 1788 (from Rio and Cape Town) • California and New Zealand by 1820

8. … but wine market globalization has accelerated hugely since the late 1980s • Most previous globalization was about technology transfer, leading to little long-distance trade growth • But since the late 1980s, share of volume of production exported has risen from <10% to almost 30% • even higher in value terms (>50%?) • Europe’s share of world exports (excl. intra-EU) has fallen from >70% to <50% • Causing Jancis Robinson to include the G-word in OCW-3 • ‘New World’ wineries have become far more export-oriented, focusing on premium (esp. low-end) bottled wine, initially exploiting retail regulation changes in UK • Australia in next slide is just one example

9. Growth of Aust. wine exports, 1970-06 Sources: AWBC Export Approval Database, ABS Catalogue No 8504.0 Domestic sales Exports

10. Other features of recent globalization of wine markets • Mergers/acquisitions of wineries, especially cross-border • In response to IT revolution, FDI reforms, and the wineries’ need to combat the supermarket revolution • Flying vignerons enjoying 2+ vintages/year • accelerating 2-way int’l technology transfer • WTO-induced policy developments • Tax cuts (eg China, India); GI legal recognition • Parkerization of preferences

11. Divergent trends in tastes • Halving of per capita wine consumption in Mediterranean Europe and Argentina since 1970s • Doubling or more of per capita consumption in new markets in Europe (and Asia), and big rises too in UK (20lit/cap) and US (8.5lit/cap) • Big switch from dominance of super premium and non-premium to dominance of bottled value-for-money, easy-drinking premium wine • Popular premium range is US$1 to $4/litre pre-tax wholesale, or US$5-10 per 750ml bottle retail

12. Declines in wine consumption per capita in traditional markets, 1970 to 2000 …

13. … while per capita consumption keeps growing in emerging markets

14. Divergent trends in production too • Winegrape acreage expanded hugely in New World from late 1980s • Trebled in Australia, aiming at popular premium wine • Five-fold increase in New Zealand, aiming at super premium sav blanc and then also pinot noir • Acreage is stagnant or declining in Old World • EU regulation of its industry stifled adjustment, so was missing out on growth in popular wine niche • However, more-innovative producers in Europe are adapting/re-positioning to capture a part of the rapidly growing mid-range market, while cutting back on low-end non-premium wine • And are following Australia with generic advertising

16. Big variance in export prices (US$/lit)

17. Rapid growth in New World’s share of global exports • Even including intra-EU trade, New World’s share has grown from • 5% in 1990 to • 11% in 1995, • 19% in 2000, and • 24% in 2005

18. New World wine export growth, 1990-2005

19. Firm concentration is accelerating … • But from a low base: wine was one of the least concentrated beverage industries as recently as 1998 • Since then, major consolidation among wine firms has been a striking characteristic of the new globalization • driven in part by the need to combat firm concentration at the distribution and retail ends of the value chain

20. Share of global sales by top 3 firms, 1998

21. Mergers/acquisitions are continually altering the rankings

22. The 15 top global wine firms, 2006 Source: Rabobank, 2006

23. Great heterogeniety across countries in firm size of wineries and growers • National annual average winery output, in cases, varies from 5,000 (France) to 290,000 (Chile) per firm • Share of 3 largest wine firms nationally varies from 6% (Italy) to 60-70% (US, Australia, New Zealand) • Average vineyard size varies from 1.3ha (Italy) to 21-26ha in Aust, NZ and South Africa, and to 40ha in the US

24. Wine production by firms, 2005

25. Vineyard area per grapegrower, 2005

26. B. Globalization prospectsover the next 20+ years

27. What to expect in terms of: • Taste and preference changes • including the influence of marketing strategies and of Parker • Terroir and technology changes • including climate change and R&D • Taxes and other regulations • including EU wine regulatory reforms, water policy reforms, excise tax changes

28. Taste changes • Slowdown in population growth in OECD • But ageing raises per capita consumption of high-quality wines • New markets emerging in Asia • Westernization of tastes in China and India • What roles for generic and brand marketing? For Parker and wine judges?

29. Terroir and technology changes • R&D strategies in different countries • Scope for rapidly emerging markets (eg China and India) to self-supply? • Will old markets rejuvenate (CEE/FSU)? • Climate change • How will it affect grapegrowing conditions globally? • How are R&D and plantings changing in various countries?

30. Impact of govt. regulations • Prospective impacts of: • EU wine policy reforms • Supermarket revolution, including in developing countries • Irrigation water policy/regulatory reforms • Will we see more convergence between Old and New World, where both regions export terroir-driven super-premium/iconic wines alongside affordable bottles of popular premium wines, while non-premium wines continue their demise?

31. Climate change: will it lead to this in Australia?

32. Climate change may cause a rise in average temperatures in grape growing regions • Rise of perhaps 2.5oC by 2050, if little mitigation in the interim • Which means earlier grape harvesting, by perhaps 1 month • Hence following a much hotter ripening period (>4oC by 2050 in Australia?)

33. Warmer temperatures alter grape quality • Growing-season temp has an inverted U-shaped relationship with winegrape quality and hence price • But there’s a different optimal temperature for different varieties (Jones 2006) • Hence even if temperature change was the same in each region, climate change will affect regions differentially because of differing varietal mixes • In New World, regions will alter their variety mix • What about in Europe (given EU regulations)?

34. Climate change could affect winegrape quality also by: • More extreme weather events • More-frequent heatwaves, frosts, high winds, bushfires • hence more variability of grape yields and quality • Less rainfall in growing season and greater variation between seasons (& more salinity) • hence lower water quality and higher water price • Increased incidence of pests and diseases • => more difficult to maintain vine balance

35. What about supplies of wine in competitor countries in the face of climate change? • More-temperate, less irrigation-dependent wine regions (maybe not Calif. or Southern Europe) will be less adversely affected than Aust, and some will benefit from temp. rise (see Jones et al. 2005 graphs below) • but may still be harmed by more extreme weather events

36. Climate in France, New Zealand

37. Climate, and regional shares (%) in Australia’s winegrape industry, 2006

38. Will rest of world’s wine regions become more or less competitive with climate change? • 1950-1999 temperature changes (Jones et al. 2005): • Bordeaux: 1.76O • Northern Calif: 1.23O • Champagne: 0.54O • But warmer may mean better there

40. Projected temp change in wine regions, 2000-2050 (from Jones et al. 2005) • Bordeaux: 2.3O • Northern Calif: 2.2O • Rhine: 1.5O • Barossa: 2.0O • Warmer may mean better winegrapes in cool areas, but not in Australia’s hot areas

41. Regional average Australian winegrape price declines as January temperature rises

42. Extent of red varietal winegrape price decline as Aust. MJT rises beyond 19oC

43. Extent of white varietal winegrape price decline as Aust. MJT rises beyond 19oC

44. Possible adaptive responses by New World • Despite the crop being perennial, with large sunk costs, the wine industry has shown great agility and flexibility when unfettered by regulations

45. Big changes in Aust varietal mix since 1980 Source: ABS Vineyard Survey

46. Aust. regions’ varietal specialization has changed a lot in six vintages, 2001-2006 • Region i’s Varietal Intensity Index: Vim = fim/fm where fim is the fraction of variety m in region i’s crush and fm is the fraction of that variety in the national crush • Australian examples of 2 red and 2 white varieties:

47. Aust. Varietal Intensity Index: Shiraz

48. Aust. Varietal Intensity Index: Pinot Noir

49. Aust. Varietal Intensity Index: Sav. Blanc

50. Aust. Varietal Intensity Index: Semillon