April 2006 Issue of Wines & Vines

Wine Evolution: a dose of reality for exporters

by Paul Franson
For small, high-end American wineries, the lesson from Wine Evolution 2006 was clear: All other wine regions are targeting the United States as the most attractive wine market in the world, but few overseas markets are ripe for any American wines except those at the low end.

The seventh edition of the conference was held in Paris at the end of January by international wine consulting firm Skalli & Rein. About 300 executives and managers attended the global sales and marketing forum and heard talks by more than 25 speakers at a time when the momentum in the wine business is shifting from the Old World to the New. Consumption per capita is growing among most countries that aren't traditional big wine producers, while that in the famed wine countries of Europe is dropping, leaving Europeans to wonder how they can compete--or even survive.

Ironically, Gallo's Red Bicyclette is one of the positive signs for the French industry, which is undergoing historic dislocation. Thierry Jacquillat, former CEO of Pernod-Ricard, said that "Even Coca-Cola has been forced to adapt its soda to different markets, so French wines will have to do it as well." British writer Robert Joseph added bluntly, "Hope is no longer a good strategy for the French wine industry."

By contrast, the U.S. market is growing at a healthy pace, and Americans don't hesitate to buy expensive wines. Our fastest-growing wines lie in the middle and higher range, not at the bottom of the market as in many countries. This, and the sheer size of the market, make it most attractive to overseas producers.

The topics of greatest interest among the largely European attendees included markets and opportunities, with special interest in the big markets of Germany, the UK and the U.S., plus intense attention to the world's largest countries, India and China. The latter are minor markets and producers, but both have the potential to become factors in both areas.

Mario Aron, vice president of Asc Fine Wines in China, discussed the potential for wine in the nation of some 1.3 billion people. Surprisingly, China has a long wine tradition, and its own wines represent more than 90% of current sales, but the wine isn't of high quality. As a result, there's great interest in imports, and the market for imported wines is growing quickly--by 52% last year--though it's still small at 7 million liters.

Aron notes that the market is primarily in eastern cities, and at four- and five-star hotels, international supermarket chains, top restaurants and for corporate events and gifts. He adds that the market represents many years of uncertainty in a market where it's often a challenge to get paid.

India also has a huge population with 1.1 billion people, a small domestic industry and huge potential. Rajeev Samant, CEO of one of the biggest Indian wine importers and producers, Sula, said that "Wine consumption in India is still very limited, even compared to China, but it will grow very rapidly in the next few years (25% in volume and 30% in value). But even with that growth, by 2010, India should hit only 1.8 million cases." It's now 600,000 cases.

Samant says the average annual wine consumption in India is 0.006 liters per capita (by comparison, it's 9 liters per capita in the U.S.) and the country has the largest number of teetotalers in the world, but Hinduism has nothing against drinking, and India is the world's largest consumer of whiskey, though most is domestically produced.

The growth of Indian "Silicon Valleys," and increasing acceptance of drinking wine by women are also encouraging consumption.

The huge country has a tiny wine production, with only about 800 hectares in winegrapes (1 hectare = 2.47 acres), though Sula is adding 400. India's second largest producer, it made 80,000 cases last year in mountain vineyards.

Within Asia, by contrast, Japan is relatively sophisticated as a wine market. Its wine consumption averages 2 liters per year, with beer, sake and most spirits declining. According to Lisa Perrotti-Brown of importer Millesimes in Japan, wine consumption has tripled since 1965, and young Japanese are gravitating toward wine. Consumption in Tokyo approaches 6.5 liters per capita.

The country's 127 million people consumed 21.5 million cases, 14.5 million imports. The biggest market now is for $4 to $8 wines, with wines between $8 and $20 growing fastest. Sparkling wines are very popular, from Italy, Spain and Champagne.

French wines represent 40% of the market, with the U.S. in third place with 14%. As in the U.S., [yellowtail] has been a huge success, and the Japanese are embracing the concept of brands.

In Europe, the United Kingdom is America's biggest wine market, but it seeks very inexpensive wines. Speaker and writer Robert Joseph notes that the UK is the fastest-growing wine market in the world, but 80% of the wine is bought at supermarkets. Tesco alone represents 29% of the off-premises sales.

American wine is doing well in the UK, being up 17%, higher than Australia's 10%, while France is down 4%. The U.S. will soon become the second largest exporter to the UK (after Australia), but it's mostly of low-end wines such as Gallo and Blossom Hill. Joseph says the average price for U.S. wines is £4 (£1 = $1.74), but less than 12% of the market is for wines over £5. And 65% of the wines in the UK are discounted or otherwise on promotion.

There's not much market for better wines from U.S. boutique or large producers. Germany is similar, a nation of bargain hunters where two-thirds of all bottles sell for less than 2 euros (1 euro = $1.18) and 88% sell for less than 3 euros.

In the Netherlands, consumption is robust at 20 liters and rising. French wines have dropped from 60% to 44% of the market and South African wines are very important because of the two countries' shared history and language. According to wine merchant Peter Klosse, the average price is rising and is now 4.44 euros.

Another subject of great interest at the conference was consolidation in the wine industry.* A poll conducted during a session indicated most of the attendees agreed that consolidation will accelerate in the years to come, and that survivors from this activity will increase their profit margin in the long run. Interestingly, the participants--many from large wine companies--were very enthusiastic about this consolidation.

It was not a venue for news announcements, but during a standing-room-only workshop on communication, Stéphane Rein, a partner at Skalli & Rein, described its new Wine Evolution Network community for managers of the wine industry. This new service will be available online by June 2006. It's sort of myspace.com for the wine business, and generated considerable interest among the forward-thinking Wine Evolution attendees.

For information about Skalli & Rein and the Wine Evolution conference, visit skalliandrein.com.

*A summary of the presentation "The polarization of U.S. wine into giants and boutiques," by Paul Franson, is available at skalliandrein.com/winevolution/news003303af.php.
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