The economic downturn signals further bad news for the still wine sector, which has already seen contraction in established markets. However, Rob Walker, senior drinks analyst at Euromonitor International, argues that wine companies must invest for the long term, particularly in emerging markets.

The economic downturn and specifically its impact on middle-income households spells more bad news for the still wine sector, which, over the past decade, has already suffered a significant contraction in demand across its core Old World consumer base. Going forward, there has, perhaps, never been a more important time for the industry to invest in new markets.

According to the latest data from Euromonitor International, global volumes of still wine increased by 2% in 2008, compared with 5% growth in the beer sector. Beer has now outperformed wine year-on-year for over a decade, illustrating a key shift in alcoholic drinks consumption culture. The disparity would have been wider had it not been for burgeoning wine sales in Asian and Eastern European markets, notably China, Russia and India, which have offset falling consumption in European markets such as Spain, Italy, France and Germany.

The problem, and by implication the challenge, for wine companies is that emerging markets, while undoubtedly offering strong potential, are yet to generate any significant value-enhancing upside for labels originating in the major wine producing countries. In China, for example, the key volume dividend is being channelled into domestic wine brands, not imports.

For New and Old World wine producers alike, the decisive trend over the past decade is that too few new consumers have been fuelling the category in developed markets and nothing that has happened in emerging markets can so far compensate for that.

The ageing demographics of major mature markets, such as Spain and Germany, are also a cause of concern. Indeed, the newest generation of drinkers, especially in the EuroZone, are turning increasingly to beer or fashionable spirits categories, such as vodka, thereby rejecting the consumption habits of their parents. In Italy, for example, consumption of beer and vodka was up 4% and 6% respectively in 2008, compared with a 1% contraction in still wine. Beer and vodka also did better in Spain, with both categories climbing 3% by volume against a 3% slowdown in still wine.

Furthermore, in the current economic conditions wine producers and distributors in developed markets are less able to rely on premium brands to boost their revenues. Specifically, as the economic crisis deepens, cash-strapped consumers of fine wine are increasingly likely to trade down, or alternatively cross-trade into more affordable drinks categories, especially in the on-trade. Beer is a probable beneficiary, due to its competitive positioning across different price platforms, but mid-priced spirits categories could pick up some of the slack too.

The still wine sector will, therefore, need to become increasingly competitive, not simply in price but in the way it markets and promotes itself, both in the on- and off-trade channels. Failure to raise its game will almost certainly lead to a damaging value slowdown in developed markets. To date that has been avoided because there have been sufficient numbers of recession-proof consumers to counter sluggishness in volume. But the current crisis will dig deeper. Critically, if fine wine demand were to erode significantly, it could mark the beginning of the end for small and mid-sized players.

If there is a silver lining to an otherwise bleak global outlook for still wine, it is the opportunity presented by emerging markets. If their potential can be successfully harnessed, they might still provide the volume and value safety net that the industry so desperately needs.

China is a powerful measure of both the risk and the opportunity. Alongside India, it has been the fastest growing still wine market in the world over the past two years. The downside for imported wine is that distribution difficulties remain a huge barrier to development. Specifically, one of the biggest problems is finding an agent or distributor with sufficient wine know-how; and there are further obstacles at retail level, not least in terms of the high entry and display fees charged by supermarkets. Wine companies will need to confront these difficulties head on, which will mean investing for the long term. Fast-track results are unrealistic and, to that end, investment in wine education will be important, especially in the on-trade channel.

One of the risks of throwing money at the emerging markets is that the contagion of the global credit crisis has spread much faster than many economists had expected. However, first-tier emerging markets such as China and India will experience a slowdown in growth rather than recession. The World Bank, for example, has recently trimmed its 2009 growth forecast for China from 9% to 7.5%, but this is still a highly attractive macro-economic growth story.

Crucially, a global financial crisis is not the time for the wine industry to go into hibernation. Rather it is, perhaps, the critical moment to raise the stakes and gear a strategy toward coming out of the slowdown stronger and reinvigorated.