A new report from IWSR and just-drinks suggests New World wine producers will continue to grow their share of the market. But while the New World can expect good growth in emerging wine markets, the Old World is fighting back. Ben Cooper reports.

The inexorable growth of the New World wine sector has been an enduring theme of the international wine market for the past 20 years. And while a new report from IWSR and just-drinks suggests the growth in New World wine will continue, it is clear that the last few years have been tougher, and the idea that the New World is holding all in its sway - and leaving the Old World in its shadow - is no longer the wine industry truism it once was.

Moreover, the challenges are likely to become greater in the coming few years. According to the report, Modern consumption and market performance of New World wine, between 1988 and 2007, New World wine sales increased from 7.8m nine-litre cases to 227.6m cases, representing a CAGR rate of 19.5%.

Australia accounted for much of that growth, with sales reaching 81.8m cases in 2007. By contrast, French wines over the same 20-year period suffered a CAGR decline of 1.7% to 133.4m cases.

By 2012, the report forecasts that New World will grow its share of all international trade in wine to just under 30%, against 27.6% in 2007. However, the report goes on to suggest that in spite of that growth, the future is likely to be more challenging for New World wine producers.

The success of New World wine was built on offering a highly favourable price-to-quality ratio, and this often meant low pricing, the report states. However, some suppliers are coming to recognise that this is no longer sustainable due to a number of factors, such as rising duties in many markets, unfavourable currency shifts, higher input costs and margin pressure resulting from retail consolidation.

Faced with these pressures, many producers are seeking to move away from the low-priced market. But, as the report points out, the midst of a major recession "may not be the most fortuitous time to undertake a premiumisation strategy". The report adds: "Moving consumers upmarket when the global economy is buoyant is one thing. Factor in falling property prices and a credit crunch, and life may become harder for the marketers."

Some suppliers, such as Gallo and Constellation, have indicated a willingness to accept a "volume hit" in the interest of restoring profitability, the report states. However, the fact that Constellation is now considering reactivating its low-price Hardy's Voyage brand suggests some "backtracking on this premiumisation push".

In the New World's favour, however, is the strong branded element in this part of the market, an important factor behind the New World's success. "Just as these marketers made their initial breakthrough at entry level through strong brand positioning, they will rely on branding to help them make the move upmarket," the report states.

The development of brands is most evident in key wine import markets like the UK and US. In the UK, the top 20 brands represent around 40% of the still light wine sector, and continue to outperform the market.

Seventeen brands sell over 1m cases in the UK and, underling the New World strength in the branded market, French brand JP Chenet is the only Old World brand in the list and sits in 14th position. Other than Chenet, none of the other Old World brands breaks the 600,000 case barrier.

The report points out that New World companies have the possibility of trading consumers up through different brands. "Suppliers are seeking to trade consumers up through coherent brand ladder strategies," it states. The problem is, however, that New World wines have a solid association in consumers' minds with lower-priced wines, and altering that mindset substantially will be a considerable challenge.

Moreover, the New World sector is doing this at a time when competition from the Old World is becoming stronger and undoubtedly more savvy. "A small number of Old World producers seem intent on playing the New World at their own game by launching well-researched, branded, varietal-based wine products," the report states, adding that the success in the UK and elsewhere of the JP Chenet brand suggests that "when French producers match New World producers in terms of easily understood brands and promotional dollars, they can succeed".

Interestingly, one of the ideas New World wine producers are pursuing as part of the premiumisation push is the development of more regional identities within countries. This is somewhat paradoxical given that the Old World has perceived that branded strength, coupled with a lack of a confusing plethora of appellations, are some of the defining strengths of the New World.

It remains to be seen whether the premiumisation move will be helped by more regional differentiation. There are growth drivers, however, that are undeniably in the New World's favour, such as potential in emerging wine markets.

"The traditional wine drinking countries are consuming less, while non-traditional countries particularly in the English-speaking world and Asia are drinking more. It is in these non-traditional markets where New World producers are winning the battle," the report states. "The fact that New World producers are performing best in non-traditional markets is a considerable cause for optimism."

The emphasis on brands is once again helping the New World in these new wine markets. "Because there is not a tradition of wine drinking, many of the consumers in the emerging wine markets are relatively uninformed about wine. New World producers have succeeded in demystifying wine to a great extent. The New World approach to wine branding has played a big role in that."