Preview of the Year - 2013 - Part V: Wine
By Euromonitor International | 31 January 2013
The final part of Euromonitor's preview of the year ahead for the global drinks industry sees senior alcoholic drinks analysts Spiros Malandrakis and Jeremy Cunnington turn the spotlight on the wine category.
From glut to shortfall: What a difference a year makes
With global grape production plunging to levels last witnessed four decades ago, and extreme weather phenomena currently plaguing wineries once drowning in excess must, bulk wine availability and – ultimately – pricing will be under extreme pressure. While tackling oversupply has been a historic priority, within an industry desperately trying to foster premiumisation, the timing for such a shift is not exactly perfect.
Western markets still find themselves either in the clutches of recessionary forces or narrowly escaping a relapse, at the same time that taxation burdens and big retailers’ clout are eroding profit margins even further. As Oscar Wilde once poignantly remarked: There are two tragedies in life: One is not getting what one wants, the other is getting it.
Packaging: Wrapping up
The emblematic nature of glass bottles and natural cork closures has already been gradually demystified and creatively undermined by a flurry of alternative packaging formats launched over the past couple of years. Bag-in-box, PET, cans, single-serve bottles and light-weighting will retain their relevance while increasing their penetration rates across the globe on the back of affordability, convenience and (true or perceived) environmental credentials.
On the other hand, the chatter regarding the massive success of the wrapped wine format in the US – wrapped in resilient and recyclable paper courtesy of aptly named design agency Stranger and Stranger – will enter the mainstream. Rude – or should that be controversial? – labelling, a focus on occasions rather than provenance and synthetic closures will spearhead the drive for the ever elusive millennial demographic.
Low alcohol, organic and low manipulation: A healthy debate
The introduction of spinning cone technology for lowering alcohol content, and the potential finalisation of agreements on the thorny issue of what really constitutes low abv and ‘natural’ wines will become the key stories in the innovation arena. Low-carbohydrate content will remain a relatively niche trend, primarily focused on the US market. Organic varietals will also post some gains, but special offers and discounts will remain key in depressed, mature Western markets.
Champagne versus other sparkling wines and the spoils of recessionary warfare
While Champagne producers have repeatedly - and vehemently - denied that their eponymous offering is in direct competition with the rapidly advancing other sparkling wine category, the facts can only be ignored for so long.
Double, triple or quadruple GDP dips and all-time record unemployment levels do not exactly create the ideal environment for Champagne to really take off. While a renewed push for emerging markets – which currently account for a minor share of global Champagne sales – is already in the making, Champagne’s mature Western bastions will continue shifting to other more affordable and less daunting sparkling wines. Contrary to the industry’s noises, aggressive discounting – a highly controversial, devaluing but ultimately necessary strategy – will retain its grip on Champagne for the foreseeable future.
Additionally, a renewed interest for the historically snubbed demi-sec, sweeter Champagne styles might provide the surprise vehicle for raising penetration rates in both younger audiences in the west as well as sceptical drinkers in markets like China, where drier styles are yet to be established.
Emerging markets: Second tier cities, wineries and flagship stores
The BRICs and – to a lesser extent – frontier markets will continue discovering still light grape wine at the same time that luxury players will expand investment in wineries, vineyards and flagship stores, educating local drinkers. With most major metropolitan areas from Brazil to China now already past the initial introductory stage, second tier cities will become the next major battleground.
While fortified wine will largely retain its sobering trajectory, cyclical drinking patterns, aspirational consumption and the product’s heritage credentials might provide a singular bright spot within an otherwise uninspiring category. Aged tawny sales will make the most of their upmarket credentials while riding the wave of niche interest that is slowly building up, and try to reinvent their positioning for younger and more experimental audiences.
M&A Still Not a Key Focus For Wine Companies
At the start of 2013, there have been a number of rumours about a possible takeover of the world’s fifth biggest wine company by volume, Treasury Wine Estates. This could be no more than the fevered imagination of people trying to hype the company’s sale. If there is more to it than that, then any acquirer will be either a company (probably from an emerging market) or investment house looking to get into the category. It certainly will not be a major wine player doing the acquiring.
As Treasury (formerly part of Foster’s Group) and Constellation Brands showed in the M&A frenzy of the late 1990s and 2000s, growing by acquiring companies and numerous brands is not a sustainable growth model. These companies will be continuing to develop themselves through enhancing their distribution in export markets instead. Any acquisitions are likely to be small scale and either focus on high-end brands in core markets or provide a route-to-market in emerging ones.
In 2012, Western wine companies, both large and small, have been looking for entry into key markets such as India and China. LVMH has been particularly active in 2012, having started a joint venture with York Winery in India, with plans to develop its own production facility there. Meanwhile in China, the company has had plans since 2011 to develop a locally-produced sparkling wine.
However, the traffic is not all one way, with a number of Chinese companies, such as Bright Foods, moving into high-end Western companies during the year. With the economic woes of Western Europe expected to continue for a while, a number of struggling small, high-end, wine companies are likely to be willing to sell.
Companies from emerging markets could be key, but multi-nationals should also not be ruled out, especially when it comes to Champagne houses. With Pernod Ricard now saying it is able to afford bolt-on acquisitions, it would certainly be interested in enhancing its limited Champagne production capacity.
With Western Europe slipping back into recession, US consumer confidence precarious and maturity issues flaring up across the West, the BRICs are increasingly viewed as the key markets for growth. There might be legislation-induced volatility, taxation-hit consumption or temporary swings in drinking patterns, but one thing is certain. As the West continues to suffer stagnation or outright declines, the wine industry's hopes are tied to China's ascent and the rising still light red wine tide. This research looks at the trend.
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Preview of the Year - 2013 - Part V: Wine
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