The global wine market.

University Degree Business and Administrative studies

MEMORANDUM

TO: MR. LEW PLATT, CEO KENDALL-JACKSON WINERY

FROM: MICHELLE NEMETZ-DERUBEIS

SUBJECT: COMPETITION IN THE GLOBAL WINE INDUSTRY: A U.S. PERSPECTIVE

DATE: 5/8/2007

The total volume of the global wine market in 1998 measured to 6.8 billion gallons, with 25% of the total volume accounting for wine that was purchased outside the country from which the wine was produced. The increasing trend for the export market since 1995 is because of a change in the strategic priority that wine producing countries are placing on exporting as a method for growth. History proves that the market for wine was one of local production and consumption. At the same time, several wine producing countries around the world have begun to make an impact on the export market in an attempt to expand their industries beyond their limited local markets by building a global competitive advantage. This is resulting in a shift in market focus for some of the older wine producing countries and a rise of new wine producing countries around the world to increase in the competitive nature of the global wine market.

The U.S. is the fourth largest producer of wine in the world and only accounts for approximately 4.2% of the total wine export market based on volume. Unfortunately with the cross boarder activities U.S. wines have a higher cost burden over local wines and other imported wines, making it difficult to compete in the local markets overseas.

With the opportunities presented by the global wine market and the threat that importers pose to the U.S. wine industry. In 1998, the industry created a voluntary program called "WineVision". WineVision is a group of industry leaders who are working on strategic planning to expand the U.S. wine market. If U.S. wine is considered high-quality, high-value product in global markets the competition become cooperative and seek alliances in the foreign market and begin joining together for research efforts, technology sharing, use of production or distribution facilities and even promoting one another’s product.

OVERVIEW OF WINE

In looking at the history of wine the global dynamics of the wine industry are better understood through the wine making process. There are several factors that create a high quality wine and provide the competitive advantage needed to survive in the industry, some of these are: the conditions the wine grapes are raised and the processes used to make the wine.

With no universal naming style of wine, the two systems currently used are, Varietal, which refers to the type of grape used and Appellation, which refers to the region or area the wine is produced. Terroir refers to the quality of the wine. With the above factors providing successful names and quality, there are many opportunities to damage, as well as improve, the quality of the wine being produced. Each wine has specific aging processes and removal of the grape casing to produce the proper color and taste then the wine is bottled, labeled and shipped to the market.

WINE PRODUCING COUNTRIES

With the wine industry being global, there are two broad categories for the classification of wine producing countries, the New World Producers (Australia, Chile, and Argentina) and the Old World Producers (France and Italy). "Strategy 2025" is a business strategy that outlines how Australian wines will expand domestically and internationally. With the vision being that by the year 2025 the Australian wine industry will achieve $4.5 billion in annual sales by being the world's most influential and profitable supplier of branded wines and by pioneering wine as a universal first choice lifestyle beverage. In 1996 Australia ...

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WINE PRODUCING COUNTRIES

Australia has 3% of the total export market and ranks 8th in the world for 1998, in conclusion the high Andean climate is excellent for the production of high quality red wines. Chilean wines are higher in quality then their neighbor, Argentina, and in 1996, the government took an active role in maintaining the quality of wine for export by implementing the Denomination of Origin (DO). The top five 1999 markets that Chilean wines shipped to were the U.K., U.S., Canada, Denmark and Japan. Chile is the 9th largest producer of wine in the world with output of 100 million gallons in 1996 and 144 million gallons 1998. Argentina: Like Chile, Argentina has a long history of making wine. Unfortunately, Argentine wines usually have a hard time competing in the premium market place, although there is one region capable of producing such wine. The production of wine in Argentina has increased over the years, but the wine produced tends to be for local consumption, not for export, due to low quality and government regulations. The AOC regulates the area of the production, the method used to produce and store the wine as well as the minimum alcohol content of the wine. Italy: Italy, like France, also has a very old and established wine industry that is based on the appellation method to control the quality of their wines. The second appellation control system was developed in recent years to help raise the quality of the wines produced. The French wines are capable of competing in the higher price ranges, and it is not uncommon to find French wines that retail for over US$100.

New World Producers are using more modern production methods and are creating more a consistently higher quality wine. With modernizing production, the New World Producers can compete globally with quality at a lower cost of production.

MAJOR WORLD MARKETS

Most of the major wine producing countries are also major markets, there are many countries and regions that do not have the capability to produce quality wines in large volumes, but have high demand for the product. This section will provide an overview of wine markets around the world and will reference the per capita consumption rates of select countries.

The total market for imported wine in Australia for 1998 was 7.5 million gallons, which ends up being a 5% market share for imported wines based on volume. According to Strategy 2025, this low market penetration by imported wine attributes to the high quality and low price of the domestic brands, not because of government intervention to protect the market. The total market for imported wine in Argentina for 1998 was 1.3 million gallons, which is about a .4% market share for imported wines based on volume. The high volumes of wine produced at low cost makes it very difficult for imported wines to come in and compete on price.

Italy, unlike France, has a very small market for imported wines. The United Kingdom's wine market is considered to be the "crucible" for the global wine market. The U.K. has a very small domestic wine industry and has good relationships with many of the wine producing countries in the world proving that their strategy to join their competitors through strong relationships. Japan has seen a steady increase in the size of its imported wine market even though they are not ranked in the top 33 countries in the world for per capita consumption.

OVERVIEW OF THE U.S. INDUSTRY AND MARKET

The total wine market in the United States for 1999 was $18.1 billion with an average growth rate of 8.5% since 1994. The consumers of wine drink at least once a week and consume approximately 88% of the wine by volume.

The international image of the U.S. wine industry until the mid 1970's was that of a low quality jug wine producer. The wineries that produced high quality wines were doing so in low volumes so their presence and reputation was understated by the Old World producers who had accomplished the production of world-class wines. This changed in 1976 during a blind wine tasting contest in Paris, France where California wines from Napa Valley beat out several well-established European wines for the top honors. The U.S. has one of the most "open markets" in the world, with low barriers to entry for imported wines. Despite this, California wines have traditionally dominated the domestic market for years due to the ideal growing conditions and favorable marketing and branding actions taken by some of California's larger wineries. California wines are also seeing increased competition from wines that are produced in Washington and New York states, as their market share has risen from 6.2% in 1992 to 14% in 1998. This trend clearly supports the theory that the import market is overwhelmingly targeting the premium wine segments.

The top 8 companies produced a total of 77.6% of the wine in the U.S. market based on volume, while an estimated 1600 plus other wineries produced the remaining 22.4% in 1998. With the high number of producers and with the market dominated by a few major wineries, competition in the U.S. wine market is high. Table 7 shows how the customer preferences for the colors, or varietals, of wine in the years of 1990 to 1998 have shifted from white wines to red. White wines in 1990 accounted for 52.9% of the volume shipped, that number declined to 40.5% by 1998. The result for wine producers is the ability to now gain access to more domestic and international markets without added marketing and capital investments. Like all branded products, image is a very important aspect to the sale of wine. With the target market for wine being educated professionals in the upper income brackets, the image of a high quality, low volume winery can have great appeal. The volume being produced by the wineries is very low and the quality and image of the wine is very high.

U.S. WINE INDUSTRY EXPORTING

The major markets for U.S wines include the U.K., Canada, Japan, the Netherlands and Switzerland. The image of U.S. wines was poor until the 1976 Paris wine tasting competition, so the demand was not there. Government monopolies of liqueur stores and over production of wine are also seen in several countries around the world. The European Union (EU) accounted for 49% of U.S. exports by value in 1997, making the EU the largest market for U.S. wines. Canada has one of the most regulated markets for wine in the world and trade issue include state monopoly of liqueur stores, subsidies for the limited local production of wine, and a distribution system that curtails the ability of foreign companies to market their products.

The agent is interested in profit, not necessarily the market penetration strategy of a wine brand that they currently carry. In the past wine sales used to be sold through specialty stores, now 47.9% of consumers prefer to buy from "hyper" or super markets and 60-70% of the wine sold in Europe now goes through this channel. Correctly positioning wines with distributors/importers can give a winery a competitive advantage in the market. The mix of channels for reaching consumers can vary greatly depending on the market strategy that the winery adopts and the market segments that the wineries want to target. Wineries decide which channels to use depending on the image and market segment they want their wine to portray and on their marketing budgets. Premium wine brands tend to be targeted to upscale restaurants, resorts and high end liquor stores while large scale producers target larger market segments that are served through supermarkets and mega-stores.

In the U.S. domestic wine market in 1999 there were over 1600 wineries in operation. Most of those wineries have very low volume production capabilities, so a small number of large volume producers dominate the market. The Gallo's were also pioneers in the development of new wine production techniques and growing high quality grapes. This enabled them to capture a very large portion of the low-end table wine market. After establishing a dominant position in the lower price/high volume wine segment, the Gallo's made the move into the higher price/low volume premium markets by purchasing land in Napa and creating several new brands. In the United Kingdom approximately 3 out of 5 bottles of California wine are Gallo brands. Robert Mondavi Corporation: A niche player in the wine market, Mondavi focuses exclusively on the premium market segment. While Robert Mondavi was part of the family wine business, he helped to create and bring to market several innovations. The use of cold fermentation in the production of wine, which created a lighter and fruitier taste enabled him to differentiate the wine from European and other California wines. The barrels were used to age the wine in, and gave the wine a distinctive flavor to rival the French wines that were dominating the international market at the time. This elevated the brand image of his wines as being higher quality due to the associations with French wines and the region where his wines were produced, Napa Valley. Exporting and growing the global premium wine market is a priority for Mondavi who expects to export a minimum of 20% of their production to the global market in the future according to the 2000 annual report.

Beringer Wine Estates, Inc.: Like Mondavi, Beringer has a market focus on the premium segment and has high production capacity for that segment. The operating name for the company given to them by Nestle was Wine World Estates. Fosters Brewing Group acquired Beringer for US$1.2 billion and will combine Beringer's portfolio of wines with their wine subsidiary, Mildara Blass Limited. Mildara Blass currently has 25% of the premium wine market in Australia and their main export markets are the U.S., the U.K. and Europe. Wente sells to an estimated 160 country markets and exported about 61% of their total production capacity in 1997. They implement specific marketing strategies on a country by country basis. They do not focus on a few larger markets with limited service to smaller markets like their larger competitors. Some times the joint ventures are in traditional markets with established wineries to help produce premium wines, other times the joint venture takes on more of a problem solving role to get access to local markets. The agreement stipulates that the foreign partners must export Indage wine to other markets and that all bottling of wine to be sold into India must be done locally. Shipping bottled wine to Mexican markets became too expensive to compete in the local markets, so Wente started shipping bulk wine to Bodegas de Santo Tomas. With the competitive nature of the global wine market increasing, U.S. wineries will have a greater challenge competing in both the domestic and export markets.

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