13

The Globalization of Wine

Historically, most of the wine consumed in the United States was produced by domestic wine firms that exported little of their output for sale abroad. Foreign wine firms and their products were a relatively insignificant component of the U.S. wine industry. Wine markets in other nations were also characterized by local production and consumption. The exception was France and Italy, which consumed mostly domestic wine, but also exported a substantial amount of wine to other European countries. Over the past several decades, world wine markets have become increasingly integrated. Retail store shelves in the United States and other nations are now filled with wine products from all over the world. Large multinational firms that source grapes and produce wine in a variety of countries have become important players in world wine markets. Joint ventures between wine firms in different countries are proliferating. Winemaking consultants, called flying winemakers, assist in directing wine producing across the globe, spreading innovative new vinification techniques and advances in technology. Australia, Chile, Argentina, South Africa, and New Zealand have emerged as new suppliers and formidable competitors in the United States and other wine-consuming countries, exporting much of what they produce. The demand for wine is increasing dramatically in Asian nations, creating large new potential wine markets. Countries like China and Japan are becoming major consumers of luxury wine products.

To what extent and why are world wine markets becoming globalized? What are the salient characteristics of the structure of the global wine industry? To what degree does the United States participate in the global wine market? These questions are the focus of this chapter.

INDICATORS AND CAUSES OF WINE GLOBALIZATION

A number of indicators suggest that over the past few decades the production and consumption of wine has rapidly transformed from a local to a global industry. From the late 1980s to 2009, the proportion of the world’s wine produced in one country but exported and sold in others increased from 15 to 32 percent.1 Today, about one of every three bottles of wine consumed in the world is an imported product. These products include a number of international brands made from wine produced in a variety of countries and sold by multinational wine firms. For example, prior to 1990 Blue Nun was a popular German white wine product made from grapes grown in Germany. Today, Blue Nun is a wine brand comprising twenty separate products, including Cabernet Sauvignon, Merlot, Shiraz, Zinfandel, and Chardonnay made from bulk wine produced in a variety of countries, France, Australia, Spain, and the United States among them.² The German wine firm Langguth sells an estimated 500,000 cases of Blue Nun each year in more than 100 countries.³ The Blossom Hill wine brand is produced in California, bottled in Italy, and sold primarily in European countries by the London-based conglomerate Diageo. Most consumers purchase Blue Nun, Blossom Hill, and other high-volume international wine brands like Franzia and Lindemans based on their quality-to-price reputation and consistent style, and neither know nor care in which country the grapes were grown and the wine was produced, or even the name of the firm that produced it.

Also indicative of wine globalization is the emergence of what is sometimes called an international wine style. Historically, different regions and countries were known for wine products with unique sensory characteristics that reflected differences in natural environment, grape varieties, winemaking technology, and winegrowing tradition. French wines, Italian wines, Spanish wines, and the wine products of other countries had manifestly different styles. More recently, there has been an evident trend toward a uniform style of wine that lacks a regional identity and could come from anyplace in the world. Many of the international commodity brands share a similar fresh, fruity, slightly sweet style that appeals to casual wine consumers in a variety of countries. The most successful expression of this style is the Yellow Tail brand identified by the distinctive wallaby on the label and produced by the Australian firm Casella Wines. Yellow Tail was originally created for the U.S. market and made its debut in 2001. Wine industry analysts maintain that Casella’s objective was to produce wine products that appealed to the potentially large population of nontraditional U.S. wine consumers who were accustomed to consuming soft drinks and shunned wine because they believed it was too tannic, acidic, dry, or oaky, characteristics traditional wine drinkers often prefer. Casella initially offered two Yellow Tail products, a Chardonnay and a Shiraz, with prominent fruit flavors, some sweetness, a trace of oak, and a soft mouthfeel at a price of $5.99 per 750 ml bottle. When Yellow Tail was launched in 2001, 225,000 cases were purchased. By 2006, it was the largest imported wine brand in the United States, with annual sales of 8.1 million cases.4 Most of this growth was attributed to word-of-mouth promotion by satisfied consumers, rather than a large advertising campaign or high scores from wine critics. By 2009 sales of Yellow Tail in the United States exceeded the combined sales of all imported French wines.⁵ Today, more than twenty Yellow Tail products are sold in fifty countries, with annual sales exceeding 10 million cases.⁶ Many wine firms have responded to the huge commercial success of Yellow Tail by producing competing commodity brands that have a similar style and flavor profile. An increasing number of wine firms that produce premium and luxury wines are also opting for an international style of wine directed at what they believe are the tastes of a more sophisticated wine consumer in the global market. This is a rich, intense, fruit-driven style complemented by oak flavors of vanilla and toast, with soft tannins and relatively high alcohol. It is criticized by some wine professionals for being a generic style of wine that can come from any wine-producing region in the world, and lacks a unique character or personality that reflects the location where the grapes are grown and the wine is made.

The development of an international wine style coincides with, and may largely result from, another globalization indicator: the growing influence of international winemaking consultants, called flying winemakers, and foreign direct investment in domestic vineyards and wineries. Prior to the 1980s, grape growing and winemaking ideas and technology spread slowly from one country to another country, primarily by written communication or winemaking internship abroad. At the end of the 1980s, European merchants began to contract with Australian winemakers to travel to Europe and perform winemaking tasks during the months of September to November, a period when they had no winemaking responsibilities at home because of differences in the grape-growing season between the Northern and Southern Hemispheres. Australian winemakers were preferred because Australia was at the forefront of developing innovative new winemaking techniques. The Australian winemakers were successful at using their advanced technology to transform cheap grapes into wine of acceptable quality. Eventually, winemakers from other countries, including France, Italy, New Zealand, and the United States, started to provide consulting services to wineries in a variety of wine-producing countries around the world. Highly regarded consultants like Michel Rolland of France, Alberto Antonini of Italy, and Paul Hobbs of the United States each advise as many as 100 wineries worldwide. This has resulted in the rapid dissemination of cutting-edge winemaking techniques and technology, and has certainly contributed to the development of an international wine style directed at the satisfaction of consumers’ preferences, supplanting the variety of wine styles based on winemaking tradition and geographic location.

Also contributing to the spread of winegrowing technology and a more uniform style of wine is the enormous investment wine firms located in one country have made in the wine industries of other countries during the past couple of decades. These investments have transformed many wine firms that previously operated in a single country into multinational enterprises. Investments in vineyards and wineries have taken several forms, including joint ventures, acquisitions, and the establishment of new wine firms. One of the first major joint ventures was the Opus One winery located in Napa Valley, California, launched in 1979 and co-owned by the U.S. winemaker Robert Mondavi and France’s Château Mouton Rothschild. It was designed to produce a single luxury wine product using both American and French grape-growing and winemaking know-how. Today, such joint ventures are commonplace in wine-producing countries around the world. U.S., French, and Spanish wine firms have invested millions of dollars to acquire or establish wine firms in countries like Chile and Argentina. In the process, they have provided capital for the modernization and expansion of the wine industry in these countries and have introduced new technologies such as canopy management, vertical trellis systems, stainless steel vessels, and sorting tables. Today, all major wine-producing countries are populated by multinational wine firms. To a degree, the international wine style may reflect foreign investment and improved grape-growing and winemaking techniques spread around the globe by flying winemakers that have eliminated wine flaws associated with traditional viticultural and vinification techniques.

A final important indicator of globalization is the entry of new suppliers into the export market. Prior to 1990, the international wine market was dominated by “Old World” European producers from France, Italy, Spain, and Germany. In the late 1980s, non-European wine-producing countries accounted for only 3 percent of the volume of world wine exports. By 2009, non-European producers—led by Australia, New Zealand, Chile, Argentina, South Africa, and the United States—had increased their share of the global export market to 37 percent.7 Today, wine firms located in these New World countries are formidable competitors in the global market.

A number of factors have contributed to the globalization of the wine industry. Many countries have negotiated free-trade agreements that reduce tariffs and other barriers to trade, allowing foreign wine firms to better compete with domestic firms and gain access to markets. In countries with growing wine demand where tariffs on wine are still high, foreign wine firms have an economic incentive to set up joint ventures with domestic firms. Often this involves a foreign producer shipping bulk wine to a domestic market, where it is then blended, bottled, and sold by a domestic partner to circumvent the high tariff.

Argentina, Chile, and South Africa have ideal natural environments for growing wine grapes and a long history of producing wine for domestic consumption. However, prior to the 1990s, political instability and unfavorable economic policies precluded them from participating in the global wine market. Economic policy provided incentives for the wine industry to produce large quantities of low-quality wine for domestic consumption and protected the industry from foreign competition. As a result, there was little demand for their wine on the export market. The inimical economic environment along with political uncertainty was a disincentive for foreign wine firms to invest in the domestic wine industry in these countries, even though they had low land and labor costs and a propitious winegrowing climate. However, these conditions started to change in the 1990s with the return of democracy to Chile, the end of apartheid in South Africa, an improvement in the political climate in Argentina, and economic reforms favorable to foreign investment and wine exports.⁸

Industry initiatives have also fostered wine globalization. In Australia, the wine industry, dominated by a handful of large firms operating in a domestic wine market limited by a small population, formulated a strategy in the 1990s to grow by exporting substantially more wine on the global market. The plan, called Strategy 2025, resulted in more than a doubling of vineyard acreage and economic policies that have led to a dramatic increase in wine exports. More recently, Argentina developed a strategic plan similar to Australia’s to provide economic incentives for strong export growth, and South Africa promotes exports through the Wine Industry Trust created in 1999. Producers in the highly concentrated Chilean wine industry also recognize that the only way to grow is through exports, given Chile’s small population and domestic market, and have acted accordingly.

A shift in wine consumption from traditional to nontraditional wine-consuming countries has opened up new export markets for wine producers worldwide. France, Italy, Spain, Portugal, and Argentina, historically some of the world’s largest wine-drinking countries, have experienced an ongoing decline in per capita wine consumption as demand has shifted away from wine to beer, spirits, and nonalcoholic beverages. Conversely, as wine becomes an increasingly important part of lifestyles, per capita wine consumption has been steadily rising in North America, northern Europe, Asia, and Russia. Many countries in these regions of the world have limited or no capability to produce wine, and must therefore rely heavily on imports to satisfy growing wine demand. The biggest potential future export market is China, where grape-wine consumption grew at a rate of 13 percent per year from 2000 to 2009. The only other countries with a larger annual rate of increase during this period were India (32 percent), Mexico (25 percent), Turkey (16 percent), and Korea (15 percent); however, China’s aggregate wine consumption is 17 to 113 times bigger than that of those countries.9

A final important factor contributing to wine globalization has been advances in transportation and information technology. As discussed previously, the development of large cargo containers with collapsible polyurethane bladders allows firms to produce wine in one country, ship it in bulk, and bottle it in (or near) the country where it is sold, without compromising quality. This has made it much easier and less costly to produce large quantities of wine for export. In 2009, bulk wine accounted for 37 percent of the volume of world wine exports.¹⁰ Advances in information technology have reduced the cost to wine consumers of acquiring information and increased the global influence of the growing number of wine critics. Many of these critics, like Robert Parker, have promoted an international wine style consistent with consumer tastes rather than producer preferences based on regional characteristics and winemaking tradition.

THE STRUCTURE OF THE GLOBAL WINE MARKET

Countries

The global wine market is composed of all those countries that produce and consume wine. There are approximately 63 wine-producing and 213 wine-consuming countries worldwide.11 A major reason a large proportion of these produce little or no wine domestically is because they are located in the Northern or Southern Hemisphere outside of the temperate climate zone between 30 and 50 degrees latitude, which is necessary for wine grape production. While a large number of countries participate in the global wine market, a preponderance of production and consumption is accounted for by relatively few of these.

Table 5 provides data on the top ten wine-producing countries (column 1) ranked by world share of wine-production volume (column 2) for year 2009. Columns 3 through 5 give data on percentage of global export volume, percentage of global export value, and exports as a percentage of domestic wine-production volume, with world rank in parentheses. Table 6 presents analogous data for the top wine-consuming nations. The ten largest winemaking countries produce 81 percent of total world output and account for 86 percent of world wine exports by volume and 84 percent by value. The world’s top three producers are Italy, France, and Spain. These three Old World winemaking countries, along with Germany, account for about 50 percent of global wine output, 56 percent of exports by volume, and 62 percent of exports by value. On average, 36 percent of the volume of wine they produce domestically is exported and sold to consumers in other countries. However, over time these traditional wine-producing nations have become relatively less important players in the global industry, as evidenced by declining market shares in both production and exports. In the late 1980s, they produced a significantly larger 58 percent of the world’s wine and accounted for 75 percent of exports by volume and 83 percent by value.

The five largest New World producers are the United States, Argentina, Australia, South Africa, and Chile. Together they account for 26 percent of world production, up from 18 percent in the late 1980s. They have also captured a much larger share of the world export market, increasing their share from about 2 percent to 30 percent by volume, but a smaller 21 percent by value, suggesting that growth in exports of higher-priced premium and luxury wine have lagged behind lower-priced bulk commodity wine. While the United States is the biggest New World wine producer, the most important exporter by volume is Australia with a 8.9 percent share, followed by Chile (8 percent), South Africa (5 percent), United States (4.6 percent), and Argentina (3.4 percent). On average, 43 percent of the wine produced by these five New World countries is exported; if the United States is excluded, this rises to 50 percent. The wine industries in Chile and Australia, two countries with relatively small domestic wine markets, are highly dependent on sales abroad: Chile exports 70 percent of the wine it produces and Australia 66 percent. Even though these New World countries are gaining a larger share of the world export market, the top three wine exporters are Italy (22.4 percent), Spain (14.9 percent), and France (14.5 percent). France continues to dominate the global market for premium and luxury wine, with a substantial 30 percent export share by value. This exceeds the value of exports of the five largest New World countries, which collectively account for only 21 percent.

TABLE 5NATIONAL SHARES OF WINE PRODUCTION BY TOTAL VOLUME, VOLUME OF EXPORTS, AND VALUE OF EXPORTS, 2009

TABLE 6NATIONAL SHARES OF WINE CONSUMPTION BY TOTAL VOLUME, VOLUME OF IMPORTS, AND VALUE OF IMPORTS, 2009

China has a long history of making wine, but much of what was produced until recently was made from rice and millet, not grapes. In the 1980s, the Chinese wine industry started to shift its resources to traditional grape-wine production. To obtain the capital, winemaking know-how, and technology necessary to expand the industry and increase wine quality, many Chinese producers have set up joint ventures with wine firms from France, Italy, and Australia. China has also been a popular destination for flying winemakers. The Chinese wine industry is presently undergoing rapid growth, and China is the ninth-largest wine producer in the world. During this development phase, the focus has been on making wine for domestic consumption, and exports account for less than 1 percent of production. However, many analysts predict that China will eventually be a formidable competitor in the global wine marketplace.12

Turning to the demand side of the global wine market, table 6 reveals that wine consumption is somewhat less concentrated than production. The top ten countries consume 69 percent of the world’s wine, importing 65 percent of it by volume and 60 percent by value. Seven of the ten largest wine-producing countries are also top consumers, with the United Kingdom, Russia, and Belgium and Luxembourg replacing Australia, South Africa, and Chile. While the United States, Italy, and France are the three largest wine consumers in the world, Germany is the top wine importer by volume, and the United Kingdom by value: 93 percent of the wine consumed in the United Kingdom and 65 percent of the wine drunk in Germany is imported. On the other hand, in Spain and Argentina, imported wine accounts for 3 percent or less of consumption, and these countries have tiny global import shares. Italy, the world’s second-largest consumer, accounts for less than 2 percent of world import volume, and much of the wine it does import is bulk wine that is bottled in Italy and then exported to other countries.

Even though the United Kingdom produces little wine domestically, it plays an important role in the global wine market as both a consumer and market leader. Many big wine-producing countries are highly dependent on the large and growing British market for export sales and compete vigorously in it for market share. Australia, New Zealand, and South Africa sell more than 30 percent of their exports in the United Kingdom, the United States about 25 percent, and Chile, France, Italy, and Germany between 15 and 20 percent each.13 The United Kingdom has a number of prominent wine critics and highly regarded wine publications, which affect wine sales worldwide. It has sophisticated wine consumers and an active auction market for age-worthy wines. Finally, it has been at the forefront of the global trend of increased wine sales in supermarkets.¹⁴ Many large retailers like the U.S.-based chain Costco, the U.K.-based chain Tesco, and the German-based chain Aldi now operate in a variety of countries and sell large quantities of both brand-name and private-label wine on the global retail market. Today, large supermarkets dominate the retail wine market in many countries.

China is the world’s sixth-largest wine consumer, and wine sales are rising rapidly there. The Chinese government has promoted increased wine consumption as a way to reduce the incidence of alcoholism and has provided consumers an economic incentive to substitute wine for spirits by significantly reducing taxes on both domestic and imported wine.¹⁵ Imported wine accounts for 15 percent of domestic consumption and includes imported bottled wine, bulk wine bottled in China and sold under a foreign label, and bulk wine blended with domestic wine and sold under a Chinese label. Chinese consumers also purchase a significant amount of imported luxury wine, particularly Bordeaux and Burgundy from France. Hong Kong has one of the most active wine auction markets in the world. Because of China’s large population and low per capita wine consumption, it has the potential eventually to become the world’s largest wine consumer and import market.

U.S. Participation in the Global Wine Market

By any measure, the United States is an important participant in the global wine market. It is the world’s largest consumer of wine and has the second-largest import market by value and third-largest by volume. A large population and relatively small but increasing per capita consumption of wine each year for almost two decades suggests there is plenty of room for the market to grow in the future. It has one of the lowest levels of trade barriers on imported wine of any nation in the world and an economic environment conducive to foreign investment. Because of these attributes, the U.S. market is attractive to foreign wine firms that want to expand their business on a global scale. For several decades, foreign wine firms have entered the U.S. market through both exports and direct investment in the U.S. wine industry. Between 1990 and 2009, imported wine continuously increased its share of the U.S. market. During this period, the volume of imported wine increased at an average annual rate of about 8 percent. Between 2005 and 2009, on average, about one-third of the wine consumed in the United States was imported.16 Italy sells the most wine in the United States, followed by Australia, Chile, Argentina, and France. In 2009, U.S. consumers purchased 31 percent of Australian exports, 28 percent of Argentine exports, and 20 percent of Chilean exports, suggesting that these countries are highly dependent on the U.S. market for their global wine sales.

A large number of foreign wine firms have also entered the U.S. market by setting up joint ventures with some U.S. wine firms, acquiring others, and starting new wineries. Foreign investment in the U.S. wine industry began in earnest in the 1980s when a number of French Champagne producers purchased vineyards and constructed wineries in California to satisfy the growing demand for sparkling wine. Foreign wine firms specializing in still wines from France, Spain, Germany, and Italy soon followed, with some establishing new wineries and others purchasing existing wine firms.¹⁷ By 2011, five of the thirty largest wine producers in the United States were owned by firms variously based in Australia, Chile, France, and the United Kingdom, which penetrated the U.S. market mostly through acquisition of U.S. wineries. Recently, Chinese investors have started to purchase vineyards and wineries in the United States.

On the supply side, the United States is the world’s fourth-largest producer and seventh-largest exporter of wine. In 2009, it produced 10 percent of the world’s wine, sold almost 15 percent of the wine it made to foreign consumers, and had a 4.6 percent share of the global export market. Prior to the 1990s, U.S. wine firms demonstrated little interest in selling their wine outside of the domestic market. During the 1980s, annual U.S. wine exports accounted for a paltry 2 percent of wine production. In 1985, Congress passed legislation that provided subsidies to wine firms to promote exports.18 This gave producers a financial incentive to pursue opportunities to sell their products in foreign markets, and initiated a quarter-century effort to increase wine exports. By the late 1990s, wine firms were exporting almost 10 percent of their production, and by 2009, this had reached 15 percent.¹⁹ Wine exports have continued to grow, and by 2011, they accounted for about 20 percent of the value of wine sales by U.S. wine firms. The twenty-seven member nations of the European Union account for more than one-half the volume of U.S. exports and one-third of the value; within the European Union, the United Kingdom is the biggest market for U.S. wine. Canada is the second-largest export market, followed by Hong Kong, Japan, China, Switzerland, and Vietnam.²⁰ U.S. wine firms have also made significant investments in foreign wine industries. Some of the first to establish operations abroad were Gallo in Italy, Robert Mondavi in France, and Kendall-Jackson in Italy, Argentina, and Chile. Today, large U.S.-based wine firms like Constellation own wineries in a number of different countries throughout the world.

THE STRUCTURE OF THE GLOBAL WINE MARKET: FIRMS

The total number and size distribution of the firms that constitute it are important aspects of the global wine industry. Economic theory suggests that competition among firms in an industry will be more vigorous and market power more dispersed the larger the number of firms and the smaller the disparity in their size. Table 7 provides estimates of the number of wine firms in each of the ten largest wine-producing countries for the most recent year for which data could be obtained, and gives a rough idea of the approximate number of producers in the global wine industry. Market shares of the largest two and four firms in the domestic industry measured by the volume of wine sold for year 2009 are also given. Table 8 presents estimates of the global market shares of the largest two, four, twenty, and thirty wine firms for years 2003, 2006, and 2009. These estimates are useful in drawing some generalizations about differences in the structure of wine industries across countries and trends in the global wine market.

Table 7 reveals that the global wine industry has over 128,000 firms supplying wine to domestic markets, with a fraction of these also producing wine for export to foreign markets. Table 8 shows that the world’s four largest wine firms accounted for less than 9 percent of the volume of world wine sales in 2009, and the largest thirty firms for just over 23 percent. No single firm dominates the world market. The largest producer, U.S.-based Gallo, has a market share of less than 3 percent and sells about 95 percent of the wine it produces in its home market. By way of comparison, the world’s largest beer producer, the Belgian-Brazilian multinational AB InBev, has a global market share of 20 percent, and the top three beer and spirits firms have shares of 35 and 42 percent respectively.21 While concentration in the global wine industry is low, it has been trending up over time. The share of world wine sales of the four largest firms rose from 6.8 percent in 2003 to 8.5 percent in 2009. The ten-firm concentration ratio increased from 11.4 to 14.3 percent, and the thirty-firm share from 18.2 to 23.2 percent. A decade ago, a number of analysts predicted that the wine industry today would be dominated by ten or fifteen large multinational conglomerates, which would continue to grow through mergers and acquisitions and capture the lion’s share of global wine sales. While global wine production has become more concentrated, however, it is still a long way from being dominated by a small group of conglomerates like other beverage industries.

From a global perspective, the number and size distribution of wine firms suggests that producers may have relatively little power in the world market and face substantial competition. However, there are significant differences in the structure of national wine industries. In general, concentration of wine production is higher in New World than Old World countries. France, Italy, Spain, and Germany collectively have more than 100,000 wine producers, and the market shares of the four largest firms are between 3.8 and 21 percent, with an average of 14 percent. Moreover, producers in France and Germany face substantial competition from foreign firms, with wine imports accounting for 34 percent of sales in France and 65 percent in Germany. The most dominant producer in the domestic industries of these European countries is García Carrión, with an 11.5 percent share in its home market in Spain. Together, the five New World countries listed in table 7—Australia, Chile, Argentina, South Africa, and the United States—have fewer than 12,000 wine firms with an average four-firm concentration ratio of 59 percent. With the exception of the United States, producers in these countries face little competition from imported wine products. Imports account for about 1 percent of domestic consumption in Argentina, Chile, and South Africa, and only 12 percent in Australia. The Chilean wine industry has the least competitive structure of any in the world; the four largest firms have a combined market share of more than 80 percent. The two largest producers, Concha y Toro and Santa Rita, each have market shares of about 30 percent. Large wine firms also have dominant positions in other New World countries, where Distell (South Africa), Peñaflor (Argentina), Treasury Wine Estates (Australia), and Gallo (U.S.) have domestic market shares of between 18 and 34 percent.

TABLE 7NUMBER AND SIZE DISTRIBUTION OF WINE FIRMS BY NATION

TABLE 8WORLD PERCENTAGE SHARES OF THE LARGEST WINE FIRMS

Organizational Structure of Wine Firms

Like those in the United States, foreign wine firms are legal entities that organize and coordinate the production and sale of wine to consumers. The dominant form of business organization in the U.S. wine industry is the corporation, which accounts for more than 75 percent of wine sales. The relatively few public corporations are owned by a large number of shareholders; the more prevalent private corporations are often family-controlled firms. The rest of the nation’s wine is produced by a large number of proprietorships, partnerships, and limited liability companies with one or relatively few owners. An important type of wine-firm organization in European countries, but nonexistent in the United States, is the cooperative.22 Estimates suggest that cooperatives produce about 35 percent of the volume of wine in Germany, 50 percent in France and Italy, and 70 percent in Spain.²³ Cooperatives also account for a significant fraction of wine output in Argentina and South Africa. In Argentina, the cooperative FeCoVitA is the second-largest wine producer by volume, with a market share of 14 percent, and the sixteenth-largest wine firm in the world.²⁴ In South Africa, wine cooperatives were instrumental in the development of the wine industry during the 1900s, but today play a somewhat smaller role. The wine economist Mike Veseth estimates that European wine cooperatives produce as much as 25 percent of the world’s wine.²⁵

Like any wine firm, a typical cooperative organizes and coordinates grape growing, wine production, and wine distribution. The critical feature that makes it different from wine firms in the United States is that it is owned by a relatively large number of grape growers, called members.²⁶ A cooperative may have hundreds or even thousands of members. In many cooperatives, a majority of the individual growers produce a small quantity of grapes on a tiny plot of vineyard land. For example, in Germany about 58,000 grape growers are members of 214 cooperatives, of which 130 produce wine. A typical member farms less than three acres of vines, and many are part-time grape growers that produce grapes to supplement their incomes.²⁷ A wine cooperative produces wine made from grapes purchased from members; most are also actively involved in distributing the wine. Winery plant and equipment are financed by the equity investments of members, sometimes supplemented by government subsidies. This allows a large number of small grape growers to pool their resources to take advantage of economies of scale in wine production and marketing, and to employ the services of a professional winemaker. Each member has an equal ownership share of the cooperative, regardless of size. The members elect directors, who conduct operations or hire managers to do so. The revenue generated by the cooperative from selling wine is used to pay grower-members for the grapes they supply and cover other expenses associated with producing and distributing wine. Any revenue over and above these costs is available to reinvest in such things as new winemaking equipment, improvements in product quality, and brand development.28 Cooperatives also have explicit or implicit contractual rules, which may affect economic incentives and behavior. For example, in a traditional cooperative, membership is open to all growers willing to accept the rules and make the required investment; however, membership may be restricted to residents of a particular geographic location. The cooperative is required to sell only the wine products of its members; it cannot buy and sell the products of other wineries. The cooperative must purchase whatever quantity and quality of grapes the member-growers choose to deliver. In some cases, growers are allowed to decide the amount of grapes they will sell to the cooperative; if they choose, they can sell grapes to private wine firms or use the grapes to make their own wine. Alternatively, growers may be required to sell all of their grapes to the cooperative.

Many observers believe that the large surplus of low-quality wine that exists in many European countries is exacerbated by the behavior of traditional cooperatives, which often have organizational and contractual incentives to maximize the quantity of wine produced at the expense of quality. For years, major European wine-producing countries have produced more wine than consumers in the domestic and foreign market desire to purchase. Estimates suggest that France, Italy, and Spain generate an excess supply of wine of about 500,000 cases each year.²⁹ This surplus is the result of wine consumption falling faster than production in these countries. Much of this excess is low-quality table wine produced by cooperatives, for which there is insufficient demand. To rid the market of this surplus, the European Union buys wine that cannot be sold commercially and uses the ethanol for gasoline and manufacturing; however, this contributes to the perpetuation of the surplus.

What economic incentives may induce traditional cooperatives to produce large quantities of low-quality wine for which there is inadequate demand on the commercial market? A unique economic characteristic of a cooperative is that owners of this type of wine firm, the growers, also supply the most important input used to produce the wine. The higher the price the cooperative pays the owners for the grape input, the more money they make, regardless of their investment in the wine firm. This creates an economic incentive for the member-owners to seek high grape prices from the cooperative to maximize revenue from grape growing. However, the higher the price the cooperative pays for members’ grapes, the higher its cost, the lower its profit, and the less money it has to make investments necessary to improve wine quality and satisfy the shift in European consumer demand towards higher-quality wine. Several common contractual rules reinforce and compound this problem. If members are contractually obligated to sell their entire grape output to the cooperative at a fixed price, then each grower individually has an incentive to maximize the quantity of low-cost, low-quality grapes he delivers to the cooperative to maximize his income. However, when all growers collectively behave this way, this results in an excess supply of low-quality wine that commands a low price. The low wine price then leads to a low future grape price and smaller payments for growers. All growers would benefit if they decreased grape production, because the cooperative would get a higher price enabling it to make higher grape payments to members; however, individually each grower has no incentive to limit output. Moreover, if members are allowed to decide what grapes to sell to the cooperative, they have an incentive to offer their highest-quality grapes to other wine firms willing to pay higher prices, or use these grapes to make their own wine products, and deliver their low-quality grapes to the cooperative at the fixed, agreed-upon price.30 As a result, it is not uncommon for European wine firms that are legally organized as traditional cooperatives to overproduce low-quality wine for which there is little market demand that is ultimately purchased by government for industrial use. Without government subsidies, these cooperative wine firms would not be viable.

A new generation of wine cooperatives have recognized the problems associated with the traditional cooperative model and have implemented changes in their organizational and incentive structure that have enabled them to compete successfully in both the national and global markets. These cooperatives have market-oriented professional managers who reinvest profit in long-term winery-related investments rather than maximizing grape price payments to members in the short run. A number have evolved from bulk wine producers to cooperatives that sell bottled wine under their own brand names, and have implemented programs to reduce grape yield and increase quality. The most successful cooperatives are selling a growing share of their output on foreign markets. The Italian cooperative Cavit, with 4,500 grower-members, is one of the top wine exporters to the United States. The 300-member French cooperative Cave de Tain produces premium wine products that have received high scores from wine critics, and exports wine to the United States and other foreign markets. These are only a few examples of wine cooperatives that have been able to thrive in the global wine market by producing products that consumers want and selling them at competitive prices.

Rising Concentration and Consolidation of Wine Firms

The beginning of the new millennium brought with it rising global market shares of the world’s biggest wine firms. From 2003 to 2009, the thirty largest firms increased their share of volume wine sales by 5 percent; today, about one of every four bottles of wine sold in the world is a product of one of these firms. Almost half of the increased market share during this period was accounted for by three firms: Constellation, Foster’s, and Pernod Ricard.31 All are multinational firms, with wineries in more than one country. Constellation is based in the United States, Foster’s in Australia, and Pernod Ricard in France. These firms have increased their global market shares through mergers and acquisitions. A similar growth strategy has been used by a number of other wine firms, resulting in increased consolidation of the global wine industry. A brief look at these large global players and their evolution will help illuminate the way in which firms are attempting to grow bigger and capture a larger share of the world wine market.

Constellation, Foster’s, and Pernod Ricard are (or were) alcoholic beverage conglomerates with wine, beer, and spirits operations in multiple countries. Each is a publicly traded corporation with a large number of shareholders. They are among the top five wine producers in the world, and Pernod Ricard is the world’s second-largest spirits producer. In 2008, wine sales accounted for 74 percent of Constellation’s revenues, 44 percent for Foster’s, and 23 percent for Pernod Ricard.³² Each has more than 3,500 employees, more than forty wine brands, and sells its products in a large number of countries. While they possess common attributes, they have significantly different histories.

Constellation was founded in 1945 as the Canandaigua Wine Company, a family-owned wine firm that produced bulk wine in a converted sauerkraut factory in New York.³³ By the 1950s, it was selling wines under its own labels, including Richard’s Wild Irish Rose. It used the profits from this popular fortified wine to acquire several wine firms on the East Coast. In 1973, it became a public corporation and embarked on a strategy of accelerated growth through acquisition of wine firms and brands. By the mid-1990s, it had become a large producer of nonpremium wine products with popular brands like Almaden, Paul Masson, Inglenook, and Taylor California Cellars. During the latter part of the 1990s, Constellation transformed itself into an alcoholic beverage conglomerate by acquiring beer and spirits producers and importers. At the same time, it entered the premium segment of the wine market by acquiring well-regarded wine firms like Simi, Franciscan, Ravenswood, Blackstone, and in 2004, the iconic Robert Mondavi, along with others, including the Beam Wine Estates portfolio of wineries in 2007. After 2000, Constellation started to expand its operations in foreign countries by acquiring BRL Hardy in Australia, Vincor in Canada, Ruffino in Italy, and several wineries in New Zealand. However, the period of rapid growth did not generate the expected profit. In 2008, Constellation began to reduce its portfolio of brands and wineries selling two nonpremium brands, Almaden and Inglenook, to The Wine Group, and eight mostly premium brands to Ascentia Wine Estates.34 In 2010, facing vigorous competition in the Australian and U.K. markets, Constellation sold all of its wineries and brands in these two countries to the Australian-based private equity firm Champ. Champ proceeded to form a new wine firm, Accolade Wines, which is now one of the ten largest wine companies in the world, with annual sales of more than 30 million cases. Even after downsizing, Constellation still has more than fifty wine brands and global sales of 62 million cases in 2011.³⁵

Foster’s history of producing beer in Australia dates back to 1886. Over the years, it grew through mergers and acquisitions, becoming Australia’s biggest brewer. With beer consumption falling in the 1990s, Foster’s entered the wine market in 1996 by purchasing the Australian wine firm Mildara Blass. In 2000, it became a multinational wine firm by acquiring the venerable U.S. wine producer Beringer Wine Estates for $1.5 billion. At the time, Beringer was one of the few public corporations in the U.S. wine industry and it owned well-known wineries like Chateau St. Jean, Meridian, and Stag’s Leap.³⁶ Foster’s continued to grow its multinational wine business by acquiring additional wine firms in Australia, the United States, Chile, Italy, and New Zealand. By 2010, its wine division had a portfolio of more than fifty brands, including Beringer, Etude, Penfolds, Rosemont, and Lindemans. However, many stock market analysts argued that Foster’s multi-beverage strategy was a failure, and that the wine division had become a financial albatross preventing its stock price from rising. In 2011, Foster’s implemented a demerger of its wine business and spun it off as a separate company called Treasury Wine Estates. Today, Australia-based Treasury Wine Estates is the world’s largest public corporation that produces wine products only, with global wine sales of 37 million cases in 2011; U.S consumers accounted for half of these sales.37 In 2012, SABMiller acquired Foster’s beer and other businesses.

Pernod Ricard began its corporate life in 1975 as a spirits producer, resulting from a merger between two existing French spirits companies. It became an alcoholic beverage conglomerate in 1989 when it purchased the Australian wine firm Orlando Wyndham. Unlike Constellation and Foster’s, its strategy has been to largely ignore its home market and establish winemaking facilities in foreign countries.³⁸ By 2009, after making a number of acquisitions, it was the largest wine firm in New Zealand, the second-largest in Spain, and the third-largest in Australia; however, it continues to be a minor player in France.³⁹ Its best-known brand is Jacob’s Creek, one of the world’s largest-selling wine products, produced in Australia and sold in more than sixty countries.

It is useful to make a distinction between three types of acquisitions used by wine firms to pursue a growth strategy. One option is for one wine firm to acquire another along with all of its assets, such as wine brands, wineries, vineyards, and vineyard contracts. Examples include Foster’s acquisition of Beringer in 2000 and Gallo’s acquisition of Louis Martini in 2002. A second possibility is for one wine firm to purchase assets such as a winery and wine brands from another. For example, in 2007 Gallo purchased the William Hill Winery, wine brand, and vineyard land from Beam Wine Estates, only one of Beam’s many brands and wineries. Finally, a third alternative is for a wine firm to make a brand-only acquisition. This involves purchasing one or more brands along with the existing inventory of wine without any additional real assets such as a winery or vineyard. As an example, in 2012 Constellation purchased the Mark West wine brand and existing inventory from the Purple Wine Company for an estimated $160 million. Mark West is the top selling Pinot noir in the United States, with estimated sales of 600,000 cases in 2011.⁴⁰ This transaction did not include a winery in which to produce Mark West wine or vineyards to source grapes for its production.

What is the motivation for wine firms to grow through acquisitions? One possible reason is to reduce cost by gleaning economies of scale in production and input purchases. Through acquisitions, a wine firm can specialize production tasks such as bottling and blending in separate plants, eliminate inefficient and underutilized wineries, and utilize the most efficient wineries to produce multiple wine brands at optimal capacity. Cost reductions can also be obtained through large-volume purchases of grapes, equipment, packaging materials, and other inputs.

Another possible motive is related to the portfolio, distribution, and marketing of wine products. Acquisitions enable a firm to offer a broader array of wine brands and products. For example, largely through acquisitions, Constellation has developed a diverse portfolio of commodity, premium, and luxury wine brands and adjusts this portfolio to satisfy changing market demand. This circumvents the high cost and relatively long time required for developing new brands internally. It also allows a wine firm to offer a variety of product choices to distributors and retailers who often prefer “one-stop shopping” for all their wine product needs rather than dealing with multiple firms. An important trend occurring in the wine industry is the global consolidation of the wholesale and retail sectors. In Europe, five large supermarkets account for more than 50 percent of wine sales.41 In the United States, the largest twenty distributors have a market share of about 75 percent, and it is not uncommon for a state to have only a handful of distributors. In this market environment, it has become increasingly difficult for small and medium-sized wine firms to sell their products through these large distributors and retailers who prefer to transact with relatively few suppliers to minimize cost. Big wine firms with large and varied portfolios of wine products and the bargaining power that comes with size are better able to market their products through wholesalers and secure increasingly scarce retail shelf space. A wine firm can also use acquisitions to build a global distribution network to increase worldwide sales. For example, when Foster’s acquired Beringer, this gave Beringer access to Mildara Blass’s established wine distribution infrastructure in Australia and Asia, and Mildara Blass gained access to Beringer’s distribution channels in the United States. This allowed each firm to increase its sales abroad. Moreover large wine firms can realize economies of scope in distribution and marketing. For example, Constellation can use its existing large global distribution and marketing network to expand sales of the Mark West brand at minimal cost. It is becoming more common for smaller wine firms to specialize in developing wine brands, use their limited marketing resources to gain a foothold in the market, and then sell them to large wine firms that have the distribution and sales infrastructure necessary to make them high-volume national or global brands.

Acquisitions may also be motivated by a wine firm’s desire to reduce risk through diversification. By making acquisitions, large wine firms have developed diversified portfolios of wine brands at different price points, which they sell in a variety of countries through their global distribution channels. They also source grapes and produce wine in a number of different locations throughout the world. This reduces the financial risk of consumers “trading up” or “trading down,” and variations in wine sales across countries. In addition, the firm is better able to manage production risks associated with weather.

Growth through merger and acquisition does not guarantee that a wine firm will be successful. As a wine firm continues to grow bigger, it may eventually experience diseconomies of scale associated with the difficulties of managing a large global operation that result in inefficiencies and higher cost. This may place a limit on the efficient size of wine firms and may have been a factor contributing to Constellation’s recent decision to downsize. Large conglomerates that enter the wine market often find that they do not realize the expected synergies between wine and other products that increase shareholder value. In providing the rationale for the Treasury Wine Estates demerger, Foster’s concluded that wine and beer are different businesses that operate in industries with different dynamics, which could be produced and marketed more efficiently by separate firms, resulting in substantial cost savings. Modern wine history offers plenty of examples of conglomerates that have entered and exited the wine market. These include Nestlé, Coca-Cola, Pillsbury, R.J. Reynolds, John Hancock Insurance, Schlitz Brewing Company, and Newcastle Breweries, as well as others. George Taber maintains that the wine industry is “a graveyard for large corporations with little experience in wine.”42 If this is true, then domination of the global wine industry by relatively few large conglomerates like the beer and spirits industries, predicted by many, may never materialize.