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Wine as an investment in the wake of globalization. Kym Anderson School of Economics, University of Adelaide, Australia Institute for Quantitative Investment Research Conference Chateau la Couspaude, Bordeaux, 9 October 2008. Investment by whom?. Wine producers

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wine as an investment in the wake of globalization

Wine as an investment in the wake of globalization

Kym Anderson

School of Economics, University of Adelaide, Australia

Institute for Quantitative Investment Research Conference

Chateau la Couspaude, Bordeaux, 9 October 2008

investment by whom
Investment by whom?
  • Wine producers
  • Buyers of high-quality wines
why is globalization relevant
Why is globalization relevant?
  • Global dominance of long-time European wine producers is decreasing
  • More challenges for those producers
  • And more choices, lower prices, but less familiarity, for wine buyers
  • Impact of globalization on returns to investing in grape and wine production
  • Information required by buyers to make sound investments in iconic wines for later consumption or resale
    • Are there proven ways for buyers to judge the future value of an iconic wine?
globalization of the world s wine markets over the past 20 years
Globalization of the world’s wine markets over the past 20 years
  • Changes in:
    • Consumer demand (tastes, regulations)
    • Production capability
    • Share of production exported
    • Global export contributions by ‘Old World’ vs ‘New World’
    • Firm size and concentration in the industry
wine globalization is not new
Wine globalization is not new …
  • Winegrape cultivation began before 6000BC
  • Spread west from Middle East from 2500BC
  • Spread north from Mediterranean by 400AD
  • Took another 1100 years before spreading to:
    • South America by 1500s
    • South Africa by 1655
    • Australia by 1788 (from Rio and Cape Town)
    • California and New Zealand by 1820
but wine market globalization has accelerated hugely since the late 1980s
… but wine market globalization has accelerated hugely since the late 1980s
  • Most previous globalization was about technology transfer, leading to little long-distance trade growth
  • But since the late 1980s, share of volume of production exported has risen from <10% to almost 30%
    • even higher in value terms (>50%?)
  • Europe’s share of world exports (excl. intra-EU) has fallen from >70% to <50%
    • Causing Jancis Robinson to include the G-word in OCW-3
  • ‘New World’ wineries have become far more export-oriented, focusing on premium (esp. low-end) bottled wine, initially exploiting retail regulation changes in UK
    • Australia in next slide is just one example

Growth of Aust. wine exports, 1970-06

Sources: AWBC Export Approval Database, ABS Catalogue No 8504.0

Domestic sales


other features of recent globalization of wine markets
Other features of recent globalization of wine markets
  • Mergers/acquisitions of wineries, especially cross-border
    • In response to IT revolution, FDI reforms, and the wineries’ need to combat the supermarket revolution
  • Flying vignerons enjoying 2+ vintages/year
    • accelerating 2-way int’l technology transfer
  • WTO-induced policy developments
    • Tax cuts (eg China, India); GI legal recognition
  • Parkerization of preferences
divergent trends in tastes
Divergent trends in tastes
  • Halving of per capita wine consumption in Mediterranean Europe and Argentina since 1970s
  • Doubling or more of per capita consumption in new markets in Europe (and Asia), and big rises too in UK (20lit/cap) and US (8.5lit/cap)
  • Big switch from dominance of super premium and non-premium to dominance of bottled value-for-money, easy-drinking premium wine
    • Popular premium range is US$1 to $4/litre pre-tax wholesale, or US$5-10 per 750ml bottle retail
divergent trends in production too
Divergent trends in production too
  • Winegrape acreage expanded hugely in New World from late 1980s
    • Trebled in Australia, aiming at popular premium wine
    • Five-fold increase in New Zealand, aiming at super premium sav blanc and then also pinot noir
  • Acreage is stagnant or declining in Old World
    • EU regulation of its industry stifled adjustment, so was missing out on growth in popular wine niche
  • However, more-innovative producers in Europe are adapting/re-positioning to capture a part of the rapidly growing mid-range market, while cutting back on low-end non-premium wine
    • And are following Australia with generic advertising
rapid growth in new world s share of global exports
Rapid growth in New World’s share of global exports
  • Even including intra-EU trade, New World’s share has grown from
    • 5% in 1990 to
    • 11% in 1995,
    • 19% in 2000, and
    • 24% in 2005
firm concentration is accelerating
Firm concentration is accelerating …
  • But from a low base: wine was one of the least concentrated beverage industries as recently as 1998
  • Since then, major consolidation among wine firms has been a striking characteristic of the new globalization
    • driven in part by the need to combat firm concentration at the distribution and retail ends of the value chain
great heterogeniety across countries in firm size of wineries and growers
Great heterogeniety across countries in firm size of wineries and growers
  • National annual average winery output, in cases, varies from 5,000 (France) to 290,000 (Chile) per firm
  • Share of 3 largest wine firms nationally varies from 6% (Italy) to 60-70% (US, Australia, New Zealand)
  • Average vineyard size varies from 1.3ha (Italy) to 21-26ha in Aust, NZ and South Africa, and to 40ha in the US
what to expect in terms of
What to expect in terms of:
  • Taste and preference changes
    • including the influence of marketing strategies and of Parker
  • Terroir and technology changes
    • including climate change and R&D
  • Taxes and other regulations
    • including EU wine regulatory reforms, water policy reforms, excise tax changes
taste changes
Taste changes
  • Slowdown in population growth in OECD
    • But ageing raises per capita consumption of high-quality wines
  • New markets emerging in Asia
    • Westernization of tastes in China and India
  • What roles for generic and brand marketing? For Parker and wine judges?
terroir and technology changes
Terroir and technology changes
  • R&D strategies in different countries
  • Scope for rapidly emerging markets (eg China and India) to self-supply?
  • Will old markets rejuvenate (CEE/FSU)?
  • Climate change
    • How will it affect grapegrowing conditions globally?
    • How are R&D and plantings changing in various countries?
impact of govt regulations
Impact of govt. regulations
  • Prospective impacts of:
    • EU wine policy reforms
    • Supermarket revolution, including in developing countries
    • Irrigation water policy/regulatory reforms
  • Will we see more convergence between Old and New World, where both regions export terroir-driven super-premium/iconic wines alongside affordable bottles of popular premium wines, while non-premium wines continue their demise?
climate change may cause a rise in average temperatures in grape growing regions
Climate change may cause a rise in average temperatures in grape growing regions
  • Rise of perhaps 2.5oC by 2050, if little mitigation in the interim
  • Which means earlier grape harvesting, by perhaps 1 month
  • Hence following a much hotter ripening period (>4oC by 2050 in Australia?)
warmer temperatures alter grape quality
Warmer temperatures alter grape quality
  • Growing-season temp has an inverted U-shaped relationship with winegrape quality and hence price
  • But there’s a different optimal temperature for different varieties (Jones 2006)
  • Hence even if temperature change was the same in each region, climate change will affect regions differentially because of differing varietal mixes
    • In New World, regions will alter their variety mix
    • What about in Europe (given EU regulations)?
climate change could affect winegrape quality also by
Climate change could affect winegrape quality also by:
  • More extreme weather events
    • More-frequent heatwaves, frosts, high winds, bushfires
    • hence more variability of grape yields and quality
  • Less rainfall in growing season and greater variation between seasons (& more salinity)
    • hence lower water quality and higher water price
  • Increased incidence of pests and diseases
  • => more difficult to maintain vine balance
what about supplies of wine in competitor countries in the face of climate change
What about supplies of wine in competitor countries in the face of climate change?
  • More-temperate, less irrigation-dependent wine regions (maybe not Calif. or Southern Europe) will be less adversely affected than Aust, and some will benefit from temp. rise (see Jones et al. 2005 graphs below)
    • but may still be harmed by more extreme weather events
will rest of world s wine regions become more or less competitive with climate change
Will rest of world’s wine regions become more or less competitive with climate change?
  • 1950-1999 temperature changes (Jones et al. 2005):
    • Bordeaux: 1.76O
    • Northern Calif: 1.23O
    • Champagne: 0.54O
  • But warmer may mean better there
projected temp change in wine regions 2000 2050 from jones et al 2005
Projected temp change in wine regions, 2000-2050 (from Jones et al. 2005)
    • Bordeaux: 2.3O
    • Northern Calif: 2.2O
    • Rhine: 1.5O
    • Barossa: 2.0O
  • Warmer may mean better winegrapes in cool areas, but not in Australia’s hot areas
possible adaptive responses by new world
Possible adaptive responses by New World
  • Despite the crop being perennial, with large sunk costs, the wine industry has shown great agility and flexibility when unfettered by regulations
aust regions varietal specialization has changed a lot in six vintages 2001 2006
Aust. regions’ varietal specialization has changed a lot in six vintages, 2001-2006
  • Region i’s Varietal Intensity Index:

Vim = fim/fm

where fim is the fraction of variety m in region i’s crush and fm is the fraction of that variety in the national crush

  • Australian examples of 2 red and 2 white varieties:
australia s wine regions are becoming more distinct also in terms of quality
Australia’s wine regions are becoming more distinct also in terms of quality
  • Regional Quality Index:

Ri = Pi/P

where Pi is the average price for region i and P is the national average winegrape price

possible adaptive responses to climate change by the wine industry
Possible adaptive responses to climate change by the wine industry
  • Changes in viticultural and winemaking practices with known technologies
  • More investment in R&D aimed at adaptation
  • Changes in varietal mix in existing areas
  • Reduce vine area in very hot zones, move to cooler zones
  • More investment in market development abroad
can wine industry adapt better faster in new world than in old world
Can wine industry adapt better/faster in New World than in Old World?
  • New World has been less restricted by viticultural regulations than in EU and, partly because of that, has been more flexible, more adaptable
  • But EU is reforming its wine policies, and EU quality may rise/costs fall with climate change
  • So New World will have to adapt faster, & from already high temperatures by global standards
    • R&D investments are gearing up
do wine critics influence prices
Do wine critics influence prices?
  • Jones and Storchmann (AE, 2001); Hadj et al. (EJ, 2008): Parker points raise Bordeaux cru classes and en primeur prices
  • Schamel and Anderson (2003): Halliday points raise Aust and NZ wine prices

=> Dearer to buy high-scoring wines, but are they more enjoyable? And do high-scoring wines offer a higher return if stored?

some answers from the latest spring 2008 issue of the journal of wine economics
Some answers from the latest (Spring 2008) issue of the Journal of Wine Economics
  • On wine enjoyment:
    • Goldstein et al. find non-expert wine consumers get more enjoyment from less-expensive wines than show wines
    • Veale and Quester find consumers judge wines more by price and country of origin than by trusting their own blind tasting
  • On returns from storing fine wine:
    • Sanning et al. find Bordeaux wines gave 7-9% p.a. above average risk-adjusted returns (and low covariance with financial asset returns), 1996-2003

=> considerable under-investment in this asset class?

if wanting to invest in fine wines how should one decide which to buy
If wanting to invest in fine wines, how should one decide which to buy?
  • If for later resale, need to restrict choice to ones with a thick-enough secondary market?
  • If for future own-consumption, choose less-popular labels, including from New World, at much lower prices (esp. if not status-conscious)
  • In either case, choose vintages on the basis of a few econometrically estimated growing-season weather variables (more reliable than wine critics’ recommendations: eg 1989, ’90 vintages)
    • useful info, especially if/when climate change raises mean temperature and volatility of seasons
the example of bordeaux
The example of Bordeaux
  • Ashenfelter (Econ Jou, 2008) finds 90% of price variation in Bordeaux wine 20-30 years old is explained by vintage weather and vineyard/Chateau features (terroir, including climate)
  • Wine age (to cover storage cost and increased scarcity) explains 20% of variation, while vintage (as captured by temperature and rainfall) explains 60%
    • dry Aug-Sept, warm growing season, preceded by wet winter, is ideal for Bordeaux
the example of australia
The example of Australia
  • Wood and Anderson (JWE 2006) find:
    • Age adds 2.2% p.a. to the price of Grange (c.f. 3% in Bordeaux)
    • Growing season temperature helps Hill of Grace up to around 200 but then hurts (as does bigger diurnal temperature range)
    • Rain prior to harvest hurts, rain in previous winter helps (though less than in Bordeaux, perhaps because irrigation can be used in Aust)
  • With higher temperatures from climate change, some Aust single-vineyard wines may become less attractive investments after optimal temp is reached
some implications
Some implications
  • For viticulturalists, results suggest climate variables can help with site selection, and in bargaining with winery over grape price each vintage
  • For winemakers, results suggest grape prices paid, and the release prices (or hold-back period) for wine, could be set in part by the season’s weather conditions
  • For wine consumers/investors, weather provides a robust guide as to which vintages to avoid (especially for wines whose release or en primeur prices change little across vintages)
  • Vine yield/ha and hence supply of a vineyard’s wine is determined by spring weather, while quality depends on weather later in the season
    • and greater supply means lower price, other things equal
  • Status also affects demand so, for those wanting to later consume, stay away from vintages status seekers want (e.g. 1982, vs 1989 or 1990 Bordeaux)
  • Technologies are increasingly affecting quality, reducing the influence of terroir (Geraud and Ginsburgh, Economic Journal, 2008)
a few references
A few references
  • Anderson, K., “Wine’s New World”, Foreign Policy 136: 47-54, May/June 2003
  • Anderson, K. (ed.), The World’s Wine Markets: Globalization at Work (Edward Elgar, London, 2004)
  • Wittwer, G. and J. Rothfield, The Global Wine Statistical Compendium, 1961 to 2006 (AWBC, Adelaide, 2008), see
  • Ashenfelter, O. “Predicting the Quality and Price of Bordeaux Wine”, Economic Journal 118: F174-F184, 2008
  • Wood, D. and K. Anderson,“What Determines the Future Value of an Icon Wine? New Evidence from Australia”, Journal of Wine Economics 1(2): 141-61, Fall 2006