NEWS ANALYSIS: Here’s the good news…

The global wine and spirits market is on the up, says the latest Vinexpo/IWSR study – with value outpacing volume. Patrick Schmitt crunches the numbers

In journalism at least, good news is not usually considered particularly newsworthy. Few front-page reports focus on the positive because there’s little drama, intrigue or shock value in all that’s upbeat. However, this month, the news is good, and worthy of analysis. The world wine and spirits market is growing, and is set to continue its upward trend for several years to come. Why?

The mechanics are varied, but in general, consumption is increasing due to new drinkers entering the market, existing drinkers consuming more, and rising incomes. Importantly, in both wine and spirits, value is rising ahead of volume. In wine, however, an agribusiness at heart, oversupply will continue to plague the industry.

A Vinexpo/IWSR study shows a wine market worth US$117.038 billion in 2010, comprising some 31.843bn bottles. This represents nearly 5% growth in volume and an almost 10% increase in value between 2005 and 2010, making the global wine business more valuable than the world’s cosmetics industry or twice the turnover of GYM (Google, Yahoo, Microsoft).
For spirits, sales will grow by 6.3% between 2005 and 2010 to reach US$180.712bn (1.6 times more than sales of wine and by 6% in volume to 2.307bn cases.

What are the trends behind these headline figures? To deal with wine in detail first, the IWSR predicts that the US will be the world’s leading wine-drinking nation. Consumption is forecast to reach 27.3m hectolitres in 2010, accounting for 12.3% of global volume and overtaking current leader France, whose consumption will fall by almost 10% between 2005 and 2010. At under 25m hl, France will fall behind both the US and Italy. The French wine industry needs to act to halt sliding domestic consumption.

In 2005 China entered the top 10 wine-consuming countries and is set to move up to ninth position by 2010 as consumption increases almost 40% from 4.1m hl in 2005 to 5.58m hl in 2010. The Russian Federation, currently in ninth position, is also forecast to rise dramatically when it comes to consumption, with a projected increase of 30% to 6.37m hl.

In terms of wine consumption per head, only six countries in the top 20 global wine markets will experience a decline between 2005 and 2010. They are France, Switzerland, Portugal, Argentina and Spain. China’s per capita consumption is currently around half a litre per head (compared to France’s 40 litres per head), according to Robert Beynat, chief executive, Vinexpo. “The day China really produces wine it will consume more and import more,” he said.

When it comes to sales of wine by price, consumption of wines sold for below US$5 (£2.90) will rise by 2.4% between 2005 and 2010, accounting for 77% of all sales. However, the rate of increase will be higher for wines over US$5, rising 9.12% between US$5-10 and 17.2% for those over US$10.

Despite increases in global wine consumption, a production surplus will persist, although the IWSR predicts it will decrease from 32.599m hl in 2005 to 23.361m hl, or 8.7% of world production, by 2010.

Asian domination
Unlike in wine, Asia dominates the market when it comes to spirits, accounting for 46.9% of world spirits consumption in 2005. Consumption here is set to increase by over 8% to reach 1.103bn cases by 2010. However, as with wine, the US presents potential, and volumes here will continue to increase, with a forecast rise of 10%. The country currently represents 8.3% of world consumption. Interestingly, Central America is predicted to accelerate in consumption by over 18%, despite experiencing a current decline.

Vodka is the most drunk “international” spirit in the world (as opposed to “local” spirits like shochu). But consumption growth is due to slow, up 4.4% between 2005 and 2010 compared to an 18% rise between 2001 and 2005. Like the drinks industry as a whole, this is dependent on continued social and political stability. The US, like China, has a low per capita consumption due to the low market penetration of wine in this vast land mass. IWSR chairman Val Smith believes consumption will increase because “people are migrating from the east and west coast to the central heartland and bringing wine with them”.

UK market focus
Despite stabilising off-trade wine sales towards the end of 2006, as reported by ACNielsen, the IWSR predicts that the UK will be Europe’s biggest wine market in the next three years. By 2010, wine sales will reach £5.496bn. Brits will also consume more wine per capita, with average consumption per head (among adults of legal drinking age) reaching 28.5 litres, 6% up on 2005. That amounts to around five glasses a week per person.

In terms of spirits, Scotch, currently the best-selling category in the UK, is predicted to take second place to vodka in 2010. Vodka sales are poised to reach 8.405m 9-litre cases by 2010. Scotch, with a 7.339m case volume in 2005, is set to continue a downward trend and fall 10.35% between 2005 and 2010.

Bourbon and tequila sales, on the other hand, are predicted to increase, but from a small base.

INSIDERS OPINION

Robert Beynat, chief executive, Vinexpo:
“A good surprise from the findings is the performance of China – the market is moving. Who knows the future, however? There could potentially be problems. But without, China will rise, but forget one billion consumers – the wine-drinking market is 50 million. It is also good to see the confirmation that the UK market is rising. The UK has been a battlefield of prices, but the average price of wine sold in Britain is higher than the world average and it will continue to rise.

“Canada is also looking positive [IWSR predicts a 20% increase in sales over the next three years. It is currently the ninth largest wine market by value.] Wine consumption is rising because of immigration and Canada is starting to free up its retail monopoly situation.

“In spirits we see a shift in whisky consumption towards more malts with increasingly sophisticated drinkers, and the rise of Bourbon as the Jack Daniel’s dynamic attracts others. Then of course there’s vodka which will do well because of
the dynamics of brands like Absolut and the rising of the Eastern European economies.

“Cognac is doing well in the US and China and will not repeat past mistakes – they know they have to have good and  
classic products.

“However, while China is exciting, the market is not there yet. The market is the US
and UK. The US is a very open country and consumers want
to discover new products – plus
the reputation of foreign brands
is high.”

Arend Heijbroek, global industry specialist, wine and spirits, Rabobank:
“The US wine market is growing very fast and consumers are spending more per bottle than UK consumers. The big hope for exporters has been the UK as they find it hard to make money in Germany and other Continental markets despite the volumes. However, the UK market is changing and is a huge challenge for brand builders.

“Overall the outlook is positive for wine because the product has a very good image and economic growth is encouraging people to spend more on better quality.

“But producers really need to be demand-driven and come with an attractive proposition. A lot are supply-driven, particularly in Europe. You see the same in the New World – managers are in love with their own product and have overlooked the need to sell.”

© db February 2007