THE GLOBALIZATION OF THE WINE INDUSTRY

A THESIS

Presented to

The Faculty of the Department of Economics and Business

The Colorado College

In Partial Fulfillment of the Requirements for the Degree

Bachelor of Arts

By

Neal K. Hustava

May 2011

THE GLOBALIZATION OF THE WINE INDUSTRY

Neal K. Hustava

May 2011

Economics

Abstract

Viticulture has had a rich and relatively stable history. However, in recent times, the

wine industry has undergone many changes. The global wine industry no longer depends

on the outmoded practices and wines of the Old World. New World wineries have grown

immensely in recent years in both production and consumption. This thesis evaluates

marketing strategies that have brought New World countries to their current state. It

includes an investigation into market positioning, market segmentation, new packaging,

and internet advertising techniques that have found their way into the wineries and brands

of the New World.

KEYWORDS: (Wine, Globalization, Marketing)

TABLE OF CONTENTS

ABSTRACT 1

1 INTRODUCTION 1

1.1 Wine-making: The Historical Setting……………………………………….. 2

1.2 The Origins of Wine Globalization………………………………………….. 3

1.3 Old World Wine……………………………………………………………... 5

1.4 New World Wine……………………………………………………………. 6

2 THEORY 10

2.1 Economic Globalization................................................................................. 11

2.2 Industry Lifecycle Theory................................................. ............................ 11

2.3 Market Segmentation..................................................................................... 14

2.4 Market Positioning......................................................................................... 16

3 LITERATURE REVIEW 19

3.1 Market Segmentation..................................................................................... 19

3.2 Globalization………………………………………………………………... 21

3.3 Packaging………………………………………………………………….... 23

3.4 Market Positioning………………………………………………………….. 26

3.5 New Developments in Consumer Interaction………………………………. 27

3.6 Marketing Efforts Around the World……………………………………….. 31

4 DATA AND METHODOLOGY 33

4.1 The Macroeconomic Picture – Production and Consumption……………… 33

4.2 Consumption Patterns………………………………………………………. 38

5 ANALYSIS 43

4.3 Old World Macroeconomic Analysis……………………………………….. 43

4.4 New World Macroeconomic Analysis……………………………………… 45

6 CONCLUSION 49

WORKS CITED 51

LIST OF TABLES

4.1 Old World Wine Country Production Data ………. ……...………………… 34

4.2 New World Wine Country Production Data...………………………………. 36

4.3 Old World Wine Country Consumption Data ………………………………. 39

4.3 New World Wine Country Consumption Data ……………………………... 41

1

CHAPTER I

INTRODUCTION

The face of the wine industry has changed dramatically in the past few decades

for consumers and producers alike. Globalization, reductions in barriers to trade,

technology, marketing, and changes in consumer preferences have all ushered the

industry into a new era. No longer does the global industry hide behind the outmoded

traditions of Old World viticulture. The new era in the wine industry has brought New

World wine production and consumption to the forefront of viticulture. This current

thesis investigates the demise of Old World countries, postulating that New World

wineries’ production and consumption growth and superior marketing strategies, such as

segmentation, positioning, packaging, and Internet advertising have contributed to the

decline in wine production and consumption per capita of the Old World countries, as the

New World wineries provide a lifecycle substitution in the global marketplace.

This thesis begins by describing the historical context of wine over the world

leading up to the modern day market. The next chapter provides the economic theories

applicable to the wine industry and the hypothesis. A review of literature regarding the

economic theories in the wine industry follows. The fourth chapter will describe the data

and methodology used in analyzing changes in this market. Finally, an analysis chapter

will summarize the results of the data.

2

Winemaking: The Historical Setting

In recent years, globalization, the idea that countries are increasingly coming

together socially, politically, economically, and culturally, has not gone unnoticed by the

average person. Transnational companies can produce commodities or services in

literally any country they desire, reducing their costs as well as the cost to the consumer.

Many countries benefit while others inevitably will be exploited whether for cheap labor,

natural resources, or lack of governmental restrictions. In many ways, this seems like a

relatively new phenomenon in the past few decades because sizeable, international

corporations have not existed for very long. However, while many believe this idea of

the world’s countries becoming increasingly interconnected is a novel concept or

development, the truth of the matter is that in some industries, globalization and

international trade has existed for centuries.

The wine industry, an industry based on the commodity that has found itself as a

symbol of celebration in various ancient civilizations, dates back to the Neolithic period,

predating any other alcoholic beverage. This may come as no surprise due to the

simplistic process of viticulture. Crushed grapes sit in a container while the yeast from

their sugary skins ferments and produces alcohol a mere few days later. The first

fermentation of grapes is thought to have dated back to 8000 BCE.1 As wine and the art

of viticulture developed over the centuries, it grew as an integral part of society and

culture in ancient civilizations. Wine drinking represented times of celebration and

socializing. Socrates’ “symposiums” literally translate to “drinking together,” an

important aspect of philosophical thought as wine operated as a social lubricant during

1 Stefan Estreicher, Wine: from Neolithic Times to the 21

st century (New York,

Algora Publishing, 2006), 4.

3

these meetings.2 Furthermore, in ancient times, the possibility of catching dysentery or

cholera from contaminated water led many to drink wine as a substitute. Even adding the

alcohol from wine to water could kill much of the bacteria found in unclean water.3

Wine also found its way into religions and their ceremonies. Bacchus, the God of

wine in ancient Greece, was a highly regarded and important figure, much like Osiris,

Goddess of Wine in ancient Egypt. In the Bible, Jesus turned water into wine at the Feast

of the Wedding of Cana at Galilee. Even Muslims who do not drink wine mention the

beverage in the Quran. In Catholic mass, wine, the blood of the wine, constitutes an

essential part of the Eucharist.4

The Origins of Wine Globalization

The path of the journey of wine starts with the movement from isolated Neolithic

villages to the Middle East and North Africa due to basic trade and the proximity of the

different cultures. The main contributors to early viticulture globalization were the

Phoenicians. Their civilization emerged around 3200 BCE in the areas of today’s Syria

and northern Israel.5 Their trading of timber, vines, and wines reached the Mediterranean

basin, Atlantic Coast of North Africa, and the British Isles. Following their footsteps, the

Greeks expanded viticulture through making sweeter and longer lasting wines. Centuries

later, the Spanish Conquistadors would expand to the new worlds in Central and South

2 Estreicher, 3.

3 Estreicher, 4.

4 Estreicher, 8.

5 Estreicher, 15.

4

America. Along with them, the Dutch brought their knowledge of wine to South Africa

and the British to Australia.6

As the industry progressed through the spread of technology and knowledge, the

art of viticulture grew increasingly personal as consumers and producers developed

tastes, preferences, and styles. In the 17th

century, the world saw its first brand name of

wine, the French Chateau Haut-Brion. The owner of the brand opened a tavern in

London to disseminate his wine.7 This idea of a French vineyard opening a London

tavern to distribute its product in the 17th

century is quite impressive and illustrates how

globalization manifested itself in transnational companies centuries before our modern

day realization of global interconnectedness.

The Dutch contributed greatly to the globalization of the industry from the 16th

to

the early 17th

century. Due to their lack of natural resources, they relied heavily on trade

and colonization. They colonized all over the globe, setting up peripheries in North

America, Cape Town, India, Ceylon, and New Zealand. With them, they brought their

knowledge of wine and vines, setting up a few successful wineries within their colonies.

In this time frame they developed new technologies in viticulture including fortification,

the use of sulfur in barrels to kill bacteria, yeast, and mold, and draining marshes to plant

vineyards.8

6 Estreicher, 16.

7 Estreicher, 70.

8 Estreicher, 71.

5

Old World Wine

The 17th

century saw the switch from clay to glass bottles and the first factory-

made bottles in England in the 1630s.9 This switch helped the commodity and industry to

expand, as factory-made glass was cheaper than clay bottles and ameliorated

transportation and storage issues associated with the unstackable quality of clay bottles.

With the technologies, preferences, and cultivars (a specific type of wine, like

chardonnay or Bordeaux) in order, Europe’s production of wine exploded in the

following centuries. European countries, such as France, Italy, Germany, and Spain,

experienced tremendous growth in wine production and domestic consumption. During

the period from 1865 to 1874, France, Italy, and Spain accounted for 85% of the entire

world’s wine production. France constituted approximately 49% of that amount. No

other single country produced more than 3% of the world’s production.10

Furthermore,

French wine consumption more than doubled from 1860 to1914.11

Along with the major

wine producing countries, southern European countries also found the industry quite

profitable. In the mid 19th

century, wine, in addition to cereals and olive oil, drew a large

foreign profit for Greece and Portugal.

Wine production saw immense changes during the late 19th

century and early 20th

century that transformed the industry seismically. First, vine diseases in Europe

decimated many vineyards, hitting especially hard in France. Next, preservation

9 Estreicher, 73.

10

Gwyn Campbell and Nathalie Guibert, Wine, Society, and Globalization:

Multidisciplinary Perspectives on the Wine Industry (New York: Palgrave Macmillan,

2007), 184.

11

Campbell and Guibert, 181.

6

techniques improved, making exportation to great distances achievable. Along with these

new techniques, transportation improvements stemming from the Industrial Revolution

decreased delivery times and costs.12

The industry also took a drastic change with the

introduction of the Institut National des Appellations Controlees (INAO) in France. This

institute created the system of the Appellation d’Origine Controlee (AOC), dictating

which regions could have specific cultivars and if they could carry the AOC label.

Furthermore, the system designated rules for fertilizers, maximum number of vines per

acre, pruning, maximum yield, and minimum alcohol content. Wineries were not

allowed to label their specific cultivar on their bottle, only a geographical number. This

system, which is still in place today, though slightly adjusted, was designed to ensure

high-quality French wines.13

These new rules, along with the devastation of French

vineyards from the vine disease, Phylloxera, meant that wine production had to find its

way into new lands and economies.

New World Wines

Though New World wineries did not make a significant impact on the wine

industry until the 20th

century, vines and wines had already existed in the New Worlds for

a few centuries. In 1522, Hernan Cortes planted the first vines in Mexico where they

thrived and produced. With the success of Mexican vines, Peru and Chile followed suit.

By the late 16th

century, production in these countries was so expansive that South

America and Mexico stopped importing wines and even exported to other South

12

Campbell and Guibert, 184.

13

Estreicher, 97.

7

American countries.14

Production and consumption remained at this level for a few

hundred years. Inspired by the American Revolution, South American countries gained

independence from their mother countries and experienced the benefits of less taxation

and trade restrictions, leading to expanded production and exportation. The success of

South American and Mexican wine production in the 16th

to 18th

centuries was not,

however, shared by their northern neighbors.

U.S. wine production started off quite poorly. The east coast had a few native

vines when colonists first arrived, but they did not possess enough sugar to procure wine.

Many attempts to plant different vines in South Carolina, Delaware, and New Hampshire

continued for quite some time with no success. As the country continued to grow and

expand westward, vineyard success occurred in Missouri, Ohio, Georgia, and eventually

a few east coast states.15

The disappointment that was seen in early East Coast vineyards

could not have differed more from the thriving production of the West Coast. Mexican

viticulture spread north to California where vines were planted and thrived in San Diego

and Sonoma around 1769. However, this Mexican success in California ended abruptly

as Americans forced Mexico to sell the land from California to the Rio Grande to them in

1847.16

U.S. wine production and domestic consumption grew for years, especially with

help from the Transcontinental Railroad 1869. However, this production and

consumption came to a screeching halt with the temperance movement and Prohibition

that eventually followed in 1919.

14

Estreicher, 103.

15

Estreicher, 107.

16

Estreicher, 111.

8

Other regions of the world, such as South Africa, Australia, and New Zealand,

also found achievement in viticulture. In the 1640s, the Dutch East India Company

created a supply post at the Cape of Good Hope in South Africa. They quickly realized

the climate was suitable for vines, and by 1659, the first grapes were pressed.17

The

region experienced a boom of wine production as new vines and cultivars found their

way down to South Africa. In 1814 and the preceding years, the British Empire took

control of the region and eventually absorbed South Africa, giving South Africa a major

export market for wine. In the wake of the success experienced in the Southern

Hemisphere, vines made their way to Australia in 1788. The region experienced

accomplishment similar to the South African boom, but had very little domestic

consumption due to the fact that it was a penal colony and wine was deemed too

sophisticated by many.18

New and Old World Wine 20th

century to the Present

With the decline in French wine production from vine disease and the

introduction of the AOC, a void in the market had to be filled. New World countries had

to step up to the plate and supply the world demand for wine. From 1870 to 1900,

worldwide production of wine grew by an estimated 22%.19

Chile, Argentina, California,

South Africa, and Australia all expanded production greatly during this time. With the

U.S. Prohibition and the two World Wars that took place in the 20th

century, wine and

other international industries, did not grow significantly.

17

Estreicher, 116.

18

Estreicher, 119.

19

Campbell and Guibert, 185.

9

Around the 1980s, the industry and the gap between Old and New World wines

saw a great shift. In the 1980s, European shares constituted about 96% of worldwide

wine exports. By the year 2000, that figure had dropped to 68.1%. In that same time

period, Australian worldwide exports rose about 1132%. Less incredible, though

significant growth was experienced by the other New World wineries.20

So what has

caused this seismic shift in wine production? This thesis contends that, though the wine

industry seemed as though it would continue to decline and eventually crash, New World

wineries have taken the place of Old World wineries by expanding to different consumers

and producing a cheaper product through new age globalization and marketing strategies.

This thesis asserts the hypothesis that New World wineries’ production growth and

superior marketing strategies, such as segmentation, positioning, packaging, and internet

advertising have increasingly led to the decline in wine production and consumption per

capita of the Old World countries, as the New World wineries provide an industry

lifecycle substitution in the global marketplace. The following chapter will introduce the

relevant economic theories relating to the recent changes in the wine industry.

20

David Aylward, “A Documentary of Innovation Support among New World

Wine Industries,” Journal of Wine Research 14, no.1 (2003): 32.

10

CHAPTER II

THEORY

Globalization has drastically changed the face of the earth economically. It has

provided industries and commodity chains with the ability to disseminate factors of

production across many countries and trade with increasingly fewer restrictions and

barriers. Spulber states, “globalization is the process of reducing the costs of

transactions, tariffs and non-tariff barriers, transportation, and time.”21

Since the end of

World War II, international trade and investment have skyrocketed. Though the wine

industry has seen the effects of globalization for centuries, the present industry looks

nothing like it did even two decades ago. Though the benefits of globalization exist for

companies that can remain competitive in the interconnected world, many firms have

ignored the drastic change in the world economy, making them slowly sink in the

marketplace. The Old World wineries have not embraced this change in the global

marketplace, while the New World thrives by using vital marketing strategies, keeping

the industry afloat. The chapter will highlight the main economic theories involved with

changing market of wine. The first part will discuss globalization theory, then the

industry lifecycle theory, followed by the market segmentation and market positioning

theories that have both bolstered New World wineries in the global marketplace of wine.

21

Daniel Spulber, Global Competitive Strategy (New York: Cambridge

University Press, 2007), 9.

11

Economic Globalization

Globalization has many implications in economic growth. Economic theory

demonstrates that globalization, to a great extent, results in economic growth, increasing

the welfare of a nation as defined by GDP per capita. An expenditure approach to the

measurement of GDP, or counting expenditures on goods and services by different

groups in the economy, implies that an increase in exports increases the GDP.22

When

examining economic effects of globalization, a useful approach involves measuring trade.

Evaluating percentage of a country’s total consumption produced in another country

constitutes one way of measuring globalization. Oppositely, calculating the percentage

of a country’s production that is consumed in another country makes up another way.23

Within the wine industry, wine consumption and production as imports and exports have

seen growing numbers in recent years. The New World countries have, to a large degree,

increased their production and exports of wine, while also increasing their consumption.

Simultaneously, the Old World countries have slowly decreased the amount of exports of

wine and domestic consumption. Globalization, it seems, has benefited New World

wineries more than Old World wineries in the increasingly interconnected global

marketplace.

Industry Lifecycle Theory

A lifeline can trace every industry and the services or products it provides, a

biological analogy that serves as a way to view the span from conception to the death of

an industry. The industry lifecycle theory developed as a way to determine where in the

22

Shahdad Naghshpour, “Globalization: Is It Good or Bad?,” Globalization 7, no.

2 (2008): 2.

23

Naghshpour, 4.

12

timeline a certain product sits and the implications that its current phase contains. In

marketing, the industry lifecycle theory provides a way to forecast what techniques or

managerial tactics a firm should employ to maximize profit. Though the lifecycle theory

suggests important implications of a product and its future potential, it largely goes

unused by firms. Many industries and the firms within them choose not to acknowledge

the theory because it seems either obvious or inapplicable to them. Many producers in

the wine industry seem to ignore the theory because of wine’s ancient presence on earth.

The industry lifecycle theory, like life, follows four main stages: birth, growth,

maturity, and decline. The birth stage starts out differently for various industries; some

firms bypass this stage while others diffuse slowly into birth. The determinants of how

an industry goes through the birth stage include: the perceived comparative advantage

relative to the best alternative, investment risk, barriers to adoption, and information and

availability.24

If the industry or product is groundbreaking, it might bypass this birth

stage as the market receives the product well. In this early stage of development, an

industry generally experiences declining costs per unit of new capacity. The marginal

cost of each additional unit remains less than the average cost per unit, making average

costs decline. Since costs determine price, any additional output sold makes profit.25

This gives the firm incentive to expand capacity further, either creating new factory or

buying more land.

24

George Day, “The Product Life Cycle: Analysis and Application Issues.” The

Journal of Marketing 45, no. 4 (1981): 62.

25

Robert Hayes and Steven Wheelwright, Restoring our Competitive Edge:

Competing Through Manufacturing (New York, John Wiley & Sons, 1984), 103.

13

The growth phase follows the success of the birth stage. During this time, the

industry will employ competitive entry strategies, seeking new consumers and foreign

markets.26

Once the existing uncertainties of the product have been cleared, firms might

begin experimentation. This can include new technologies, formulas, designs, and

market strategies. If the industry is based in non-durables, it might gain increasing repeat

or replacement purchases from consumers. At this point the industry’s growth induces

more growth. Additionally, a firm might seek to segment its market to adapt and tailor a

product to better fit the needs of customer groups who previously did not take advantage

of the product. This idea of market segmentation will be discussed later in this chapter.

After the industry has experienced a stage of growth it will evolve to maturity.

This phase includes an expansion of market potential. Increasing demographic changes

cause the target market to grow or shrink. Social or economic trends may cause changes

in the market. The industry grows more aware of its buyers, including elasticities and

responsiveness to changes in price, advertising, and promotion efforts.27

Following the

stage of maturation comes the onset of the decline of the industry. This decline differs

greatly among various industries, some ending quickly with others taking decades to

reach their demise.

The industry lifecycle theory suggests the inevitable death of every industry.

However, some industries, such as the wine industry, seem to have no end. Is this

because it will never die or are other forces in play? One theory suggests that an industry

might not seem to die because a substitution has taken place. The production substitution

26

Day, 63.

27

Day, 63.

14

cycle says that products can displace an existing set of products by offering enhanced

performance and/or a lower cost. This type of substitution usually takes two or three

decades before the superior product largely replaces the inferior one.28

This type of

substitution can take place for a variety of reasons, but the underlying idea is that

changing times change buyers’ needs. The maturation of a market and its underlying

technology may alter the resources and managerial skills required to remain

competitive.29

So a product substitution cycle can override the inevitable downfall of an

industry predicted by the industry lifecycle theory. This substitution comes about

through new competition employing superior skills in management, production, and

marketing.

Market Segmentation

The use of market segmentation by a firm remains a necessity to stay competitive

in an industry. As briefly mentioned earlier, market segmentation involves dividing up

the consumer base into smaller groups with similar wants and needs. Rosenberg

describes the process as “the subdividing of a market into homogenous subsets of

customers, where any subset may conceivably be selected as a market target to be

reached with a distinct marketing mix.”30

A firm must first identify its consumer base,

then figure out what they want, then tailor a product to fit their specific taste.

A firm must first select its segments, a rather straightforward process. A segment

needs measurability, like the population of a city or college graduates. The segment

28

Edgar Pessemier, Product Management: Strategy and Organization (New

York: John Wiley & Sons, 1977), 25.

29

Pessemier, 26.

30

Larry Rosenberg, Marketing (Englewood Cliffs: Prentice-Hall, 1977), 150.

15

needs substantial size and must contain potential buyers with enough money to gain

sufficient profits. Next, a segment needs reachability, accessible to the marketing and

advertising efforts of the firm. The segment needs exposure to the product at stores and

through the media. Lastly, a firm needs to know the market responsiveness of a segment.

The segment should react to changes in any of the elements of the marketing mix and

pricing.31

Defining the segments by consumer characteristics or consumer response

makes up a crucial aspect of segmentation. Personal consumer characteristics include

geographic, demographic, socioeconomic, and psychographic variables. At the other end

of the spectrum, consumer responses include benefits and usage of the product and brand

loyalty.32

These characteristics and responses help the firm define the segments and

market accordingly.

The potential gains from market segmentation should persuade every company to

make use of the system. Filling the needs of these specific consumers will result in profit

and growth. Furthermore, segmentation can lead to a more easily coordinated product

and more effective advertising, reducing unnecessary advertising and sharpening the

brand image.33

However, market segmentation possesses flaws as well. A firm can over

concentrate its efforts by focusing too much on a certain segment and neglecting another.

This idea has serious implications in the wine industry, as many New World wineries

tailor their wines too much towards highly educated wine consumers, or a much older

consumer base, leaving out a huge market of less wine-savvy consumers and young

31

Rosenberg, Marketing, 154.

32

Rosenberg, Marketing, 154.

33

Rosenberg, Marketing, 152.

16

adults. In addition to the benefits of market segmentation, other marketing techniques are

vital in keeping an industry from reaching its downfall and remaining competitive in the

marketplace.

Market Positioning

The fathers of the market positioning theory, Al Ries and Jack Trout, once said,

“Positioning is not something you do to a product, it’s what you do to the mind of the

prospects.”34

Market positioning exists as a mental concept in the brain of the consumer.

The concept tells consumers the location of a brand relative to its competitors in terms of

style, price, and quality. A consumer conceptualizes how a product relates to others of its

kind, sometimes without even realizing. The process of market positioning involves two

sides, one from the firm and the other from the consumer. On one side, a company

devises a strategy to claim a position in a market that provides itself with a competitive

advantage. The other aspect of positioning involves the consumers’ perception and

memory of the product or brand relative to its competition. The consumer classifies a

brand among a group of brands on the basis of most relevant category characteristics and

distinguishes the brand from others based on its most distinctive characteristics.35

The process begins with the company’s defining three main things: the category

(what is it?), target group or segment (who wants or needs it?), and the properties or

differences that create the brands advantage (why do they want or need it?). Once the

company has answered these questions and defined its goals, it can follow one of three

34

Giep Franzen and Sandra Moriarty, The Science and Art of Branding (Armonk:

M.E. Sharpe, 2009), 165.

35

Franzen and Moriarty, 165.

17

basic strategies. A company might want to employ broad positioning, aiming at all users.

Within this strategy, a company can choose to monobrand by supplying only one product

variant that answers to generic expectation, or the variety strategy, supplying a wide

assortment of product variants under a brand to accommodate varying needs and

expectations of different user groups. Other strategies include segment positioning

(positioning to accommodate a particular user group) and niche segment positioning

(accommodating a single user with a custom product).36

A company must decide to what extent a brand should resemble its competitors,

making market positioning a tough marketing strategy. The consumer categorizes brands

on the basis of their similarities and distinguishes them from others on the basis of their

differences. As similarities between a brand and its competitor’s product increases, the

perception of that brand increasingly resembles others of its kind, largely making them

alternatives. However, a brand should not stray too far from resembling other brands

because, through similarity with competitors, a brand acquires greater legitimacy in the

eyes of the consumer who perceives it as a justified choice. Contrarily, as differences

between a brand and its competitor’s product increase, the brand grows less affected by

exchangeability and is not seen as an alternative. However, with great differentiation, a

brand risks losing legitimacy in the eyes of the consumer.37

The globalization of the wine industry has greatly changed the face of the market

for New and Old World countries as these two different types of countries have

approached the global marketplace in different ways. Potentially, this disparity in New

36

Franzen and Moriarty, 167.

37

Franzen and Moriarty, 167.

18

and Old World production has occurred due to differences in business strategies. The

marketing strategies of segmentation and positioning remain necessities for any

successful industry. For the most part, the industry should employ them at every stage in

the industry lifecycle. These tools can keep an industry from reaching the declining

phase or they might be used by a new industry that will serve as a substitute to the

declining industry. Within the wine industry, these marketing strategies have found their

way into New World wineries’ business strategies and remain almost non-existent in the

wineries of the Old World. In the increasingly globalized world, the use of these

strategies has to a great extent, led to increased New World wine production and a

decline in the Old World as the New World serves as a lifecycle substitution in the global

marketplace for wine. To further understand the changing global wine industry, a chapter

on the review of literature regarding the changing marketplace of wine and how the

discussed economic theories have found their way into the industry will follow.

19

CHAPTER III

LITERATURE REVIEW

Marketing to specific consumer groups is relatively new, and its employment by

the wine industry has been generally slow. The industry has had a preoccupation with

wine as a product, with an emphasis on production-orientation, not sales-orientation. The

production-oriented aspect of the industry has led to less concern for how the wine

market or its consumers behave. However, in the past decade, growing interest in wine

marketing is evidenced by increased attention devoted to brands, quality products,

appropriate pricing, refined distribution, concern for packaging, and new advertising

techniques. Along with those factors, researchers have paid increased interest to the

behavior of wine consumers and market segmentation.1

Market Segmentation

The history of market segmentation in the wine industry has been relatively short,

due to a slow-growing interest in marketing thought and application and a slow

acceptance of marketing by industry players.2 In a segmentation study conducted by

McKinna in 1987, the author four types of wine drinkers: connoisseurs, aspirational

drinkers, beverage wine consumers, and new wine drinkers. In 1992, Dubow, elaborated

on the ideas of McKinna but employed occasion-based segmentation rather than user-

1 Art Thomas and Gary Pickering, “Behavioural Segmentation: A New Zealand

Wine Market Application,” Journal of Wine Research 14, no. 2-3 (2003): 127.

2 Thomas and Pickering, 129.

20

based because it offered deeper understanding of the wine’s consumers.3 In the past two

decades, with the globalization of the wine industry and shifts in consumer behavior, the

wine industry faces a complex market. Wine makers face a dilemma in how to approach

the ever-changing, diverse market. An abundance of wine brands exist, aimed at

consumers who are more sophisticated and educated than in the past.4

A recent study by Thomas and Pickering sought to evaluate the different segments

of wine consumers using occasion-segmentation. They examined where people did most

of their wine purchasing, how many bottles they purchased a month, how much they paid

for wine, and the types of wine they consumed. Light purchasers bought 1 to 7 bottles a

month, medium purchasers 8 to20 bottles a month, and heavy purchasers bought 21

bottles or more a month. The results suggested that light purchasers were typically

married females from the 31 to 50 age bracket, who had a slight preference for still (non-

carbonated) white wines, most often purchased bottles from a supermarket, and bought

wine from the lower end of the price spectrum. The medium purchasing segment

constituted mostly married males in the 31 to 50 age bracket, who possessed a stronger

preference for still red wines, mostly shopped at bottle stores, and bought wine from the

low-end and mid-level price spectrum. Lastly, the heavy purchasing group consisted of

mostly married males from the 31 to 50 and 51+ age groups, who had a strong preference

for still whites, shopped at bottle stores and wineries, and purchased from the middle of

the price spectrum. The large differences in the three different groups suggested that

3 J.S. Dubow, “Occasion-based vs. User-based Benefit Segmentation,” Journal of

Advertising Research, 32, no. 2 (1992): 11-18.

4 Thomas and Pickering, 131.

21

segmentation of the wine market provided a useful platform for wineries and wine traders

to apply to their respective client bases and subsequently orient their marketing efforts.

Globalization

Competitive positions and consumption patterns have changed drastically in Old

and New World wine countries in recent years. Global wine exports as a share of global

production have increased from 15% to 25% over the 1990s.5 This growth is resulted

from decreasing tariffs, logistical cost reductions and the lowering of certain trade

barriers leading to producers’ selling outside their own regions. The countries best able

to adapt to this wider playing field will gain significant national competitive advantage in

the wine industry. New World countries have adapted well to the new global markets. In

2001, five New World Countries (Australia, Canada, Chile, New Zealand and the United

States) “diminished barriers by reducing regulatory burdens faced by winemakers” by

signing the Mutual Acceptance Agreement on Oenological Practices.6

The globalization of the wine industry has also had negative implications for

countries. Hussain, Cholette, and Castaldi highlight three main issues with growing

global interconnectedness within the wine industry: (1) the worldwide oversupply of

grapes and the incumbent pricing pressures, (2) increased consolidation at the producer,

distributor, and retailing sectors, and (3) shifting consumer behavior patterns.7 The

worldwide grape oversupply has led to price cutting in the industry from competing

5 Mahmood Hussain, Susan Cholette, and Richard Castaldi, “An Analysis of

Globalization Forces in the Wine Industry: Implications and Recommendations for

Wineries,” Journal of Global Marketing 21, no. 1 (2007): 33.

6 Hussain, Cholette, and Castaldi, 34.

7 Hussain, Cholette, and Castaldi, 38.

22

firms. In the U.S., imported wines account for roughly 25% of bottles sold. Countries

like the U.S. need ways to compete with the low price and high quality of imports to

regain market share. Furthermore, pricing pressures could decrease overall industry

profitability if the firms engage in pricing wars.

The consolidation of the industry accounts for another repercussion from

globalization. Through mergers and acquisitions, consolidation is taking place among

wineries worldwide. As an industry starts to mature, firms enhance profits by

consolidating to become bigger players, creating competitive advantages through

economies of scale and acquiring negotiating power with distributors. This consolidation

has made it difficult for smaller producers to gain power in the market and get their

product onto retailers’ shelves.8 Distributors want trustworthy, high selling products, not

ones that sit on store shelves endlessly.

Along with the worldwide oversupply of grapes and consolidation, consumer

behavior has shifted in recent years globally. Old World producers have the advantage of

tradition in their domestic and international markets. Furthermore, European cultures

have wine as an integral part of their culture, often consuming wine with lunch and

dinner. However, most of these countries are experiencing a decline in per-capita

consumption due to campaigns against alcoholism and drunk driving.9 Opposite of the

Old World, U.S. consumption per capita has slightly increased over the past few years.

To further increase U.S. consumption per capita, wine needs to be marketed in a way to

promote everyday drinking in a socially responsible manner. A study in 2005 revealed

8 Hussain, Cholette, and Castaldi, 39.

9 Hussain, Cholette, and Castaldi, 39.

23

that 80% of U.S. wine consumers consider themselves “uninvolved” or uneducated about

wine.10

Consumers want to easily identify wines they will enjoy without assistance in the

store. In addition, innovation in packaging has influenced consumer behavior. Boxed

wine and more eco-friendly packaging have gained appeal in recent years in

environmentally conscience wine consumers. Also, twist-off bottles have grown in

appeal as a substitute to cork bottles because of the increased convenience.

Packaging

Glass solidified its position as the dominant format for wine packaging in the

global market in the 1998-2003 period, accounting for over 70% of the market.

However, other forms of packaging have developed and have started to capture some of

the market share.11

One only has to look back to 2002 to notice the significant trend in

Bag-in-box wine. In the United States, before 2002, three brands dominated the market

for boxed wine: Franzia, Almaden, and Peter-Vella, all of which came in 5 liter boxes.

These brands emphasized quantity and value over quality and lifestyle. Today, the

market for boxed wine looks nothing like it did in the early 2000s. Premium varietals in

bag-in-box format and smaller boxes now share the shelf with the 5 liter brands.

Furthermore, more brands from all different regions across the country have grown quite

successful in this format, coming in all shapes and sizes. Production of 1.5, 2, 3, 4, 5, and

10 liter version boxes has begun for many brands. These companies have made the

switch because the box is more eco-friendly and wine can last around three to four weeks

10

Hussain, Cholette, and Castaldi, 40.

11

Per Jenster, David Smith, Darryl Mitry, Lars Jenster, The Business of Wine: A

Global Perspective (Copenhagen: Copenhagen Business School Press, 2008): 136.

24

in a box compared three to four days in a glass bottle. Also, shipping paper costs much

less than glass, lowering prices for the consumer.12

Within the boxed wine market, 3 liter boxes account for the category’s fastest

growth. Sales of 3 liter boxes jumped around 160% between March 2003 and March

2005. While sales in 750 mL bottles grew 7% in the year ending in September 24, 2005,

3 liter boxes experienced a growth of 42.5%. Premium boxed wines saw immense

growth around this time as well. Bag-in-box wine in the highest price range (over $16),

account for most of the category’s growth, 24%. While wines in the $12-$15.99 segment

accounted for roughly 17%.13

As the boxed wine category has grown in recent years, the increased competition

among brands has led to greater differentiation between boxes. This differentiation has

taken the form of new, unique designs, boxes with a view, and boxes have started to take

the shape of cubes, tubes, and cylinders. Evolution in the design of boxes has started to

incorporate embossing, debossing, and foil stamping. Furthermore, boxes, like Kendall-

Jackson’s The Wine Block, have shrunk to the point where the 1.5 liter boxes can fit in

the palm of a hand.

The eco-friendly movement has also found its way into the wine industry.

Boisset’s French Rabbit line comes in an aseptic wine carton called the ePod, an eco-

friendly 1 liter Tetra Prisma container. The box boasts the slogan, “Savor the wine, Save

the planet”. The container also explains to the consumer that the container is 100%

12

Kristine Hansen, “2010 Recap: Wine Trends.” www.slashfood.com. (2011): 2.

13 Tina Capuito, “New Bag-in-box Options: From Cubes to Tubes.” Wines and

Vines. (2006): 1.

25

recyclable and reduces waste by 93% and costs 83% less to recycle than the standard

glass bottle. The company, Three Thieves, released the Bandit, a 250 milliliter in a

similar Tetra Pak container around the same time. With the same idea of reaching to an

environmentally conscious market, their package explained that it is “made largely of

renewable resources and reduces packaging waste by 90% compared to glass bottles”.

Growth in the area of carton packaging has grown enormously in the past two decades,

reaching more than 2 billion liters worldwide in 2005. Many wineries that formerly

bottled only in glass have made the switch to Tetra Pak.14

Cartons have grown

increasingly associated with higher quality wine, due to the expanding variety of New

World wines helping to improve the perceived quality of carton wine.15

Cartons do not

have a significant packaging presence in Old World countries. “The greater size and

maturity of such markets, and their long-standing traditions, mean that novel formats are

less capable of making a significant impact on market share.”16

In recent years, the marketing of wine has grown as a focal point within the

industry. New World wineries have recognized that consumers have different tastes,

preferences and expectations, and a one-bottle-fits-all approach is not a realistic

marketing strategy. Many different cues on the package appear today than a decade ago

that can influence the purchase of wine. Consumers face more complexity in buying

wine than most consumable products. Different labels, bottles, colors, regions, and

14

Hansen, 1.

15 Jenster, Smith, Mitry, Jenster, 137.

16

Jenster, David Smith, Darryl Mitry, Lars Jenster, 138.

26

varietals all influence a purchase.17

With the wide varieties of wine to choose from, these

characteristics possess great influence in grabbing the consumers’ attention. The design

of the wine package adds directly to the look of the product and most consumers tend to

consider the package as a direct representation of the quality of the wine.18

For this

reason, wineries have put an emphasis on the overall design of the package and an

importance on market positioning.

Market Positioning

“Understanding the factors that determine which options consumers choose and

whether they make rather than defer purchase decisions is critical for the development of

wine marketing strategies.”19

The complexity of wine means a distinctive choice process

exists when a consumer chooses to make a purchase. Consumers often do not have well-

defined tastes or preferences, leading them to construct their preferences when faced with

the need to make decisions. For the most part, consumers do not know exactly the

quality of the product they will purchase, as assessing the quality follows the actual

consumption. Thus, when making purchasing decisions for untasted products, consumers

have to rely on the cues readily available to evaluate the wine. These extrinsic cues

appear in two forms: (1) cues related to the product itself like grape varietals, oak

maturation, and region of origin; and (2) cues that can be changed without altering the

17

Nelson Barber, Joseph Ismail, Tim Dodd, “Purchase Attributes of Wine

Consumers with Low Involvement,” Journal of Food Products Marketing 14 no. 1

(2008): 69.

18

Barber, Ismail, and Dodd, 72.

19

N. Novemsky, R. Dhar, N. Schwarz, I. Simmonson, “Preference Fluency on

Consumer Choice,” Journal of Marketing

27

product such as price, packaging, and the brand name.20

Barber et al elaborate on this

idea suggesting, “any variable that facilitates fluent perception is likely to increase the

preference for that wine product, from label image (animal figures); color, type face or

previous exposure with that label.”21

Compared to modern-day wine labels on the market, older front labels were

highly standardized, uninteresting and unimaginative. Old World wines restricted their

front label design changes in hopes of sustaining the image of quality through tradition

and history. Today, wine labels come in various colors, shapes, designs and sizes. New

World wine producers have grown increasingly creative, focusing on their position on the

shelf space compare to others. Many New World wineries recognize that to a new

generation of consumers, the package is as important as the product. Manufacturers work

to tailor the images to appear youthful and trendy to increase “on-shelf presence”.22

This

idea in market positioning has not quite seen its way into Old World wines, but remains a

very crucial aspect to a successful business strategy in the new era of wine.

New Developments in Consumer Interaction

The Internet has had a profound influence on society and markets in the past two

decades. In June 2008, the Internet had over 1.4 billion users, a 300% growth since

20

C. Chrea, L. Melo, G. Evans, C. Forde, C. Delahunty, D.N. Cox, “An

Investigation Using Three Approaches to Understand the Influence of Australian Wines,”

Journal of Sensory Studies 26 (2011): 13.

21

Nelson Barber, Joseph Ismail, Christopher Taylor, “Label Fluency and

Consumer Self-Confidence,” Journal of Wine Research 18, no. 2 (2007): 75.

22

Jenster, Smith, Mitry, Jenster, 136.

28

2000.23

In the past few years, a new phase of consumer interaction has taken place with

the introduction of social network sites, blogs, and online virtual communities that have

had a large impact on the way people consume. The wine industry has had a presence

online since the 1990s, when wineries incorporated it into their business strategies.

Today, research has shown that around 90 to 100% of U.S. wineries have a presence on

the Internet.24

Recently, some wineries have capitalized on this new consumer

interaction while others continue to take a more passive fashion online with a basic

informational website. This new online consumer interaction in the wine industry, which

Thach calls Wine 2.0, allows producers to “engage with wine consumers on their terms in

a time and manner of their choosing.”25

The current state of the Internet, specifically, this new consumer interaction, has

the ability to significantly influence the wine market. It provides a way for producers to

connect with consumers to market, educate, and understand needs, preferences, and

tastes. Wine blogs have grown significantly in numbers in recent years. In 2008, there

were around 555 English wine blogs and 160 in other languages.26

A blogger, a producer

or consumer, writes wine reviews in the form of informational or opinionated pieces.

Some of these blogs provide reviews and ratings that rival those of international wine

critics. A few of the more popular blogs approximate 40,000 Internet hits a month.

Often these consumer-generated wine blogs can influence other consumers.

23

Liz Thach, “Wine 2.0- The Next Phase of Wine Marketing? Exploring US

Winery Adoption of Wine 2.0 Components,” Journal of Wine Research 20, no. 2 (2009):

143. 24

Thach, 144.

25

Thach, 144.

26

Thach, 144.

29

With this level of market influence, it is crucial for wine producers to incorporate

this new trend in marketing into their business strategies. Furthermore, because the

younger generation has adopted this new consumer interaction, producers must attract

these current and future wine consumers.27

A wine consultant’s survey in the United

States found that 21 to 35 year olds now prefer wine over beer. They know very little

about wine and have little brand loyalty to any one firm.28

It is crucial for brands to

recognize this and increase advertising to cater to this new and novice segment of the

market.

One new method of advertising, viral advertising, has appeared in the 21st century

and has proven quite successful. Viral advertising focuses on building opinions through

existing social networks to generate brand awareness and sales. This new advertising

technique does not use the standard billboard, television, or print ad space, rather focuses

on video clips, videogames, emails, and on-the-scene events at young, trendy gatherings.

It also makes use websites and social networking sites, like Facebook or Myspace, and

podcasts.

The Internet has also served to bolster the growing sector of direct to consumer

shipping within the wine industry. “While there is an undeniable trend towards

consolidation and globalization of wine distribution and marketing, there is also a

breakaway faction of small suppliers who have created niche markets by employing

Direct to Consumer distribution through mail.”29

Within the United States, the monthly

27

Thach, 148.

28

Fred Tasker, “Gen Y Picks Wine Over Beer,” www.winemarketer.com,

(2009):1.

30

dollar value of direct to consumer shipments grew by 8.9% from April 2009 to April

2010. California, specifically Napa Valley, makes up the biggest sender and receiver of

direct to consumer shipments, accounting for 760,000 cases, a total shipment value of

$481 million dollars, in that time period. Following California, Oregon shipped 188,000,

a total shipment value of $75 million dollars. The direct to consumer method varies

across countries, some like on Australia, rely on it heavily. In Germany, it accounts for

18% of sales.30

In the U.K., direct to consumer shipments have also seen growth. France

instituted direct to consumer shipments of high quality wines in the 1980s, but the format

has experienced only marginal success.31

The reason a spike has occurred in the sector of direct to consumer shipments can

reasonably be attributed to wineries’ Internet presence, especially on websites like

VinterActive, a site that helps wineries with their online wine marketing endeavors. It

has helped numerous wineries gain marketing share, increase consumer satisfaction and

loyalty while enhancing the overall sales experience. VinterActive leads the way in

providing this online direct to consumer service because of its advanced software.

VinterActive uses a Listraka designed technology to build preference-

based lists consequent of customers, locations, purchases, shopping habits, and

membership status. It can capture and store consumer information and unlimited amount

of preferences. With the captured information and preferences it allows VinterActive to

send highly customized email campaigns that directs business to winery websites. The

29

Jenster, Smith, Mitry, Jenster, 143.

30

Jenster, Smith, Mitry, Jenster, 146.

31

Jenster, Smith, Mitry, Jenster, 147.

31

body of the emails contain individualized information like product preferences, locations,

and unique user IDs and passwords which can automatically fill out forms with account

information if the user decides to click through to the winery website.

Members of the website enjoy this service as it only sends them information on

specials, products, reviews, and events in which they prefer. Because members only

receive information based on their own preferences customer satisfaction and loyalty

increases. VinterActive campaigns attain open rates of nearly 30% with highs of 60%.

The click-through rates also achieve great numbers averaging between 15% to 25% with

highs of 40%. These targeted email campaigns from VinterActive have a response rate

of 250% higher than broad, uncustomized emails.32

Marketing Efforts Around The World

While the U.S. has taken advantage of the new developments in marketing

through the Internet, many Old World countries have increased advertising expenditures

but have stuck with traditional marketing techniques, a potentially risky move among the

new generation of wine drinkers. France has had rapid growth in media expenditures

since the start of the 21st century. Advertising expenditures for wine increased over 7%

from 2003 to 2008. Print advertisements made up the majority of those expenditures at

53%, followed by billboards at 37%, and radio advertisements at 9%. German marketing

focused mainly on heavy television and print advertisements. Italy has also had an

increase in advertising activities. In the past, Italy focused primarily on advertising for

boxed wine. Recently, an increase in promotional spending has occurred among bottled

32 Megan Oullet, “VinterActive Cultivates Customer Relationships.”

www.winemarketer.com. (2007): 2.

32

wine producers. In the south of Italy, where promotional activities are less restricted,

promotional activities have increased by 15%. A total of 75% of those expenditures

directed towards television commercials. In the U.K., total advertising expenditures have

declined in recent years, of which the leading brand Piat D’or made up 10% of all

advertising. The U.S. leading brands have experienced significant sales growth. E&J

Gallo increased its market share to 27.3% of the entire U.S. wine market through a single

brand-oriented strategy. Constellation Brands, an E&J Gallo brand spent $420 million on

marketing and advertising in the few years previous to 2008.33

The application of improved marketing through the Internet, coupled with market

segmentation and positioning, has taken place, to a great extent, in New World wineries.

This has given them a crucial advantage over the Old World competition in recent years

as they cater to an expanding, younger consumer base and accommodate the existing

consumer base. In this new global environment, a modern marketing strategy is an

indispensible necessity. Winery owners must find an e-commerce partner and embrace

the rapid changes and the developing marketing tactics within the industry. The next

chapter will describe the data and methodology used in evaluating the changing

marketplace for wine in Old and New World countries.

33

Jenster, Smith, Mitry, Jenster, 147.

33

CHAPTER IV

DATA AND METHODOLOGY

An examination of data pertaining to the wine industry on a macroeconomic level

should serve to better understand the changing wine industry. First, this chapter

identifies the data observed and its sources for macroeconomic data of specific New and

Old World countries in the industry. The chapter following then will analyze this data

and assess how marketing efforts have contributed to the data how it has manifested itself

in the context of the global wine industry.

The Macroeconomic Picture – Production and Consumption

The macroeconomic variables examined should highlight the trends of the

changing market of the world wine industry. For the purposes of efficiency, this data will

concentrate on five Old World and five New World countries. France, Italy, Spain,

Germany, and Portugal constitute the Old World countries and the United States,

Australia, New Zealand, Chile, and South Africa represent the New World countries.

These countries were chosen because they best represent Old and New World wineries

and are appropriate for highlighting the trends within the industry. The macroeconomic

data evaluated in this chapter will include production and consumption from 2004 to

2008. All of the figures come in hectoliters. The data come from the Trade and Data

Analysis (TDA), a reliable and credible source for macroeconomic data. Examining this

macroeconomic data should serve to highlight the trends in Old and New World

34

production patterns in the global industry of wine. The following part of this chapter

includes tables for Old and New World wine production followed by an analysis of

interesting figures and findings within the data.

TABLE 4.1

OLD WORLD WINE COUNTRY PRODUCTION DATA

(in hectoliters)

Country 2004 2005 2006 2007 2008

Italy 44,086 53,135 50,566 49,631 51,500

France 57,386 52,105 53,400 52,127 45,692

Spain 41,843 43,168 36,158 38,290 36,781

Germany 10,107 9,150 9,256 9,000 10,363

Portugal 7,340 7,481 7,267 7,542 6,049

Old World

Total

160,762 165,039 156,647 156,590 150,385

World Total 291,987 301,363 285,035 284,700 283,898

As Table 4.1 indicates, in 2004, France produced the most wine with 57,386

hectoliters. However, their production declined by around 5,500 hectoliters, a

considerable figure, in 2005. Production stayed around the low 50,000-hectoliter range

for 2006 and 2007 before experiencing yet another significant decline to 45,692 in 2008.

Overall, from 2004 to 2008, France experienced a 24.4% decline in wine production.

This negative change in one of the Old World countries known for its wine represents a

serious shift in the world’s wine industry.

35

In 2004, Italy produced 44,086 hectoliters of wine, much less than leader France.

However, in 2005 Italy took the role of top wine producing country at 53,135 hectoliters

of wine, 1,030 hectoliters more than France. In 2006 and 2007, Italy fell short of France

in production, by around 3,000 hectoliters each year. However, in 2008, Italian

production trumped France by a significant 5,808 hectoliters. From 2004 to 2008, Italy’s

wine production increased by16.8%.

Spanish wine production approximated 41,843 hectoliters in 2004. The following

year, Spain increased production to 43,168 hectoliters. In 2006, Spanish wine production

showed a significant decline, at only 36,158 hectoliters. Production remained relatively

stable at that level for the two next years, ending at 36,781 hectoliters in 2008. In sum,

from 2004 to 2008, Spain’s production experienced a negative 12.1% change. This

decline in production in those years represents another Old World country, with a long

history of viticulture, decreasing production in the new era of the wine industry.

Germany and Portugal, two other Old World wine producing countries, have not

had as great a market presence as their Old World relatives. From 2004 to 2008,

Germany produced a relatively stable amount of wine, ranging from a low of 9,150 in

2005 to 10,363 in 2008. Its overall change from 2004 to 2008 was a positive 2.5%.

Portugal, in 2004, produced a modest 7,340 hectoliters of wine. It remained in the low to

mid-7,000 hectoliter range for the following three years. However, in 2008, Portugal’s

production dropped to 6,049 hectoliters. The overall change in production from 2004 to

2008 was a negative 17.6%. The Old World countries’ production patterns from 2004 to

2008 varied for the different countries. France, Spain, and Portugal all declined in

production, while Germany and Italy exhibited increases in production. To understand

36

the changing times of the wine industry in the context of production, an evaluation of

New World production seems necessary. Like the above data, these New World

production data span the 2004 to 2008 timeframe and come from the Trade and Data

Analysis (TDA) source and are displayed in Table 4.2.

TABLE 4.2

NEW WORLD WINE COUNTRY PRODUCTION

(in hectoliters)

Country 2004 2005 2006 2007 2008

United

States

24,110 27,859 24,298 25,125 24,274

Australia 15,048 14,669 14,628 9,620 14,750

South Africa 9,279 9,052 10,130 10,200 10,300

Chile 6,550 8,046 8,450 8,280 8,690

New

Zealand

1,192 1,020 1,195 1,250 1,300

New World

Total

56,179 60,646 58,701 54,475 59,314

World 291,987 301,363 285,035 284,700 283,898

As the data in Table 4.2 show, the United States has grown in the world market

share in the wine industry in the past decade, ranking fourth in the list of countries

covered by this study. In 2004, the United States produced a sizeable 24,110 hectoliters

of wine. The next year, it saw a great increase in producing, reaching 27,859. However,

the next three years saw less production, at 24,298, 25,125, and 24,274 hectoliters for

2006, 2007, and 2008, respectively. From 2004 to 2008, the U.S. experienced a positive

.7% change in production.

37

Australia, like the U.S., has also gained significant market share in the wine

industry in the past decade. In 2004, Australia produced 15,048 hectoliters of wine. The

following three years saw less production for Australia, reaching a low of 9,620

hectoliters in 2007. However, it climbed back in production and reached 14,750

hectoliters in 2008. Even so, the overall change in production from 2004 to 2008 came to

a negative 2%.

South Africa’s production levels resembled those of Australia’s in the years from

2004 to 2008, though demonstrating much more stability. In 2004, the country produced

9,279 hectoliters of wine. In 2005, South Africa decreased production by about 200

hectoliters, dropping to 9,052. The next few years exhibited modest, but steady growth,

finally reaching 10,300 hectoliters in 2008, making the overall change from 2004 a

positive 11.0%. Chile experienced significant growth from 2004 to 2008. In 2004, the

country produced 6,550 hectoliters of wine. The next two years saw more growth,

reaching 8,450 hectoliters in 2006. In 2007, the country experienced a minor cutback in

production, followed by another increase, hitting 8,690 hectoliters in 2008. The overall

change in production experienced by Chile came to a sizeable, positive 32.7%.

The wine production of New Zealand has not achieved the levels of its New

World counterparts, but should not be discounted. In 2004, the country produced a

modest 1,192 hectoliters before dropping to 1,020 in 2005. The next three years saw

positive growth for the country, reaching a high of 1,300 hectoliters in 2008. New

Zealand experienced a positive 9.1% increase in production from 2004 to 2008.

As the data suggest, Old World production in these five countries has decreased

from 160,762 hectoliters in 2004 to 150,385 hectoliters in 2008. On the other side of the

38

spectrum, the five New World countries expanded production from 56,179 hectoliters in

2004 to 59,314 hectoliters in 2008. To further examine this data, a t-test was performed.

In the t-test, the totals for Old and New World production patterns for each of the five

years were calculated. The mean of Old World production came to 157,884.6 hectoliters.

It had a standard deviation of 5452.44 hectoliters and a standard error of mean of 2438.41

hectoliters. On the New World production side, the values possessed a mean of 57,863

hectoliters, a standard deviation of 2493.35 hectoliters, and a standard error of mean of

1115.06 hectoliters. The test calculated a t score of 37.3039 with 8 degrees of freedom

and a standard error of difference equal to 2681.265. The overall test revealed the two-

tailed P value between Old and New World productions was .0001. In other words, the

downward trend of the Old World and the upward trend of the New World are

statistically significant with a 99% confidence interval. Although, the differences in total

hectoliters between Old and New World countries are large, the trends suggest that a

definite shift has taken place in the global wine industry. To better understand these

trends, an evaluation of the consumption side of the industry follows.

Consumption Patterns

While the production component of the wine industry seems of utmost importance

when discussing the global wine industry, consumption patterns of individual countries

should also serve as an important variable when evaluating the changing face of the wine

industry. The next part of this chapter examines consumption levels of Old and New

World countries, because the changing consumption patterns of individual countries

might have direct influence on a country’s production. Like the above data, these data

come from the TDA, spanning from 2004 to 2008, and all of the figures are in hectoliters.

39

TABLE 4.3

OLD WORLD WINE COUNTRY CONSUMPTION

(in hectoliters)

Country 2004 2005 2006 2007 2008

France 33,218 33,530 32,600 32,400 32,200

Italy 28,300 27,016 27,000 27,900 29,100

Germany 19,845 19,849 19,940 19,900 19,900

Spain 13,898 13,686 13,510 13,450 13,300

Portugal 4,913 4,820 4,793 4,750 4,700

Old World

Total

100,174 98,901 97,843 98,400 99,200

World 236,812 237,605 240,915 244,294 245,012

French consumption of wine in 2004 came to 33,218 hectoliters, while 2005 saw

minor consumption growth for France, reaching 33,530 hectoliters. From 2006 to 2008,

consumption from France decreased modestly and steadily, hitting 32,200 hectoliters in

2008. The overall change in French consumption from 2004 to 2008 came to a negative

3.1%. French wine consumption was much less than their wine production during this

period.

Along with their increase in production, Italy also experienced an increase in

consumption in the time spanning 2004 to 2008. In 2004, the country consumed 28,300

hectoliters of wine. The years 2005 and 2006 saw a decline in consumption, reaching a

40

low of 27,000 hectoliters in the latter. However, in 2007 and 2008, Italian wine

consumption experienced reasonable growth, reaching 29,100 hectoliters in 2008. Their

overall change from 2004 to 2008 came to a positive 2.8%. Like France, Italian wine

consumption was much less than their production in the period from 2004 to 2008.

Germany experienced very stable consumption patterns from 2004 to 2008.

Beginning with 19,845 in 2004 and ending with 19,900 in 2008, experiencing a positive

.3% change over the period. Spain, much like Germany, saw only minor changes in their

consumption patterns in this time period. In 2004, Spain consumed 13,898 hectoliters of

wine, experiencing small declines each year until 2008. In 2008, the Spanish consumed

13,300 hectoliters of wine, making their overall change from 2004 a negative 4.3%.

Finally, Portugal’s consumption patterns resembled those of Spain but on a smaller level.

In 2004, Portugal consumed 4,913 hectoliters. From 2005 to 2008, consumption steadily

declined, with a low of 4,700 in 2008. Portugal’s overall change from 2004 to 2008 was

a negative 4.3%. Though Italy and Germany experienced minor consumption increases

from 2004 to 2008, the other Old World countries experienced decreased consumption,

suggesting less societal involvement and concern with the wine industry.

While New World country consumption does not reach the high levels of Old

World consumption, however, the trends suggest interesting information regarding the

changing face of the wine industry. The United States consumed 25,227 hectoliters in

2004. Over the next few years, it experienced significant and steady growth, reaching

32,200 hectoliters in 2008. From 2004 to 2008, the U.S. experienced a positive change in

consumption of an incredible 14.5%. Australia also underwent growth in the same

41

period, starting at 4,361 hectoliters in 2004 and growing to 4,600 in 2008 reaching a

positive 5.5% change.

TABLE 4.4

NEW WORLD WINE COUNTRY CONSUMPTION

(in hectoliters)

Country 2004 2005 2006 2007 2008

United

States

25,227 26,308 27,204 28,574 32,200

Australia 4,361 4,523 4,567 4,590 4,600

South Africa 3,509 3,450 3,452 3,465 3,510

Chile 2,547 2,644 2,600 2,600 2,600

New

Zealand

770 817 870 880 890

New World

Total

36,414 37,742 38,693 40,109 43,800

World 236,812 237,606 240,915 244,294 245,012

South Africa experienced a decline in consumption from 2004 to 2005, dipping to

a low of 3,450 hectoliters. In the next few years, very minor growth in consumption

occurred, reaching 3,510 in 2008, one single hectoliter more than 2004. Chile increased

consumption from 2004 to 2005 before declining to 2,600 hectoliters in 2006, the level it

remained at from 2006 to 2008. From 2004 to 2008, it experienced a growth of 2.1%.

Finally, New Zealand maintained a steady growth in consumption from 770 hectoliters in

2004 to 890 in 2008, resulting in a growth rate of 15.6%.

42

The data show that Old World countries’ consumption modestly declined from

100,174 hectoliters in 2004 to 99,200 in 2008. However, in the New World countries,

consumption increased from 36,414 hectoliters in 2004 to 43,800 hectoliters in 2008. To

further evaluate the trends, a t test was applied to the consumption patterns. Old World

consumption had a mean of 98,903.6 hectoliters, a standard deviation of 877.53, and a

standard error of mean equal to 392.44. New World’s consumption statistics possessed a

mean of 39,351.6, a standard deviation of 2829.13, and a standard error of mean equal to

1265.23. The test revealed a t score of 44.9553 and 8 degrees of freedom. The two-

tailed P value equaled less than .0001. These results conclude that, with 99% confidence,

Old World consumption has a significant downward trend and New World consumption a

significant upward sloping trend.

43

CHAPTER V

ANALYSIS

Much has changed in the past few decades in the context of the world wide wine

industry. No longer is viticulture subjected to the antiquated policies and practices from

the Old World wineries. The data from the previous chapter speak loudly of the current

trends in the global wine industry. The industry data suggest recent changes have finally

introduced a new era in the ancient history of wine. This chapter draws on the ideas and

analyzes the trends that come from the data in the previous chapter. The following

chapter will conclude the thesis.

Old World Macroeconomic Analysis

In analyzing Old World production and consumption in Tables 4.1 and 4.3

respectively, the data suggest interesting trends in the wine industry. France, one of the

most world-renowned wine producing countries, dramatically decreased production from

57,386 hectoliters in 2004 to a low of 45,692 hectoliters in 2008. This great decrease in

production could stem from the country’s similarly declining domestic consumption, or

other variables, such as a loss of preference for French wine on the global scale. As

mentioned in the introductory chapter, France’s implementation of an appellation system

and their strict rules on market positioning and bottle labels could seem less preferable to

consumers in other countries, specifically uneducated or introductory wine consumers.

With the growth of bag-in-box wines and new, eco-friendly packaging in New World

44

countries like the U.S., and France’s preference for glass bottling, their exports of wine

might have led to a decrease in production. Furthermore, their old-fashioned advertising

techniques and reliance on print, radio, and billboard advertisements might fail to reach

the new generation of wine drinkers. Their inability to connect with this segment could

greatly affect their production in the future. Finally, the marginal success of their direct

to consumer sales could contribute to their production and consumption decreases.

Italy remained the only Old World country to significantly increase their

production from 2004 to 2008. In 2004, it produced 44,086 hectoliters before growing to

51,500 hectoliters in 2008. During this time, Italian consumption also increased. This

suggests that a domestic and possibly a global preference for Italian wine increased

during this time. Their increased advertising efforts for glass bottled wines and the lack

of restrictions on wine advertising in the south of Italy could have also led to an increase

in production and consumption. Furthermore, this could result from favorable weather

conditions for grapes. Along with Italian production and consumption, Germany made

up the other Old World country to increase both production and consumption. From

2004 to 2008, Germany increased production from 10,107 hectoliters to 10,363

hectoliters. On the consumption side, Germany grew from 19,845 hectoliters in 2004 to

19,900 in 2008. The disparity between the much higher consumption and lower

production suggests a strong preference for foreign wines. Though the German

production figures represent about 20% of Italian production, the trend suggests German

preference to produce and consume wine is increasing. This could mean their increased

television advertising has proved a viable marketing strategy in Germany. In addition,

45

their growth within the direct to consumer shipping format might have contributed to this

increased production and consumption.

Spanish production also followed a downward trend. Spain produced 41,843

hectoliters in 2004, which dropped to 36,781 in 2008. Like France, Spain also

experienced a decline in consumption over those years. This drop could stem from Spain

losing their preference for wine domestically or globally. Furthermore, the loss in

consumption could be the result of campaigns against alcoholism and drunk driving that

have taken place across Europe. Finally, the decline in production might be attributed to

insufficient advertising and marketing strategies from Spanish wineries. Along with

Spain, Portugal also decreased production and consumption from 2004 to 2008.

Portugal, though not a large producer, decreased production by close to 1,300 hectoliters

in the time span. Its proximity to Spain could mean the same factors that affected

Spanish consumption and production could have taken place in Portugal as well. These

countries have not made significant efforts in advertising and marketing and could benefit

from embracing the necessity adapt to the new marketplace for wine.

New World Macroeconomic Analysis

The New World data examined in this section comes from Tables 4.2 and 4.4,

highlighting production and consumption patterns. New World countries from 2004 to

2008 did not share the overall loss in production and consumption felt by Old World

wineries. The United States, the largest New World producer from the data sample,

experienced modest growth from 2004 to 2008. The U.S. grew from 24,110 hectoliters in

2004 to 24,274 hectoliters in 2008. Though this growth was small, the trend suggests

production expanded. A more interesting fact to examine is the sizeable growth in

46

consumption. In 2004, the United States consumed 25,227 hectoliters before growing to

32,200 hectoliters in 2008. As mentioned in the review of literature, the United States

has set the standard for marketing, through viral advertising, adopting the new, eco-

friendly packaging techniques and leading the way in the fresh, growing market of online

direct to consumer shipping. This large growth suggests the American consumer base for

wine is a rapidly expanding consumer base. Moreover, today’s United States Millennial

generation has shown for the first time to have a preference for wine over beer. Because

the consumer base continues to grow so quickly and is largely made up of casual, mostly

non-wine savvy consumers, wineries should work on expanding marketing efforts

towards these consumers.

South Africa makes up another New World country expanding both production

and consumption. In 2004, South Africa produced 9,279 hectoliters, experiencing

moderate growth until reaching 10,300 hectoliters in 2008. Their consumption

experienced much less growth, however, with a net growth of 1 hectoliter from 2004 to

2008 for a total of 3,520 hectoliters. The lack of domestic consumption compared to

domestic production suggests that South Africa has been exporting wine at a much higher

rate and the world wine market has developed a preference for South African wine.

Along with the growth of the United States and South Africa in production and

consumption, Chile and New Zealand have both experienced growing trends in those

areas. Chile grew from 6,550 hectoliters in 2004 to 8,690 hectoliters in 2008. New

Zealand expanded production from 1,192 hectoliters in 2004 to 1,300 hectoliters in 2008.

Considering the size of New Zealand, and the amount of land it can dedicate to grape and

wine production, the figure is relatively sizeable. In terms of consumption, both grew in

47

hectoliters consumed, Chile, from 2,547 in 2004 to 2,600 in 2008, and New Zealand,

from 770 in 2004 to 890 in 2008. These trends show wine has grown as a preferable

alcoholic beverage within these countries. Wineries worldwide should recognize these

trends as they try to segment and position towards these growing consumer bases.

Furthermore, these countries produce many high-quality boxed wines, and the world has

started to recognize that boxed wines can be of great quality largely due to the wine of

these countries.

Lastly, Australia constitutes the only New World country examined with a loss in

production. In 2004, Australia produced 15,048 hectoliters, sinking to 14,750 hectoliters

in 2008. It is crucial to note that the loss in production is only 298 hectoliters.

Furthermore, compared to the years of 2005, 2006, and 2007, the 2008 figure is higher.

So, one could surmise that the year of 2004 produced an outlier figure, and the actual

trend shows growth. Consumption for Australia also grew during this time. In 2004, the

country consumed 4,361 hectoliters, growing steadily over the years until reaching 4,600

hectoliters in 2008. The disparity between the much larger production and smaller

consumption suggests Australia has relied on exports and foreign markets to reach their

consumer base. Because of this high exportation to domestic consumption rate, Australia

has relied on improved marketing strategies from Old World wineries to stay abreast

within the industry. Also, Australia relies heavily on direct to consumer shipping which

has clearly affected the amount of exportation.

The declining trends of consumption and production in the Old World countries

and the growth of production and consumption in the New World show the global wine

industry is reaching a new era. With improved marketing strategies combined with

48

growing production, the New World is working towards taking over the Old World as

leaders of the global wine market. Though, the data clearly show the stated trends, it is

unclear at this time that New World wineries are providing an industry lifecycle

substitution. Further research in the future might demonstrate that a substitution has

taken place within the industry. With the declining interest in consuming and producing

wine in the Old World and the growing interest in consumption and production within the

New World, the worldwide wine industry is most certainly changing.

49

CHAPTER VI

CONCLUSION

The wine industry has existed for centuries. Additionally, one might even say

that the industry has seen globalization for centuries. Throughout that time, Old World

countries have remained the most powerful force with the most market share. However,

as the previous chapters have made clear, New World wineries have grown immensely in

the past few decades and have introduced a new era in the ancient timeline of the wine

industry. By embracing new marketing strategies such as segmentation, positioning,

packaging, and Internet advertising they have begun to gain market share in the global

industry as Old World countries have experienced the opposite.

This thesis set out to investigate whether an industry lifecycle substitution has

taken place within the industry as New World wineries have begun to replace Old World

wineries amidst the recent large expansion in globalization with their improved

marketing strategies. The data cannot completely confirm this has happened, but have

pointed to the fact that trends within the industry suggest that an industry lifecycle

substitution is a distinct possibility in the future. With more recent data, the trends might

show that to a large extent, Old World wineries have continued to fall in production and

consumption and New World wineries have done the opposite.

The introduction described the ancient history of wine. Later, it explained the

expansion of the wine industry through trade, transportation, and technological

50

advancement. It ended by describing the current context of the industry and the growing

New World producing countries. The theory chapter described the relevant economic

theories within the context of the global wine industry and why the recent changes in the

industry have taken place. Later, the literature review analyzed how the relevant

economic theories have manifested themselves in the wine industry and previous studies

that have examined them. Next, the data chapter showed recent statistics for both New

and Old World countries’ production and consumption. Finally, the analysis chapter

highlighted the important trends in the data, finding that there are, in fact, very clear and

significant changes happening in the global wine industry.

Viticulture has had a rich and relatively stable history. Up until recent decades, it

was following the same path it always had, led by Old World wine producers and

consumers. However, the recent globalization of the world has made new entrants to the

market increasingly important in the global industry. With their improved marketing

strategies, they have revamped an antiquated, innovatively and creatively stagnant

industry. If the Old World countries do not take heed of the clear signs of industry

lifecycle substitution and remain ignorant to improved marketing strategies, they will

eventually lose their entire market share.

51

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