The Palgrave Handbook of Wine Industry Economics

The wine sector is crucial for the French economy. It represents the second net trade surplus (behind aeronautic) and allows for creating numerous jobs in rural regions, where economic activities are rare. France is historically one of the leaders of wine production around the world; one of the biggest producers in volume, along with Spain and Italy; and the main producer in value. French wines have an ancient and large reputation. Nevertheless the consumption and the production of wine have been experiencing a long-term decline (since the 1970s) in France. The exports are essential then. Facing the development of an intensive worldwide competition in the wine sector since the 1990s, French producers have to perform in order to maintain their competitiveness. The complexity of their industrial organization, the numerous appellation regimes, the high fragmentation of the production and the length of their supply chain are real challenges to face this competition coming from the Old World as well as the New World.

The wine supply chain represents a sizeable share of the Italian agro-food economy, especially as regards exports, and viticulture still characterizes Italian rural landscapes. The operators involved in the various phases differ in number, size, and production functions (grape-growing, crushing, bottling, shipping). Small- and medium-sized family wine farms coexist with cooperatives and big industrial producers, but overall the sector is highly fragmented. The degree of concentration of the industry is low, notwithstanding the role of some big firms (especially cooperatives and industrial companies) that operate in different segments of the domestic and foreign markets. In the domestic market, the distribution is dominated by large-scale retail channels (especially for less expensive wines), followed at a distance by small retail and direct sales. Marketing strategies and segments are quite different among individual firms, both in Italy and abroad. The majority of wines have a designation (PDO, PGI), and the share of generic wines is decreasing. Appellations are more important than brands for Italian consumers, while abroad brands can be important references, especially for super-premium and icon wines.

The Spanish wine sector is characterized by its prominent position in the world. Spain has more than 130 quality geographic indications (PDO and/or PGI). Of these the PDO Rioja is the most notorious. The grapes are produced in small holdings, and many local and foreign grape varieties are being used, though mostly Airen, for white wines, and Tempranillo, for red ones. Data show a big disequilibrium between a growing supply—despite decreasing vine surface—and a decreasing domestic consumption, especially with younger generations. The consequence, together with legal changes eliminating subsidies to distillations, is that large amounts of Spanish wines are exported in bulk, which in turn places Spanish wines in a lower price segment in the international markets. However, large investments in reinforced distribution capacity and the expansion of the number of exporting firms, combined with a better knowledge of the international markets, could improve the value of Spanish wine exports in the near future.

Among countries, the United States is the world’s fourth largest producer of wine and the largest consumer and importer. The industry is located primarily on the US west coast, and California alone accounts for four-fifths of production. It is a diverse industry in terms of the varieties grown, farm size, yield, fruit attributes and price, and ultimately value of the wine produced, attributes that have a strong relationship with the geographic location of production. The current complex taxation structure and peculiar “three-tier” wine marketing and distribution system owe much to the legacy of Prohibition. Effectively, each state is a separate entity, and they can differ significantly in their regulations and taxes applicable to wine marketing and distribution, performed by an increasingly concentrated industry. These features may be daunting to some suppliers. Nonetheless, growth in population and per capita demand continue to drive changes in production, markets, and imports in this vibrant sector of the US economy.

Despite favorable growing conditions, Australia did not become a net exporter of wine until the 1890s, and not a significant player internationally until the early 2000s following two decades in which Australia’s wine production quadrupled and the export share of that rose to two-thirds. This chapter seeks to explain how and why the industrial organization of Australia’s wine industry changed over recent decades. It begins with a brief outline of how the industry has evolved through past cycles around its long-run growth path. It then provides details of the industry’s current structural organization and how it developed. The final section speculates on how that structure may change in the decades to come. It concludes that despite the recent downturn in the industry’s fortunes, the country’s competitiveness in international wine markets is at last firmly established and commensurate with its ideal wine-growing climate.

The Argentinean viticulture sector has undergone striking transformations in the last quarter of the century, from the process of uprooting low-quality grapevines covering 72,000 ha (178,000 acres) to the plantation of highly demanded grapevines extending over 77,000 ha (185,000 acres), 30,000 ha (74,000 acres) of which correspond to Malbec. Additionally, production capacity has increased, combined with the arrival of national and international investments in the sector. Finally, two commercial developments are worth mentioning: wine premiumization in the domestic market and their export to the main international markets. The last five years have witnessed an adverse economic context in Argentina, which has slowed down the momentum for many wineries. In the next years, lower inflation rates and a policy for remaining open to the world will allow the Argentinean wine industry to expand and evolve into an increasingly professional industry with an even sharper strategic focus, even, perhaps, with fewer companies operating. The recent years have been very difficult for the Argentinean economy, and many wineries have had to adapt the business to new conditions, especially in the domestic market. Nowadays the Argentinean wine sector structure is very different, and the wineries and producers have the challenge to grow in a very competitive market with opportunities and very strong threats.

The Chilean wine industry has had an outstanding development since the 1980s to present days, which has resulted in a new viticulture and business environment. This was due to a significant change in the sector, which implied an adaptation of the wine offer to international demand. Some examples that support this adaptation, among others, are related to the use of stainless steel tanks, the constant search for the best expression of the grape variety linked to the territory, the identification of markets and their requirements and the adoption of management practices in business. Today Chile has around 137,000 hectares of cultivated area, distributed and concentrated mainly in Coquimbo and Araucania Regions, although there are some experiences that are expanding our wine-growing areas in southern Araucania and northern Coquimbo. The red grape Cabernet Sauvignon and the white grape Sauvignon Blanc are the two most cultivated in Chile. In terms of market structure, the Chilean wine industry is rather concentrated and strongly export oriented. Today wine exports represent more than 1800 million dollars and represent more than 80% of wine produced, which reach more than 130 countries. The domestic market is about 20% and currently registers a per capita consumption of about 13 liters, one of the lowest historically, because in the year 2000 it was close to 20 liters, and before the 1970s it was above 50 liters. Concha y Toro is the biggest company and one of the largest in the world.

Modern South Africa is a product of its history and geography: the strategic location of the Cape Colony on the sea route to the east, the great mineral discoveries, and the greed that went with attempts to control the flow of profits from the mining sector and the protection that farmers received from the large, landlocked market in Johannesburg were the impetus for economic development of the country. The wine industry forms an integral part of this history right from the beginning. In this chapter, the consequences of these origins for the structure of the modern industry are analyzed in some depth in order to illuminate pertinent aspects of the future of the industry. In this regard, industry dependence on a benign government in the absence of meaningful transformation has the potential to divert attention from the industry’s first aim, namely, to convince the rising black middle class of the benefits of drinking wine.

In order to provide a global overview of the Chinese wine industry, this chapter introduces and analyzes the main operators along the industry chain. China is an emerging and dynamic wine market experiencing rapid growth since the beginning of the 2000s. The domestic wine industry is characterized by high vertical integration along the industry chain from winegrowing to winemaking and then to distribution, with a few leading groups dominating market share. Geographical indications have developed in the main wine-producing regions, and certain elite wineries in these areas have gained an international reputation thanks to the quality of their wines. Meanwhile, the Chinese government has been playing a significant role in supporting the development of the domestic wine industry. In terms of consumption, imported wines are well welcomed, and Chinese wine drinkers have been becoming more adventurous in trying various types of wines. The market has been evolving rapidly, in every aspect, from production to distribution, as it adapts to the changes in consumer behavior.

This chapter introduces the topics that will be covered in Part II: Regulations in the Wine Sector.

This chapter analyzes the main international wine organization—the International Organisation of Vine and Wine (OIV)—versus the main wine plurilateral agreement, the World Wine Trade Group (WWTG). Although the OIV is the oldest, biggest, and most influential organization in the world of wine, it is useful to analyze it in the face of the WWTG, as they represent a different way to design regulation and international policies. Even if both aim to facilitate trade and exchanges, one does so through harmonization and the other, the less ambitious, through the goal of mutual recognition of standards. There are no formal relations between WWTG and OIV, although many WWTG participants participate in the OIV. They don’t compete but its philosophy is very different. Through a detailed analysis, this section highlights the different philosophies and goals of action between the two.

The European Union (EU) is the world leading producer of wine and it accounts for 45% of world wine-growing areas, 65% of production, and 70% of exports in global terms (https://​ec.​europa.​eu/​agriculture/​wine_​en). The entire EU production is regulated under the framework of Common Agricultural Policy (CAP) and the single Common Market Organization (CMO). Nowadays, wine policy is one of the most articulate laws of the CAP and this is due to the complexity and heterogeneity of the policymakers, institutions and organizations involved, and the international scenario. The latest reform of the CAP was decided in 2013 that mostly renews the measures and approaches initiated during the 2008 wine reform which reorganized the way the EU wine market was managed, in order to ensure EU wine production matches demand, and redirect spending to make European wine more competitive.

The aim of this chapter will be to examine the evolution of EU wine policies through three main policy orientations: “price and income support”; “quality of wine”; “competitiveness”. The chapater is organized as follows. Section 13.2 "The development of European Wine Policies: objectives" highlights the historical instruments implemented through three policy orientations). Section 13.3 "Historical expenditure and provisional distribution" analyzes the budget expenditures of each phase described (from 1970 to 2015). Section 13.4 "The EU system of Wine classification" analyzes the EU system of wine classification, the international debate, and the role of World Trade Organization (WTO) and the protection model of traditional wine terms and their origins.

International wine trade is influenced by barriers which are relevant elements of the global wine market’s institutional setting. Trade barriers result from customs tariffs or from policy measures that can potentially have an economic effect on international trade quantity and direction of flows; such policy measures are classified in technical measures, non-technical measures, and export measures. In the wine market the impact of tariff barriers is rather small, despite not negligible; while non-tariff measures have an higher impact on flows and wine exporters have actively negotiated with importing countries’ preferential trade agreements to lower barriers. Scientific studies demonstrate the discriminatory effect of such preferential agreements and the heterogeneous impacts on trade of technical measures. Considering the current tensions in international relations, it is high the risk of a raising of barriers to trade in the next future; it is therefore urgent the empowerment of institutions, like International Organisation of Vine and Wine (OIV), in charge for harmonization of definitions and rules in wine production and trade.

This chapter introduces the topics that will be covered in Part III: “Diversity of Organization in the Wine Industry”.

The widespread assumption that mergers are the best way for co-operatives to break free from their “natural” territorial anchoring (perceived to be a strong impediment to their global insertion) is questionable. Observation of the recent merging processes of wine co-operatives shows a more subtle phenomenon at work. On the one hand mergers do indeed loosen their constitutive territorial anchoring.

On the other hand, they also come together with new geographical and organized proximities, prone to the re-dimensioning of the territorial scale of the co-operative action. These findings were supported by a round of thorough interviews with most of the managers of the Aquitanian co-operatives created by merger between 1994 and 2006.

What is so unique about the wine market? Diversity! There are an extremely large variety of wines, as well as producers who make them. What is important to understand about this diversity? It is organized: it is embedded in a complex set of social relationships and is governed by various institutions. From this perspective, the organization of this level of variety can be seen as a historical process. The actors involved constantly seek to ensure their business models are coherent with the current production and market environment. To achieve this, they do not simply adjust their own strategy or the way they implement it but also try to change the environment, where it is needed, by interacting with other decision-makers. In the wine industry this manifests itself as the power game between winegrowers and merchants. The wine region of Bordeaux is a striking example of how historically organized diversity can be transformed into the basis of market success. At the same time this example shows the fragility of a regional production system which is only temporarily coherent.

While outsourcing is considered to be a basic principle of good management for modern companies, it is sparsely applied in the wine industry with respect to the core stage of winemaking, although it is likely to be used for peripheral activities. Given that the majority of wine estates are not loss-producing, the goal of this chapter is to study whether outsourcing or vertical integration of the wine companies is a factor of growth and profitability.

The share of harvest sold as fresh grapes, grape must or juice increased from 10% to 16% between 2000 and 2010 in the French wine-producing region of Burgundy. This outsourcing pertains to the core stage of business for wineries: the winemaking process. We explore the strategies of 3430 wine estates operating in Burgundy in 2011 with respect to outsourcing versus integration of winemaking. A cluster analysis was carried out in order to identify the main differences among Burgundian wine estates in terms of winemaking outsourcing versus integration. A principal component analysis was then used to highlight the latent variables underlying the different strategies. Finally, the difference in profitability existing between wine-grape growers making their own wine and those outsourcing the winemaking process is shown. The results indicate that winemaking integration has a positive effect on estates’ profitability in Burgundy.

In this chapter, we gather results about vertical-integration strategies of wine farms (and especially co-operative members compared to the others) and wine co-operatives in France to explore wine farms’ performance in relation to their vertical-integration level. We discuss the interest that the wine co-operatives could find in forming commercial unions as the best downstream strategy. The results show that vertical integration for wine-grape producers can be carried out at the farm level or collectively via co-operative membership. In both cases, it seems that operating on the bulk-wine market is not profitable. Indeed, bulk-wine producers display low financial performance, and “traditional” co-operatives seem to be affected by short-termism, by prioritizing the payment to producers over the co-operative’s sustainability. As such, vertical integration appears as an efficient way to create value for wine-grape producers, but it should not stop at the bulk-wine production stage. They should rather bottle the wine. Moreover, vertical integration requires a full consideration of costs and investments necessary to perform well. This implies specific learning and presents wine-grape producers with new challenges, whether they choose to perform vertical integration either alone or within a co-operative.

This chapter investigates the industry structure of the Conegliano Valdobbiadene Prosecco Superiore DOCG sparkling wine. By assembling multiple-source data, we develop a schematic flow chart of the supply chain structure, which has been segmented into four different strategic models. We observe that the fully integrated production chains (i.e. wine growers and wine cooperatives) generate 38% of the aggregate output, while the transformer-bottlers and plain bottlers, which are non-integrated chains, deliver the majority (62%). However, the analysis results for the 2010–2016 period have shown that the bottled wine growth has affected all the supply chains, keeping the actors’ market shares on the aggregate wine volume substantially unchanged. Intermediate markets for grape and base wine play a significant role within the chain structure. The industry structure appears highly fragmented at the grape production stage, while it exhibits a rather notable degree of concentration in the bottling phase. The intense interrelation among different operators seems to be one of the key factors of Prosecco Superiore DOCG’s enduring success.

This chapter introduces the topics that will be covered in Part V: Efficiency in the Business Models in the Different Wine Industries.

Two seemingly opposite reputation models appear to coexist in the wine industry: geographic indications and collective reputation in the Old World on the first hand, and branded wines and individual reputation in the New World on the other hand. These models are the result of natural, economic, and institutional features of the wine industry. This chapter mostly focuses on the collective reputation model, its effects as well as its failures, to show that such a categorization might be simplistic. Both coexist more and more frequently on the same label, suggesting in some way a convergence of both reputational models.

Chile is both an established and successful wine country and a highly functioning business wine cluster. The purpose of this chapter is to explain the architecture of the Chilean wine cluster and how it is linked to competitiveness. We argue that the organization of the Chilean wine industry in a cluster establishes a level playing field generating positive externalities and driving success. Following the literature, we explain the cluster as an inter-organizational structure where the key elements include the leading firms, intermediaries, and the capacity of the cluster to solve problems related to collective action. Further, we discuss the influence of institutional arrangements such as public-private partnerships, strategic alliances, and foreign investment in the performance outcomes. The strengths of the Chilean wine cluster are discussed through performance achievements, risks, and cluster resilience.

Switzerland’s wine landscape deserves closer academic analysis due to its peculiar structure, production conditions and market. The Alps and differences in altitudes, soil composition, exposures and hygrometry result in a variety of terroirs and, thus, a large number of wine types can be encountered. Generally, two business models are encountered in Switzerland: small family wineries which sell most of their production directly to final consumers and cooperatives/larger wineries which sell mainly through supermarkets. In terms of wine market, Switzerland is saturated by both local and international players. In order to compete, Swiss winemakers therefore need to focus on quality and rely on a differentiation strategy. While producing and consuming locally has worked out for Swiss winemakers thus far, in the future, they will need to evolve and focus on increased visibility and exportation.