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Introduction and Overview

Introduction and Overview

Who would have thought in 1990 what we have been able to achieve in 20 years? VDQS,1 the old French certification neglected by the wine authorities, has become the beacon for the Vineyard Data Quantification Society. It was founded by a group of academic researchers coming mainly from applied econometrics and members of the AEA (Applied Econometrics Association, founded in 1973) and was based on the challenge of developing contributions of knowledge on the economics of the wine and grape sector. After more than 20 international conferences, our initial challenge can be regarded as having been met largely successfully; each year, new studies, scientifically validated by a rigorous process, provide new elements of reflection (and action) to the decision makers of the wine world.

Alcohol Consumption and Welfare


1. Life Satisfaction and Alcohol Consumption: An Empirical Analysis of Self-Reported Life Satisfaction and Alcohol Consumption in OECD Countries

Since the 1960s the level of alcohol consumption, as well as the drinking patterns, have changed significantly in several OECD countries. From a producer’s point of view, structural demand shift is of particular interest as the observed changes may reflect shifting preferences of consumers. The old, traditional wine-producing countries have experienced a decline in domestic wine consumption, and additionally there has in some cases been a shift towards increased beer consumption, for example in Spain beer consumption is exceeding wine consumption. In the northern European non-wine-producing countries a decline has been observed in the shares of beer and spirits in alcohol consumption. In general, patterns in alcohol consumption may have been in a process of convergence in the OECD countries during recent decades where the level of alcohol consumption — as well as the structure among the various alcoholic beverages — exhibit less variation than the conditions a few decades back in time.

2. Alcohol Demand, Externalities and Welfare-Maximising Alcohol Taxes

Alcohol production and consumption, starting with beer-type products, has been a feature of human life for at least 8000 years (Poelmans and Swinnen 2011). Production and consumption of wine came after beer, but it is thought that by about 3000 BC winemaking skills were well developed in Egypt (Clark and Rand 2001). Spirit consumption and production came last, and while distillation for consumption may have taken place earlier, it has been a part of human life since at least the first century AD (Forbes 1970). Today, alcohol consumption is widespread, and in a 12-month period just over one half of all men and just under one third of all women will have consumed alcohol (WHO 2011, p. 14). In terms of the importance of alcohol in the consumer budget, there is significant variation, both between and within countries, but Selvanathan and Selvanathan (2005, p. 209) report that on average the people of the world devote approximately 3.2 per cent of their income to alcohol; alcohol is therefore an important global consumption good.

3. The Demand for (Non)Alcoholic Beverages in France and the Impact of Advertising

Over the last four to five decades the demand for (non)alcoholic beverages In France has changed dramatically. The total adult per capita consumption of alcohol (in pure alcohol equivalents) has decreased from 24.30 litres in 1963 to 12.30 litres in 2009 (WHO 2012). Furthermore, changing preferences have led to shifts between different kinds of alcoholic beverages, and hence the per capita consumption of beer, spirits and wine to some extent exhibit conflicting trends. An analysis of the per capita consumption (see Figure 3.1) reveals that the demand for beer between 1975 and 2004 decreased by approximately 1 per cent per year, with most of this decline taking place between the early 80s and mid 90s. The per capita consumption of spirits has on the other hand increased steadily, with an average annual rate of 0.5 per cent between 1975 and 2004. It is however in the consumption pattern of the traditional favourite alcoholic beverage in France, wine, that the most dramatic changes can be observed. In the following, a distinction is made between two different categories of wine: sparkling wine (including champagne) and still wine. While the per capita consumption of sparkling wine has increased by on average 2.5 per cent per year, and more than doubled since 1975, the consumption of still wine has declined. With respect to still wine, it should however be noted that there has been a shift in consumer preferences from less expensive table wine, which has declined, towards more expensive high quality wine. Consequently, it is not surprising to observe a decline of the per capita consumption of wine in France (Laporte 2005; Besson 2004).1

Consumer Behaviour and Prices


4. The Economic Value of Wine Names That Reference Place in the US Market: Analysis of ‘Champagne’ and Sparkling Wine

Place names or geographic indicators used to identify wines (or other products) have long been raised as major marketing and policy issues, but these have become even more important and more complex with increased globalisation. The issues arise especially for food and beverage products where characteristics of particular regions are most likely to imbue products with special characteristics that are difficult or impossible to duplicate outside the region of origin. With the spread of people and product styles, however, some place names have become used without clear association with geographic regions of origin. So, for example, one sees apartment buildings in Beijing, China, with the names Sonoma or Seville and one sees mustards with the name Dijon, even though neither the apartments nor the mustard has any connection to a place other than, perhaps, an approximation of a broad style.

5. The Price of Wine: Does the Bottle Size Matter?

What’s behind the bottle price? Weather, vintage, geographic area, bottling, marketing and recipe are all important factors in the cost of the wine. Many papers look at the determinants of prices by using hedonic price functions. Wine prices are determined by climate influences and by their reputation, their perceived quality or sensorial characteristics. Most of the recent literature (Combris et al. 1997 and 2000; Landon and Smith 1998; Oczkowski 2001; Jones and Storchmann 2001; Horowitz and Lockshin 2002; Schamel and Anderson 2003; Benfratello et al. 2004; Cardebat and Figuet 2004; Lecocq and Visser 2006) demonstrates the importance of considering all these factors to explain the formation of a price on the market.1

6. Wine Judging and Tasting

Professional tasters, experts and judges are key actors in the wine sector. In fact, they play a pivotal role at the interface between the supply and the demand sides of the market. On the supply side, wine judges and professional wine tasters exert a profound impact on winemakers’ oenological choices as well as their commercial and marketing strategies. In addition, by affecting producers’ reputations and pricing strategies, experts may directly affect producers’ sales volumes and margins, and therefore, ultimately, their profits and economic performance.

7. Willingness to Pay for Appellation of Origin: Results of an Experiment with Pinot Noir Wines in France and Germany

Ever-increasing international competition in the wine sector has sharpened the controversy among economists who are in charge of analysing the agricultural sector and regional development. The growth of exports from the so-called New World countries (Australia, South Africa, Chile, Argentina, United States) questions rural concepts of wine-growing economy and makes it necessary to reconsider consumers’ expectations and the whole economic organisation and marketing strategies of the wine sector.

Wine Ranking and Financial Issues


8. How Best to Rank Wines: Majority Judgment

Cassifying and ranking wines has been a favourite activity of men and women since time immemorial. Gaius Plinius Secundus (Pliny the Elder) who died in the year 79 AD wrote in his treatise

The Natural History

(Pliny the Elder, circa AD 77–79):

Who can entertain a doubt that some kinds of wine are more agreeable to the palate than others, or that even out of the very same vat there are occasionally produced wines that are by no means of equal goodness, the one being much superior to the other, whether it is that it is owing to the cask, or to some other fortuitous circumstance ... The late Emperor Augustus preferred the Setinum to all others, and nearly all the emperors that have succeeded him have followed his example . The second rank belonged to the wine of the Falernian territory, of which the Faustianum was the most choice variety; the result of the care and skill employed upon its cultivation . To the third rank belonged the various wines of Alba . I am by no means unaware that most of my readers will be of opinion that I have omitted a vast number of wines, seeing that every one has his own peculiar choice . Indeed I have no wish to deny that there may be other wines deserving of a very high reputation, but those which I have already enumerated are the varieties upon the excellence of which the world is at present agreed.

9. Wine as an Alternative Asset Class

Investors have never faced as many investment choices as they do today. Not only have markets become more integrated and international investments facilitated but also the number of available asset classes has grown more important during the last decade. This has also led to an increase in complex financial products. As a counterbalance, demand for basic or physical products has increased equally. These products should ideally be tangible, their characteristics quite easily understandable, rather uncorrelated with other assets which would allow for diversification benefits of an investment portfolio and yield good returns. At the same time a new class of investors is actively seeking possibilities to convey a certain lifestyle, social status and passion for aesthetic goods.

10. Financial Reaction to the Business Cycle in Periods of Difficulties: The Case of French Wine Companies

From the beginning of this century, French wine companies are said to have been in a state of crisis … Over the last 20 years, major studies have been commissioned: Booz-Allen and Hamilton (1993), ONIVINS and Ernst & Young (1999), the Ministry of Agriculture (Berthomeau 2002). As a whole, France lost its world export leadership in 2005 (by 2010 the French export market share was just 3.8%, against 6% in 1982),1 as well as losing its position of first world consumer in 2007 and leading wine producer in 2008. The French wine industry is struggling to maintain its commercial position.

Intermediary Markets and Strategic Decisions


11. The Technical Efficiency of Wine Grape Growers in the Murray-Darling Basin in Australia

The wine industry in Australia has grown at an impressive rate during recent decades. From 1982 to 2009 the area under vine grew from 60,000 ha to 163,000 ha, the wine grape harvest grew from 500,000 tonnes to 1.73 million tonnes, and Australia’s volume of wine exports grew exponentially from 8 million litres to 764 million litres, becoming the fourth largest exporter by volume behind the traditional wine-producing giants of Italy, France and Spain (Anderson and Nelgen 2011).

12. Product Assortment and the Efficiency of Farms

During the past decade, interventions for the restructuring and modernising of viticulture have been of great interest to the winemaking Western Balkan Countries (WBCs) and Early Transition Countries (ETCs) (Food and Agricultural Organization 2009). Within the platform for rural development and support from the national Rural Development Programs (RDP), grape producers have been encouraged to uproot old vineyards consisting of regional/local grape varieties and replace them with recognised European grape varieties. Growing demand for rootstocks of European grape varieties in all WBCs and ETCs has been reported by the FAO (Food and Agricultural Organization 2009). Macedonia,1 which is used as a case study in this chapter, is an EU aspirant country, and adjustments to match EU regulations and practices, including wine regulations, are considered to be the key to improving the competitiveness and environmental sustainability of the Macedonian wine sector. However, adjustments in the grape assortment in Macedonia may not necessarily be economically sustainable (Bozinovski, personal communication 2011).2 Moreover, it has not been proven to be appropriate for achieving higher farm efficiency, which is a key objective of the ongoing RDPs.

13. Determinants of Wine-Bottling Strategic Decisions: Empirical Evidence from the Italian Wine Industry

Multiple factors contribute to creating and maintaining a competitive advantage in the current world wine market: firm size and, more generally, the financial capacity to undertake long-term quality investments (equipment, technologies, innovation, R&D etc.), the possibility to exploit scale and scope economies in production and sales activities, the strategic flexibility to adapt volumes and product range to changing market conditions, and product quality and quality differentiation (and signalisation) strategies either through individual or collective brands. In this setting, the recent European CMO (Common Market Organisation) wine reform aims at improving the competitiveness of the EU wine sector, encouraging structural adjustments, modernisation of vineyards, greater cost-effectiveness and market orientation of wine production (EC 2007). Moreover, a strong information and promotion policy aims at improving the image of EU wines and ‘exploiting the new opportunities provided by the emerging markets’.

14. Export Intentions of Wineries

The theory of reasoned action, initially proposed by Fishbein and Ajzen (1975) and Ajzen and Fishbein (1980), is one of the most widely used models that explains the relationship between attitudes, intentions and behaviour. The theory rests on the assumption that behaviour results from intentions, which in turn are the result of attitudes and subjective norms, the latter being a reflection of social norms (Beedell and Rehman 2000). Extending from this, the theory of planned behaviour (TPB), posited by Ajzen (1985, 1991), introduces perceived behavioural control or perceived ability to perform an action as additional factors to explain intentions. This theory, which focuses on the motives underlying decisions, may prove useful in exploring the internal determinants of export behaviour (Marshall et al. 2005; Sommer 2010;Sommer and Haug 2011).

New Topics


15. Wine Tourism and On-Site Wine Sales

The concept of oenotourism first appeared in the 1980s and was really developed in the 1990s although action relating to this type of tourism and vineyard visits had already begun to take place in several viticultural regions. One dimension of wine tourism is linked with the organisation of trips and the reception of visitors. In this aspect, France became a pioneer when the first Route des Vins was created in 1934 in Burgundy, followed by the Routes desVins (wine roads) of Alsace and Champagne in 1953. This model was adopted and enhanced in Europe, followed by other great viticultural regions of the world, in particular the United States (Robert Mondavi’s objective was to educate the public about wine when he created the first winery with an open cellar in California in 1965) and later in Australia.

16. The High and Rising Alcohol Content of Wine

Initial motivation for the work in this chapter came from an observation that the sugar content of California wine grapes at harvest had increased by more than 9 per cent, from 21.4 degrees Brix in 1980 (average across all wines and all districts) to 23.3 degrees Brix in 2008.1 Sugar essentially converts directly into alcohol, so an 11 per cent increase in the average sugar content of wine grapes implies a corresponding 11 per cent increase in the average alcohol content in wine. Questions arose as to whether the rising sugar content of grapes was indeed reflected in rising alcohol content of wine and whether we could distinguish between causes related to climate change versus other causes related to evolving market preferences, as indicated by expert ratings for wines, and government policies that discourage the production of wine with higher alcohol content.2


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