UK Wine Import Industry Within This Report,

¶ … UK Wine Import Industry

Within this report, an analysis will be provided of the wine import industry in the UK. Initially, an environmental analysis will be provided. This will be followed by a competitive analysis of the UK wine import market. The report will conclude with a summary of key findings.

Environmental Analyses

The history of grapevine cultivation, wine production and wine importing/exporting is both interesting and relevant to understanding the current marketing mix and importation of wine into the UK. While an in-depth historical analyses is beyond the scope of this paper, a brief overview of historical issues of relevance to the importation of wine into the UK and the globalization of the wine industry today will be provided.

Anderson, Norman and Wittwer (2001) have provided a succinct historical analysis of critical issues related to globalization and the wine industry. As described by the authors, grapevines were first cultivated approximately 6000 years ago in the Black and Caspian Seas region, spreading gradually to Egypt, Greece and Spain by 2,500 BC. From that point, cultivars were taken from Greece to Italy where native varieties were already being sued around the 8th century BC; to France from Rome around 600 BC, and was spread north in the 2nd and1st centuries BC. As reported by Anderson et al., by the 4th century AD, the cultivation of grapes used for wine was well established in the Old World and in North Africa.

According to Anderson et al. (2001), as explorers moved into the New World, grape cultivars were taken to South America and Mexico in the 1500s, to South Africa by 1655, and to North America by 1619. However successful cultivation did not occur in North American until the 1900s when the Spanish-Mexican Jesuits moved into California and began growing grapes in this region. Similarly, in 1788, cuttings were imported to Australia by early British settlers and into New Zealand in the 1800s.

As also reported by Anderson et al. (2001), for centuries, policies established by various governments significantly impacted the exportation and importation of wine throughout the world. Wine taxes were frequently levied on both imports and exports with fluctuations often reflecting relations between countries. According to Anderson et al., the most extensive and recent policy influences impacting wine exporting and importing were those established after World War II, including the European Union's

Common Agricultural Policy (CAP) and the COMECON arrangements within the communist bloc. While the communist bloc no longer presents problems, as explained by Anderson and colleagues, wine policies originating within CAP may present exportation and importation issues within the future. Additionally, taxes associated with wine consumption in countries throughout the world may also present unique challenges. As noted by Anderson et al., such taxes remain significantly high in non-producing countries.

Wine Consumption in the UK

Wine consumption in the UK has increased significant. As reported by Berry Bros and Rudd (2003), the UK has emerged as the largest importer of wine as well as the largest consumer of wine among non-producer countries. According to information available within the Berry Bros and Rudd report, recent research has documented that UK wine consumers as a whole drank the equivalent of 1.3bn bottles in 2001, with each person on average consuming 21.8 litres.

On the basis of current estimates, as explained by Berry Bros and Rudd, if the growth rate associated with wine consumption continues, it is expected that the per person average will rise to 25.4 litres of wine a year, with total wine sales climbing to £6.9 billion in 2006.

As noted by Conibear (2000), consumers of alcohol in the UK have also shown an increase in drinking wine as well as a taste for better quality wine in comparison to spirits and beer. Even though UK wine consumers drink less wine than consumers in Italy, France and Spain, as reported by Conibear, the UK value spend on wine is equal to that of Italy.

Furthermore, as reported by Conibear (2000), research documents that young women in the UK are increasingly becoming consumers of wine, drinking 9.4 litres in 1999 and projected to rise to 11.8 litres by 2004. Similarly, the research suggests that women are growing more comfortable to drinking wine in public without the presence of men. Similarly, as reported by Harpers (2001), currently, females purchase over 60% of all wine in the UK. According to Harpers, the purchasing power of women within the wine market has increased largely as a result of the dominance of the wine category by supermarket distribution. As reported by Harpers, a 6.5% yearly growth rate in female wine consumption was noted between 1996 and 2001, with forecasts suggesting that this rate could be expected to continue.

As reported by Fallowfield (2001), another influence leading to the increase in female wine consumers is continuing widespread economic independence of women. The driving force behind the shift towards women is the more widespread economic independence of women. According to Fallowfield, women recognize wine as something that they can afford and tend to value wine as something more than just a drink in a bottle. Thus, wine consumption for UK women represents a "luxury like perfume," with the wine industry effectively selling the enjoyment of drinking wine as hardily as they are selling the wine itself. Furthermore, as reported by Fallowfield, women as wine consumers have been described as enjoying the opportunity of experimenting with wines and also look for sophistication amongst wines.

While young women in the UK have been identified as increasing wine consumer group, according to information provided by Harper's (2001), statistics on wine consumption amongst 18- to 25-year-olds suggests that a decline has occurred, with some of the greatest decreases occurring within more recent years. Concern has emerged, as noted within the Harper's report that this declines could eventually impact the overall heath of the wine market in the UK. Thus, individuals within this age bracket have become recognized as a target for marketing. As suggested within the report, while many of the younger generation have grown up in an environment in which their parents drink wine, there is greater diversity within the overall drinks market. While some in the wine market have suggested that younger persons will develop a taste for wine in their later adult years, others suggest that this assumption is not necessarily the case. As reported in Harper's, if wine preference is not established in early adulthood, the probability that it will not be established in one's later adult years is probably a more correct assumption.

As well, as reported by Harper's (2001), the wine industry has failed to recognize UK young people as a profitable market as this age group is often misperceived as having little money to spend. However, as noted in the report in Harper's, this represents another misconception regarding persons in this age bracket. Research has documented that when the head of the household is under 30, expenditures on alcohol have increased extensively, with n approximate £14.80 a week spent on alcohol in 1997/1998. According to the Harper's report, this estimate rose to £18.20 in 1999. Thus, as can be concluded on the basis of this information, while young people between the ages of 18 and 25 represent a potential market for the wine industry, this group currently is not representative of wine consumer's within the UK market.

According to Berry Bros and Rudd (2003), the ongoing growth amongst wine consumers in the UK has largely been driven by the New World producers as well as special offers in supermarkets. As well, as Berry Bros and Rudd noted, on the average, wine consumers purchase wine at an average price per bottle of £4.65, with 75% of wine purchased for consumption in the home. Additionally, research has also documented that the growth rate in wine consumption has been strongest amongst those age 35 and 50, with some evidence suggested that the growth rate is influenced more by an increase in intake among long-term wine consumers rather than the emergence of more new consumers. Further information was provided by the U.S. Department of Agriculture (USDA) (2003) who reported that within the UK red wine consumption has now become more popular than white wine, which is thought to indicate the maturity and increasing level of knowledge of UK consumers. As well, according to information provided by USDA, generally wine consumers in the UK are representative of the upper middle/middle class (classified as AB social grade) and are drinking more frequently, particularly at-home.

Current Trends in Wine Importing

In order to understand the competitive situation of South Africa in its efforts to import wine to the UK, it is important initially to gain a perspective of the current overall trends in wine importing as they relate to the UK. Thus, an overview will be provided of these trends.

According to Anderson et al. (2001), while Europe in the late 1980s accounted for all but 4% of wine exports and 75% of wine imports globally, in the last decade, ongoing structural changes have occurred in the world's wine markets that have led to significant changes. Figure 1 provides a visual depiction of these changes over the course of the last two decades of the 20th century and projected to 2005.

Figure 1: Wine Export Values Top Ten Countries

As evident within Figure 1, while Western European exporters continue to account for half of the value of wine exportation throughout the world, New World suppliers account for the remaining half. Further evidence of the structural changes that have occurred are documented with Table 1.

Table 1: Percentage Shares of major regions in world wine production, consumption volume, value of exports and imports, including and excluding intra-European Union trade, 1988 and 1999

Source Anderson and Norman (2001)

As evidenced within both Figure 1 and Table 1, the New World Suppliers have increasingly begun to impact and claim a share of the world's wine markets.

As also reported by Anderson et al. (2001), changes have also occurred in the world's importing markets. Where France, Spain, Italy, Argentina, Chile once represented the four largest importers of wine, by 1999, included Germany (21 per cent of the world total), followed by the United Kingdom (16 per cent), France (11 per cent) and the United States (7 per cent). As these market trends have emerged, the Old World exporters have continued to maintain dominance within neighboring countries while the New World exporters have been more successful in penetrating the growing markets of the UK, the U.S., Japan and Germany.

As evidenced within these trends, the wine market throughout the world is becoming more internationalized rather than concentrated within the Old World. These trends also emphasize that the wine market throughout the world is becoming significantly more competitive, with most key New World suppliers expanding their export sales at a relatively appreciable rate. As noted by Anderson et al. (2001), these trends are even more significant in that the rapid growth in wine exports over the past decade has occurred at a time when there has been a slight decline in world wine production and consumption.

Competitive Analysis

Overview of the UK Wine Import Market

As reported by Key Note Ltd. (2002), during the year 2000, the UK wine market was worth £7.9bn, representing an unusually optimistic appraisal associated with the Millennium celebrations. In spite of this unprecedented market value, according to information provided by Key Note Ltd., the market value increased by 43.2% between 1996 and 2001. As well, information obtained from Key Note Ltd.'s report indicated that wine's share of all British consumer spending on alcoholic drinks was 23.7% in 2000. As to the market volume, it reportedly grew at a slower rate, at 26.2% between 1996 and 2001 reflecting a gradual increase in spending per bottle. As explained by Key Note Ltd., this figure represents a movement towards better quality wine on the part of UK wine consumers rather than an indication of price inflation.

As reported by Key Note Ltd. (2002), price inflation within the wine market was restrained by a marketplace that has remained extremely competitive. Competitiveness within the market is largely a result of the fact that every major wine-producing country competes in the UK market, which relies almost entirely on imported wine. As well, marketing success by the New World importers has also influenced the degree of competitiveness currently representative of the UK market.

On the basis of information provided by Key Note Ltd. (2002), the strongest competitor in the UK continues to be France, with a 35.1% share of the value of all wines consumed in the UK in 2000. France is followed by Australia, representing the leader in the New World importers. Reportedly, Australian imports increased by 53.6% between 1998 and 2000, while wines from the U.S., Chile and South Africa also grew in popularity. According to UK Customs data, as reported by USDA (2002), the import volume of U.S. still wine increased by nearly 29% in 2001 to reach 734,000 HL. The forecast for 2002 indicated that UK imports of U.S. still wine were likely to increase again by a similar percentage (30%) by volume to reach 954,000 HL. As well, as reported by USDA, total third country (non-EU) imports increased by 18% in 2001 and were forecasted to increase a further 19% in 2002 to reach 4,257,000 HL.

According to information provided by Key Note Ltd. (2002, this data represents the wine import market as it applies to the take-home market, where wines that are treated as 'brands' by the consumer have soared in popularity. As reported by Key Note Ltd., the majority of the branded still light wines (SLW) are New World, led by Jacob's Creek (Australia) and Gallo (U.S.). However, as identified in the Key Note Ltd. Report, supermarket own-label wines, using grape 'varietals' as names, (e.g. merlot and sauvignon blanc) have also remained important.

European importers, as explained by Key Note Ltd. (2002), tend to set better records in the on-trade (e.g., pubs and restaurants), accounting for 42.3% of the market value in 2000 for wines, despite the growth of take-home through grocers' superstores. However, according to information from Key Note Ltd., Old World importers rely primarily on success with the more traditional wines, including sweet German and Italian wines and fortified wines, such as vermouth and sherry. In spite of this continued success in the traditional wine market, as reported by Key Note Ltd., such wines are increasingly losing popularity with UK wine consumers.

According to USDA (2002), consolidation within the wine-making industry and the proliferation of global brands have had an extensive role in current UK wine consumption patterns. As consumers depend on brands to provide consistent quality at the right price, countries with large, prominent winery brands such as Australia and the U.S. have been effective in eroding the market for lesser known wines from traditional European suppliers. As reported by USDA, total imports of still wine from the Old World importers were forecasted to decline by 6% in 2002 to 4,470,000 HL. Thus, as value had not increased, it appeared that the traditional European suppliers would remain challenged as to how to regain market share. According to information provided by USDA, the value of French imports was not predicted to recover, with Italy and Spain continuing to steadily lose ground in terms of volume. As was also reported by USDA, Germany continued to show ongoing indications of more decline than other European suppliers, with volume and value steadily decreasing.

South Africa

As South Africa continues to emerge as a competitor within the UK wine import market, it is important to examine the market elements that currently influence its status within the market as compared to other major competitors. Such an analysis will provide indicators of potential growth opportunities for expanding within the UK market as well as constraints that have prohibited its expansion as a competitor.

As described by Reid (2000), in terms of place, the wine industry has continued to grow in South Africa largely as a result of the favorable climatic and soil conditions of the region. Currently, as reported by Reid, viticulture is responsible for approximately 30% of the region's total horticultural income. Within Table 2, an overview of South Africa's wine industry is provide

Table 2: Key statistics, Western Cape wine industry (1999) of SA's wine industry

Producers' income

R1.44 billion

Employment

3300 cellar personnel

345 000 farm workers including dependants)

Number of grape producers

Number of wine producing cellars

Volume of production

914 million litres

Total exports

129 million litres

Total export value

R1.22 billion

Land under vines

104 000 hectares

Number of vines

312 million

Number of wholesale buyers

Source: South African Wine Industry Directory (1999)

As reported by Reid (2000), after South Africa was readmitted in 1994 to world markets, the wine industry in the country has attempted to focus more on further developing the quality of its products. This also has been accompanied by an ongoing effort to maintain replanting in order to continue meeting demand for wine products.

While the industry is aware of the demand, both in the UK and in other countries for red wine, as reported by Reid, production of red wine products has been restrained by an excess white grape stock. In response to this problem, efforts have been extended to further expand the Cape's red wine vineyards in order to meet the demands of the future.

According to Reid (2000), Chenin Blanc continues to be South Africa's most widely planted grape, representing 24% of the total in 1999. However, it is reportedly down from 32% in 1990. There has continued to be plantings of white varietals such as Sauvignon Blanc (5%) and Chardonnay (6%), as well as red cultivars like Cabernet Sauvignon (7%), Pinotage (5.5%), Merlot (4%) and Shiraz (3%). As further reported by Reid, within the Cape, vineyards also include Colombard (11%), Hanepoot, otherwise known as Muscat d'Alexandrie (4%), Cape Riesling (3%), Fransdruif (2.5%), Clairette Blanche (1.5%) and Semillon (1%).