Premium growth for New World wine makers

- Last updated on GMT

Related tags: New world, Wine, Uk

Overproduction by New World wine producers has pushed down prices
over the last few years, taking a major toll on producers' margins.
But a growing trend towards premium wines could save the day, in
both established and emerging markets, suggests a new report.

The latest Euromonitor research on the global wine industry shows that overproduction in the New World had a significant impact on pricing, with producers forced to cut prices in order to offload more of their wine.

The UK, the largest export market for six of the largest New World producing countries (the US, Argentina, Chile, Australia, New Zealand and South Africa, was one of several beneficiaries of heavy discounting and price promotional activity between 1998 and 2003. According to industry experts, around 60 per cent of all still wine sold in the UK off-trade is on price promotion - good news for drinkers, but not so good for wine makers.

Nor have New World producers fared any better in their own markets. In the US, for example, overproduction of wine in California led to the creation of discount wines such as the hugely successful Charles Shaw brand (or Two Buck Chuck as it is more commonly known), which has sold more than 10 million cases in the US between August 2003 and February 2004, exclusively through the Trader Joe's retail chain.

Many wine makers are fearful that such success will undermine their profitability in the long term, as the traditional credo​ that a good wine had to come at a certain price begins to weaken.

The problem for New World producers is that while they have been far more successful at growing sales of their wines than their European counterparts in recent years, this has been primarily achieved by targeting the 'man in the street' with simple, unpretentious wines, branding, dynamic marketing and a flavour profile to appeal to the broadest range of palates.

Old World wines may have struggled to stop the advance of their New World counterparts in the mass market - at least in non-producing countries such as the UK - but the premium market has by and large remained the sole demesne of French, and to a lesser extent, Spanish and Italian producers.

But this is slowly changing, according to Euromonitor, with the new wine consumers courted so successfully by American, African and Antipodean producers now taking the next logical step and seeking more sophisticated wines from these regions as their palates - and knowledge levels - improve.

Not surprisingly, this trend has been most clearly visible in the developed markets of North America, Western Europe and Australasia, helped by increasing disposable incomes. Canada is a good example: the Liquor Control Board of Ontario (LCBO) reported that among its best sellers in 2002 was yellow label Wolf Blass Australian wine, retailing at C$16.95 a bottle, while other top sellers included Masi Valpolicella at C$11.95 a bottle, and Rosemount Estate's Diamond Shiraz at C$16.95.

However, it is not just the developed world that has witnessed the growth of premium wine: Asia's newly formed love affair with wine has seen premium products play a major role. Other premium alcoholic drinks - notably Cognac and Champagne - have long benefited from the Asian tradition of gift giving (and subsequently suffered when the Asian economic bubble burst in the 1990s) and premium wines are increasingly falling into this bracket as consumers become aware of their reputation, if not necessarily their bouquet.

Thailand, for example, saw a wider range of wine become available towards the end of the 1998-2003 period, including several imported premium wines from Europe, North America and Australia.

Faced with declining margins from 'standard' wines, producers also shifted their marketing focus to premium products. Chilean drinks group CCU, for example, upped the quality of its Gato Premium and Castillo de Molina ranges, quality wines which are marketed both at home and abroad. Following the example of key rival Concha y Toro, in 2001 CCU established a joint venture with French wine maker Château Dassault for the production of super-premium wines in Chile.

America's E&J Gallo is another New World producer which has successfully expanded to position itself in the higher margin premium segment of the market. Gallo's interest in developing its positioning in the premium wine segment can be demonstrated by its recent efforts to enhance the equity of the UK's number one Californian brand, Wine Cellars, which has been relaunched with the new name Ernest & Julio Gallo Sierra Valley.

The new launch, which will split Sierra Valley into a classic range and an upmarket premium range, will include new packaging and will be supported by a $7 million advertising campaign.

The increasing importance of premium wines is also reflected by the moves of the major spirits groups such as Diageo and Allied Domecq to expand their portfolios in recent years - premium wines have truly become big business.

For details of how to order Euromonitor's report, The World Market for Wine and FABs​, click here​.

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