How does the wine market work

What is currently moving the wine market

For some wine lovers, the value of the fine drop lies in the stories it tells. And not only French winemakers believe in a deeply rooted legacy that the fermented juice from the noble grapevine unfolds and whose aromas draw their strength from the soil and ventilation of its growing regions. Wine is identity and origin. His taste is the journey to remote places - or to the places of his own childhood. Wine has accompanied mankind for thousands of years and is widely received in cultural history. For Christians, the red grape juice embodies the blood of Christ as the sacrament of the Eucharist to this day. He brings people closer to the past, connects tradition with modernity as a symbol of fertility, status and power.

As a commodity, wine gained economic importance in ancient times. The Phoenicians traded the coveted food on the Mediterranean trade routes, and its economic importance has hardly changed since then. In 2017, global wine producers exported a total of 30.4 billion euros. In some regions, the wine industry is one of the most important economic factors. In Spain alone, the world's largest exporter last year, around 4,000 companies are active in this sector. One side note is allowed: The wine was mainly spread in Spain by the Phoenicians. Tradition connects the past with the present.

The added value of the global wine industry is estimated at almost 300 billion US dollars for 2017. The largest producers were Italy, France and Spain, followed by the USA in fourth place. All three European nations produce around half of the world's production. A similar picture emerges in the case of the exporting countries with a different ranking, although Chile is the first non-European country to take fourth place. And: Although the Germans were the largest wine importers in 2017, the Americans were able to assert themselves as the world's largest consumer. In terms of per capita consumption, dwarf states such as Andorra or the Vatican state are in the lead.

What is a good wine?

The international wine market is complex and subject to strong dynamics. As in all markets, the relationship between supply and demand determines the overall market situation. But the wine market is subject to specific characteristics that result from manufacturing processes or the changing consumer behavior of the population. Regional and local peculiarities are just as important as legal and tax regulations or customs duties by governments. Since wine is also an agricultural product, the weather conditions have a significant influence on the harvest yields at the time of the grape harvest, but also on the quality of the end product. The course of the weather during the vegetation cycle of a vintage has - compared to other agricultural products - a greater relevance for the reputation of the product and consequently for the subsequent pricing. The so-called top vintages describe those wines which have been given the most optimal external conditions (weather conditions) for their maturity potential and which can consequently develop their full taste pattern. Experts also speak of “age-related typicality” here.

The climate of the respective cultivation regions has a decisive influence on the quality. In regions where there are major fluctuations in climatic conditions between the individual vintages, the wine quality also fluctuates. However, other factors also play a role: The quality of the growing soil, the grape variety or the storage of the wine also contribute to the fact that a wine can express its taste character.

How a “good” wine is to be judged is a passionate argument among winemakers and wine experts. There are several reasons for this. One of them is probably that the sense of taste is subjective. There are different quality systems and hierarchies according to regional traditions. However, it is now also about being able to assert oneself economically against new competition. The marketing factor is becoming more important.

The traditional wine country France has a reputation to lose. Wine nations like Australia, the USA or Chile, on the other hand, can only win. The proud French winemakers therefore refer to the glorious name inheritance of their growing regions and wineries. Origin matters less for the new world of wine. The question of origin consequently gained sovereignty in France in the 1970s, when ambitious and ambitious winemakers from the New World entered the wine markets. The term terroir established itself as an express commitment to the origin, which composes the uniqueness of a wine from the growing country and the prevailing microclimate there. On closer inspection, the term remains vague for some connoisseurs. This is why wine lovers still argue about the exact definition today, as the number of terroir wines, or those that are at least called that, tends to increase.

Nevertheless, the principle of origin (terroir) has also been able to establish itself politically and legally in Europe. The EU wine market regime has followed the Romansh concept of quality since 2009.

The wine market is highly segmented, which is not only due to the distinction in the range between red, white or rosé wine and sparkling wines (champagne, cava, sparkling wine). The market is characterized by a price-related segmentation, which is rather unusual for other agricultural products despite processing processes. Between the wine from the discounter and the top wines from the most renowned growing regions, the price ranges from less than one euro to five-digit amounts per bottle.

Germans tend to be stingy when it comes to buying wine

This price segmentation results in turn from different types of consumers. While wine is a food for many people, other consumers see it as a symbol of prestige, a luxury good or an investment. The image of the cheap market has been attached to domestic wine sales in Germany for years. International studies show that Germany is significantly more price sensitive than other sales markets. In this country, discounters and food retailers therefore dominated in 2016 with around 77 percent of consumers' wine purchases. On average, German consumers only spent 2.92 euros per liter. The Germans spent 0.28 euros more on wine from their own country, but for German winemakers the international markets are sometimes more lucrative from the margin perspective. The prices achieved here are often over four euros per liter. The US sales market brought in the largest revenues with more than a quarter of total exports in 2016. The average price per liter was 4.26 euros. The German Wine Institute identifies the USA as an important trend market.

Initial figures for 2017 as a whole show that German exporters recorded growth rates in both the value and volume of their exports. According to the German Wine Institute, exports increased by seven percent and sales rose by 20 million euros to 308 million euros compared to the previous year. 2017 was a very positive year for European winemakers. France was able to increase its export volume for the first time in five years - by six percent. The USA and China in particular are responsible for more demand. German exporters were also able to sell more wine in China. Although China still accounts for a relatively small total amount of exports, China is considered to be the trend market for the next few years.

Trends in the wine market over the next few years

How will the wine market develop in the future? A study by ProWein in collaboration with the University of Geisenheim surveyed 1,500 wine experts worldwide. The result shows that Asian markets (South Korea, Hong Kong, China) are considered attractive and that exporters see their future more in the non-European region. There is great potential for growth here, but, as in the case of China, there are also some risks. Emerging countries with great potential, as is the case with Russia, Brazil or China, for example, are unsettling the experts, particularly with regard to regulatory uncertainties and unstable economic conditions.

The traditional European wine countries have shown falling consumer behavior for several years, which is likely to continue. The German market is assessed as saturated and highly competitive and is therefore rated rather negatively. As growth markets within Europe, Scandinavia, Poland and Switzerland rank at the top. Britain is seen as a source of uncertainty due to Brexit.

It is noticeable that the experts at the time of the survey did not rate Trump's politics as a great risk. From the point of view of European winemakers, that is likely to have changed.

Wine exporters can benefit in particular from the growing middle classes in the emerging countries when the global economy is good. Despite all the imponderables: According to the opinions of experts such as Antoine Leccia, head of the French wine and spirits exporters' association, China's consumers are developing more and more sensitivity for quality wines. This opens up further market opportunities. “In the future, China will develop into an interesting market, especially for premium wines,” says Nikolas von Haugwitz, board member of the premium wine retailer Hawesko.

Since 2000, the demand has increased especially in the top segment of French red wines, which are traded as Premier Cru and Grand Cru and come from the top wineries in France. The growing demand from very rich Russians and Chinese was largely responsible for this. Wine has thus also become an emotional asset outside of Europe and North America, as the investment and wine expert Valentin Brodbecker from notes. This has also made itself felt in the price of blue-chip wines, around 300 of the most valuable representatives of their craft. “Anyone who put a second box of Rothschild in the cellar as an investment could expect the value to double after ten years,” says Brodbecker and continues: “Between 2000 and 2011, prices really inflated and even quadrupled. "

Wine as an investment

Brodbecker explains that it is not uncommon for Chinese business people to initiate business transactions to present their potential partner with one of these blue-chip wines. Expensive wine is also a prestige object that is often presented in special refrigerators and showcases. The anti-corruption campaign under the General Secretary of the Communist Party of China Xi Jinping led to a noticeable flattening in demand from 2012 onwards.

Still, some experts agree that wine can be an investment. Even if the slogan “Good wine is there to drink” meets a certain consensus among Europeans, which in turn makes the investment interesting, because the good vintages are becoming rarer.

A look at the Liv-ex Fine Wine 100 index, which lists the price development of top wines, confirms this assessment. The leading stock market barometer on the London Wine Exchange has increased significantly since the end of 2015. According to Liv-ex 100, the return plus in the five-year valuation is 15.2 percent.

Investing is difficult for private investors as individuals rarely get large quantities of suitable wines. Proper cellar storage is expensive and requires storage space. Nevertheless, a direct investment is possible, for example through auction trading or a provider of such investments. Wine funds never achieved their breakthrough in Germany. Brodbecker comments that this was due to a wrong purchasing policy. The situation is different in other countries: in Great Britain even pension funds and insurers are investing in wines.

As is common with luxury goods, the market is inefficient and illiquid. So it takes enormous knowledge to be able to assess the market situation. Therefore, these investments are more suitable for wine lovers. If you still want to take advantage of opportunities, you should keep an eye on public companies from the wine sector. Another possibility is to invest in wineries in order to support imaginative winemakers financially. //