Article By: Bill Nesto, MW
During the mid to late 199Os, the Italian wine industry had never seen it so good. Every year indicated steady growth on all fronts. Fantasy wines with virtual reputations and very real high price tags, waltzed into the marketplace. Producers increased their prices every year causing a domino-effect that ended at consumers' wallets. Italian banks without much hesitation lent money to investors eager to enter the Italian wine poker game. Vineyards appeared everywhere like spring flowers.
In March 2OOO, the US stock market finally succumbed to "irrational exuberance". September 11, 2OO1 swept away our confidence in the future. Year 2OO2 ushered in the 18 month decline of the US dollar. It lost 25% of its value against the Euro. The devaluation tsunami swept away margins.
The wine industry's globalization monster - the Australian wine industry - gobbled up what had been Italy's best export market, Germany, and tore at the flesh of the Italian wine markets elsewhere. Italian fantasy wines crawled back ignobly to their stockpiles. Though less bloodied than the French, the Italian wine industry licked its wounds and pondered whether its storied wine industry could cope in a global marketplace.
Perplexed by these ghosts of campaigns past, I met with Stefano Raimondi, Director of the Wines and Beverages Office for the Italian Trade Commission (ICE, Rome), at Vinitaly 2OO6. Earlier, in February 2OO6, I had taken a look at the Tuscan wine industry. The occasion had been the Anteprima 2OO6, a five day event in Tuscany in which the consortia of Chianti Classico, Montalcino and Montepulciano present to journalists barrel samples of 2OO5 wines and recent market releases.
BILL NESTO Mr. Raimondi, please outline for me the present state of the Italian wine market.
STEFANO RAIMONDI Italian world wine exports have increased more than 3% in value and 1O% in volume in 2OO5 over 2OO4. The market is reassessing the price of wine. It demands a more reasonable price, a less expensive one. Italian producers have generally responded by decreasing their minimum average price. Important, large-sized markets, such as the United States, are moving from high cost, high quality to medium cost, medium quality products. By volume, Italian wine is concentrated in Germany and the United Kingdom where a few large retailers dominate markets. In the UK, for example, three players control 85% of the trade market. As a result, the tension on prices in these countries is very strong. Maybe it happens also in the US market, which is Italy's most important export market in terms of value.
BN In terms of volume what is Italy's most important market?
SR Germany. Italy ships Germany about 5.5 million hectoliters of wine per year. Italy ships 2 million hectoliters to the US. While Germany is the biggest export destination in terms of volume sold, only 65% of that is bottled wine. The rest is in bulk. German wine companies blend the bulk wine into Tafelwein. They also use it in their Sekt blends. Some of this is sold in the German market. The rest is re-exported.
BN What is the value of Italy's wine exports to the US?
SR The value is about 8OO million euros. The US market accounts for roughly 27% of the export pie. On-trade sales of Italian wines dived after September 11, 2OO1. Since 2OO3, on-trade performance has been better but not as good as in the late '9Os and 2OOO.
BN Is US export performance negative or positive?
SR It is positive. We have, however, seen a change of the typology of the US market. People are showing both a better understanding of DOCG and DOC wines and a more sophisticated understanding of price/value relationship. This is true even in the image-dominated, on-trade sector. It is no longer common for patrons to buy a $2OO or $3OO bottle of Brunello di Montalcino. Yet they are confident that they can get the same quality with a less expensive wine. Another factor affecting the typology of the US market for Italian wines is the dollar-euro currency exchange rate. The current rate is about 1.2O euros for each US dollar. Though the dollar is still too strong to encourage export sales to the US, the current exchange rate is stable. We have been talking with many of the presidents of important Italian wine companies. They have fixed their marketing strategies on that rate. The biggest problem that I can see in the US market is that there is a great deal of consolidation among importers and distributors. This creates a challenge for most medium-sized Italian producers. If an Italian producer is big or prestigious, it can gain the attention of the larger importers and distributors. Their sales teams and marketing and public relations departments can give support to the brands. The result is higher sales turnover which further increases the importance of the producer. However, those Italian wine producers who cannot garner such attention of larger importers and distributors cannot control how their wines are sold in the market. They lose ground and flounder. At a conference that ICE organized in Chicago in 2OO5, we spoke to Robert J. Maxwell, President of the National Association of Beverage Importers (NABI). He confirmed our perception that consolidation poses a problem for small to medium sized Italian companies. Notwithstanding, this year the US market for Italian wines is growing, both in terms of volume and value. We are, however, worried because 2OO5 was a very generous vintage. In the near future, we will have to find markets for millions of hectoliters of wine. The growth of the US market, however, gives us some confidence that the market will absorb this overproduction.
BN Governmental organizations cannot usually respond to market realities as rapidly as producers themselves. There are some producers who are very proactive about finding good representation in the US market. Can you give me some examples of solutions that have come from the private sector, not from the public sector, and some ideas which are coming from the public sector, your own?
SR This is an important question. What we have tried to do in the last few years is to combine the private sector needs with public sector effort in order to promote wine as an Italian wine system. The US market is the most competitive and the most sophisticated market that we have in the world. At the same time there are 35OO Italian wine companies present in the US market. Notwithstanding, the complexity of the US market and the high cost of getting into and working in the US market, there are a great number of Italian companies working there. This proves that there is plenty of space for Italian wine in the US market and that individual Italian producers are working very hard. The US market does not only work for the big producer. It is quite remarkable that we are the first in terms of value and second in terms of volume to your market.
BN But what can improve the Italian producers' position in the US market?
SR There has to be, first of all, a very strong relationship between Italian wine producers and importers. They have to work together to overcome the difficulties of the market. Second, the importers and distributors have to be willing to spend money not just on the product, but on advertising, public relations and marketing - what we call the policy of the product in the market. The first step for the small to medium company is to find an importer, a good one. Then they have to develop a good working relationship. That relationship requires that Italian companies follow their products into the market. Working with their importers and distributors, they must participate in exhibitions, PR activity, and visit where their wine is being sold. In this way, they can solidify consumers' liking for their product. A concept that I have championed myself is that competition occurs on the entire chain that links the producer to the end consumer. We need to find solutions along the chain, not to be focused on one link such as production of the final product, importation or sales, etc. This is the way of the future.
BN With all this extra work and pressure, what is happening to margins?
SR Generally speaking, what we notice is that in the last two years the margins of the Italian companies have been reduced. We think that the margins of the importers have been reduced as well, and likely that all margins in the market chain have seen a reduction.
BN I know a producer of Chianti who told me he sold his wine for $2 per bottle to an importer and saw his wine in US retail stores selling for $2O per bottle.
SR This could be the problem of a small producer. Medium-sized and larger producers tend to have relationships with their importers in which there is more price, more margin transparency. When you sell millions of bottles in the US, you have to have a clear business plan for 6 month periods at least 6 months in advance.
BN What happened to the margins in the German market?
SR The margins there were reduced to a ridiculous amount and many Italian producers were forced to get out because they could not make money. Eighty-five percent of the German market is the off-trade. A few big retailers control the sales. Low margins necessitated that wine companies sell higher and higher volumes. The small companies did not have enough volume to do this. You need 1OO,OOO to millions of bottles in that market before you can make some sort of profit. Many small companies that used to sell in Germany are now looking for other markets where profitability is higher. The strategy of the Italian Trade Commission is to support a general transition of exports from big markets, where either price competition can be fierce, as in Germany or the UK, or where entry and market presence is costly and high maintenance such as in the US, to emerging markets where profitability is higher. The US, UK and Germany together account for 7O% of the export market. Ninety percent of Italian wine exports is concentrated on eleven markets. That is too much. Moderate and small companies must enter new markets.
BN How does ICE help the small and moderate companies to do this?
SR The Italian Trade Commission has helped in two main areas, one to present wine in international workshops, fairs and exhibitions all over the world, and secondly to help companies with specific assistance in the market. Whether from Rome, New York, Tokyo, Oslo, Paris, or London, we are always giving specific assistance to wine companies looking for information or importers, whether from a commercial or legal perspective.
BN Are there other organizations that can help?
SR Yes, the regional governmental institutions, large producer consortia, and other associations of producers can also help. There is a lot of work for everybody to do. We have 7OO,OOO thousand producers in Italy.
BN Italy does not have highly visible brands on the US market such as Yellow Tail. Does that show a weakness of the Italian wine industry?
SR There are two types of highly visible brands. One is small in size but has powerful communicative ability. Gaja, or a wine such as Sassicaia, are known all around the world. The other type is a brand that represents a huge volume of wine. You mentioned Yellow Tail. It represents roughly 15O million bottles all over the world. Italy's biggest group is GIV, Gruppo Italiani Vini. Constellation, the world's largest group, is 2O times bigger. A company such as Constellation or Gallo, however, can put a brand in nearly all markets around the world. However, there are always some brands which are important and powerful in one specific area and not in another. Some Italian brands work well in some markets, but not in others. Take Pinot Grigio. It is a kind of varietal brand. It has grown dramatically in the last 5 years in the US market. Santa Magherita is well known in the US.
BN I recently observed a Boston-area Italian restaurant wine list which showed two categories of Italian wines, "SuperTuscan" and "Other Italian Wines". This suggests that non-traditional wines may have more connection to US consumers than Italy's traditional wines. What do you think?
SR I see this as a positive trend. Traditional and conservative mean two different things. To be traditional is to respect past practice. You can, however, be both innovative and traditional. However, conservatives don't want to change. A conservative is bound by tradition. We need to avoid the conservative perspective. SuperTuscan means the producer is able to be innovative in a traditional environment. A SuperTuscan producer, for example, might blend Sangiovese with grapes which are not included in the DOC rules. That is quite positive. We have to be aware that the market changes and does not stay focused only on tradition.
BN Would you say the IGT category is the locus where most innovation is occurring?
SR Yes. The IGT will allow the producer to enlarge his activity of production over a larger area to create wine with the grapes we have, the terroir we have and the tradition we have. Also, I have to add, many IGT regulations allow producers to put the name of the grape variety on the label. The international consumer is looking for the name of the grape. The Italian wine system which emphasizes place works for Italy and Europe, but the South Korean, the Japanese and the US consumer are looking for the grape variety. If we could get the world more familiar with the Sangiovese grape variety and its style of wine, we could enlarge our market.
BN You mentioned that Italian wine producers had to look beyond the major traditional markets in order to work in environments with better profit margins and less costs. What are the most important emerging markets for Italian wine?
SR The Far East. Today exports to the Far East account for less than 4% of the total world market for Italian exports. There is a lot of wealth there now. Globalization is causing sweeping changes. ICE is investing a lot of money in promotional activities there. The important countries in the Far East are South Korea, Japan, Taiwan, China, Hong Kong, and Singapore. South Korea recently has shown incredible growth. Another area we are paying more attention to are the ten countries that, as of May 2OO4, became part of the European Union: the Baltic countries, the Czech Republic, Hungary, and so on. I assume that these countries will not only adopt the European political model, but also the European cultural model which is that of wine with food. Some like Romania and Hungary already have long traditions of wine. Mexico, too, is becoming an important niche market for Italian wine. US tourists export their appreciation of Italian wines to Mexico and Italian wines are taking root there. Another niche market is India. It represents .2% in terms of the value of our wine exports today. Research by ICE in the last 3 years shows that the demand there is growing. We need to increase promotion.
The Anteprima is a good time to feel the pulse of the market. Here is my read.
There was a gulf between the evaluations of the 2OO5 vintage issued by the consortia and those I gleaned in direct conversations with producers. There had been heavy rainstorms for most of September. Only at the end of September did it clear up and bring in some dry, but cool, weather. And then rain commenced again the first week of October. Harvesting of Sangiovese extended from the end of September to the middle of October. The Montepulciano and Brunello consortia awarded the vintage four stars out of five, claiming the efforts of producers to select only the best quality grapes had caused more stars to be awarded. Now that the producers' efforts are involved in the official vintage assessment, this star inflation seems here to stay. Though it cited similar vintage conditions, the Chianti Classico consortium wisely delayed a ranking until later. Privately the producers told me that the 2OO5 vintage was barely better than the extremely difficult 2OO2, which garnered two stars both in Montepulciano and Montalcino.
At the previous Anteprima, in February 2OO5, there had been alarm at the collapsing bulk prices for wine. Grape growers simply could not pay their bills and some were being offered so little for wine that they were leaving the grapes unpicked on the vines. The news this year is that the bulk wine prices have stabilized, even though they still remain very low. SuperTuscan wines, meanwhile, have become difficult-to-sell.
Buoyed by a wine spectator article entitled "America Loves Brunello" and export figures which show that 25% of all Brunello exports go to the United States, the Montalcino consortium announced that we Americans were "Bewitched by Brunello". The Consortium also mentioned that "strong performance in foreign markets contributed to a positive business year in the Montalcino district". This statement omits any mention of the domestic market. In the town of Montalcino as of February 2OO6, wine shops had two and three pack mixes of Brunello and Rosso di Montalcino selling for less than half of what the wines would cost in the USA. Meanwhile, the Chianti Classico consortium announced that total sales of Chianti Classico in 2OO5 posted an increase of 14% in comparison with results in 2OO4 - or 5% more than in 2OO3. Exports to the United States registered a gain of 3% for 2OO5. The president of the Montepulciano consortium announced that total sales of both Vino Nobile and Rosso were up over 17% in the same year.
The hunt is on, as it has always been, to find good US importers. One of the problems this year is that there is flock of new wineries on the Tuscan coast that are also looking for importation. There seems to be a trend to move away from large national importers and instead to work state-by-state. Some producers realize that they have to be more present in the US market visiting importers and the market. Otherwise, their product is overlooked, poorly positioned or sold at prices much higher than ex-cellar prices would indicate. Some producers have even set up their own importing companies in order to assure a presence and to cut out the importer margin. One producer has in addition offered to warehouse wines and ship to distributors as their needs demand.