Vino’s Still Populi
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.
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