Stephen Rannekleiv is an Executive Director for Rabobank International in New York. He joined Rabobank in 2006. Now he is the global head of research for the beverage sector, analyzing trends in the wine, beer, spirits and soft drinks sectors. Before joining Rabobank, Rannekleiv worked for eight years in Latin America analyzing agricultural sectors and designing support programs for farmers and agribusinesses.
- Why is wine less profitable than other alcohol beverages?
I think there are a couple of reasons why wine is less profitable than other beverages. In a globalized economy, oversupply in any given region places downward pressure on prices throughout the world. Last year, Australia had a lot of excess inventory and was forced to sell enormous volumes of bulk wine at extremely low prices on the world market. Much of that volume came to the US market, and placed downward pressure on prices for US producers of basic wines.
Beyond the oversupply issue, wine is much more closely tied to the agricultural product itself than other beverages such as beer or spirits, so qualities and so forth vary much more from year to year. Added to this is the highly fragmented nature of the wine industry, which makes it even harder to build brands.
Finally, a key issue to the lack of profitability has to do with the capital intensive nature of wine. The image of high quality wines are often tied to the vineyard, so vineyard ownership of at least some vineyards is often necessary, and this is an enormous expense that you do not have with other beverages such as beer.
- Is it possible to build strong wine trade brands that allow companies to set reference prices on different prices ranges?
It is difficult to achieve but it is possible. One example that comes to mind is Robert Mondavi. I cannot really think of any great examples of BRANDS that cut across ALL price ranges, though you can certainly find a number of COMPANIES with products across price ranges.
For a brand to develop a range of products across price points, I think the key is that it has to establish itself first in the higher price categories and then move down. Once you establish the brand in a lower price category, it is much more difficult to move up. Indeed, in this recent recession a number of luxury wineries introduced some lower-priced brand extensions to help maintain sales without eroding the brand equity of their established brands.
- What do you think about the growth of the US wine market?
Wine consumption in the US continues to grow and there is nothing out there that indicates that this growth is coming to an end. The growth rate may be slower than in the years prior to the recession, but it is still growing. Premium wines seem to be on a steady growth path again, but there has been some clear re-setting of prices.
One key factor to keep in mind is that while wine consumption continues to grow in the US, wine production in the US (or at least in California) has stagnated. As a result, most of the future growth in wine consumption will, in all likelihood, have to come from imports. However, competition to supply that growth will also likely be intense, considering that key producers such as Australia and Europe are currently dealing with excess supply.
- What are the main problems that the UE has to face?
I would say that the EU has a number of issues to confront.
- Oversupply: They simply produce more wine than they have demand for. In the past they have dealt with this through subsidies used to purchase excess production, but this has simply helped to maintain excess production. They are now in the process of removing vines, but it is still a bit early to know if it will be enough to balance out the end of the subsidies.
- Quality: Europe has some of the best wines in the world, but also some of the worst. There is a lot of low quality wine that comes out of Europe, and it could really eventually hurt the quality image of some of the better producers.
- Market mentality: Europe has a great tradition of wine production that we could all learn from, but in many ways it seems to be hurting them. They are not used to marketing their product, and have been slower at trying to really build modern brands. While I understand and appreciate their historical system for designating wine based on terroir and style, it is often confusing to many new markets which are now much more focused on varietals.
Finally, I would say fragmentation is a big challenge for them, as wine production in Europe is much more fragmented than in the New World countries, and this makes it much harder to develop a consistent product and to market large brands.
- What is the perception of Argentina and its wines?
Argentina is the really hot success story of the moment. The trade likes it because consumers like it.
- Do you think Malbec has the potential to be successful in the US market?
I guess that depends on how you define success. In many ways, given its current growth rate, I would argue that Malbec already is successful in the US market. If you define success as achieving consumption levels similar to Cabernet Sauvignon or Merlot, then I think that it would be somewhat unlikely in the near term.
Tags: Rabobank, Stephen Rannekleiv, United States
