BORDEAUX: An Iconic Region Battles to Sustain Market Share - Part 1
January 21, 2014
Bordeaux is arguably the most famous of all French wine regions and has had an immeasurable impact on the world of wine. Bordeaux has been an active wine exporter since the early 14th century. No other region can match this French icon in terms of commercial longevity and influence. The wines of Bordeaux have had such allure for centuries that grape varieties of Bordeaux origin—led by Cabernet Sauvignon and Merlot—have been planted in countless places, and the “Bordeaux blend” is a universal concept.
But leaders rarely remain unchallenged; at some point, they face new competitors and suffer internal stresses. General Motors was once unassailable but European, Japanese and, now, Korean, carmakers present strong competitive threats even in GM’s home market. Challengers may develop and perfect products consumers find more appealing or simply easier to understand. So it is with soft, well-endowed New World wines bearing the straightforward language of grape variety rather than one of 60 appellations of Bordeaux. Evolving consumption patterns can as well undermine a seemingly unshakeable franchise. For Bordeaux, this includes a dramatic decline in wine drinking in France over several decades.
Critics say Bordeaux tends to be insular and skeptical of criticism from the outside. Complacency and rigidity, they argue, present barriers to needed change. Fortunately, there is another side to Bordeaux: one that is dynamic, energetic and relatively open-minded. The region is more susceptible to change than most outsiders are inclined to believe. Even if the will exists, however, adjusting to new market conditions is liable to confront structural obstacles. Try as it may, Bordeaux cannot control larger market forces, and disruptive changes are being imposed on the region. Many small growers in modest appellations will have to adapt or perish; in fact, this process has already begun.
Many people do not realize the scale of wine production in Bordeaux. Consider that its output of 5.5 million hectoliters or 61 million 9-liter cases on average in recent vintages (leaving aside the atypically small 2013 crop) equals roughly half the entire production of Chile or Australia. Yet, this enormous region with an incredible history claims far less than one percent of the U.S. market. Moreover, that share is declining as total U.S. consumption grows and Bordeaux shipments remain within the same small volume range. How and why has this happened, and what is the future likely to hold for Bordeaux, particularly in the U.S. market?
A Changing Landscape
Per capita consumption in France has declined from 160 liters per person (15+ years old) in 1965 to less than 57 liters in 2010 (or 47 liters per inhabitant) according to FranceAgrimer, a division of the Ministry of Agriculture. The percentage of regular wine drinkers has fallen from 51 percent in 1980 to 17 percent in 2010, whereas non-drinkers have doubled from 19 percent to 38 percent.
Bordeaux is being buffeted by serious challenges. In the U.S., sales have remained essentially unchanged for more than two decades while the overall market has become the world’s largest. Bordeaux is not alone in facing threats to its franchise. French wine generally has been under attack, and Bordeaux, as the leading trading region, is taking a good part of the beating. Global wine commerce has surged, and France has not kept pace.
France’s export volume has hardly been dynamic over the last decade. The value of the country’s exports has held up better and has shown advances recently. Rising value partly reflects the mix of products (i.e., more high-end products) and, primarily, increasing prices. Total value of shipments increases when producers put up the cost of their wines to boost revenue.
The lack of progress in overall volume may not be a serious worry if the available quantity is not increasing—unless, of course, domestic demand is also shrinking. Per capita consumption in France has declined from 160 liters per person (15+ years old) in 1965 to less than 57 liters in 2010 (or 47 liters per inhabitant) according to FranceAgrimer, a division of the Ministry of Agriculture. The percentage of regular wine drinkers has fallen from 51 percent in 1980 to 17 percent in 2010, whereas non-drinkers have doubled from 19 percent to 38 percent.
Exacerbating trends at home, France has been standing still while competitors capture a disproportionate share of an expanding world market. France’s wine exports have hovered around the 150-million case mark from 1998 to 2012 based on data from FEVS (Fédération des Exportateurs de Vins et Spiritueux, “Bilan 2012-Perspective 2013”). Consider that, since 1980, global commerce in wine has doubled from around 50 to 100 million hectoliters (Office International de la Vigne et du Vin). Being static means that someone else is reaping the benefit of that higher level of activity.
If we go back to the period from the 1980s to 2000, France’s share of the world wine market averaged one-fourth. In the last dozen years, its portion has dropped to 14 percent. The proceeds of other traditional European producers such as Italy, Spain, Germany and Portugal have remained fairly consistent in terms of share: together they control about half of trading volume. The biggest winners in the global sweepstakes have been Southern Hemisphere countries, notably Australia, South Africa, Argentina, Chile and New Zealand, together with the U.S. This New World grouping now accounts for 25 percent of the world market, up from 15 percent in 1996 to 2000 and a mere 2 percent of a smaller market in the early 1980s (OIV). The tables have turned, and France is the loser.
The U.S., meanwhile, has become the largest consumer country with a total volume estimated at 360 million cases in 2012, of which an estimated 123 million cases—a sizeable 34 percent share—are imported (California Board of Equalization, DOC, TTB, GFA estimates). From 2000 to 2012, total U.S. consumption has increased by roughly 50 percent, and continued growth is forecasted by most observers. Logically, the U.S. has to be a priority market for Bordeaux, but the region is confronting aggressive competitors angling for their own piece of the action.
The Haves and Have-Nots
One of the core issues bedeviling Bordeaux is that a handful of glamorous appellations dominates the region’s financials.
It is undeniable that New World producers have captured the spoils of a burgeoning world market. Bordeaux is front and center in this tectonic shift as it represents the largest single component of France’s exports of appellation wines with a 16 percent share in 2012. In value terms, Bordeaux delivers 29 percent of the total, just behind Champagne, which has a 31 percent share yet only 8 percent of shipments (FEVS). Bordeaux commands approximately 10 euros per liter exported in 2012 based on data from Agreste, a part of France’s Ministry of Agriculture. There is a huge disparity, however, in prices of elite Bordeaux wines compared to the basics: 59.5 euros/liter for Médoc communes versus 4.4 euros/liter for regional Bordeaux red.
One of the core issues bedeviling Bordeaux is that a handful of glamorous appellations dominates the region’s financials. These famous names—Margaux, Pauillac, Saint-Julien, Saint-Estèphe and Pomerol—represent around 10 percent of Bordeaux exports by volume and a whopping 50 percent by value. Moreover, these areas (five out of 60 Bordeaux appellations) cover only 5 percent of the vineyard surface yet account for 50 percent of land values according to an official study by Jacky Bonotaux at DRAAF (La Direction Régionale de l’Alimentation, L’Agriculture et de la Fôret d’Aquitaine). Pauillac fetches $888,000 per acre on average whereas simple Bordeaux-ranked vineyard is worth a humbling $8,000 (Wines & Vines, September 2013). The valuations of prestigious vineyards have continued to increase, even during the financial crisis of 2008 to 2009. Rubbing salt into the wound, the broad base of the Bordeaux pyramid has actually declined in value over the past decade.
Some observers like to say that the locomotive has pulled out of the station, leaving the cars at the platform. In other words, a sliver of the extensive portfolio of wines produced in Bordeaux not only dominates financially, but also fails to pull along the bottom appellations constituting well over half of the region’s output. Wine growers producing basic Bordeaux have already suffered. Low vineyard valuation simply reflects the meager price of regional Bordeaux AOP. Many estates have already become uneconomical, and their numbers are dwindling. According to the 2010 “Agricultural Census” by Agreste, there were more than 12,000 exploitations viticoles or wine-growing properties in 1998 and just over 7,000 by 2010. The very smallest are disappearing: the proprietors simply cannot make a living given market prices for their wine and their lack of scale. As a result, the average size of a holding has gone up (to about 15 hectares) as marginal enterprises are absorbed by new owners.
Larger units of production might actually be a plus for the region, but the troubles do not end there. Younger generations are choosing other occupations, and there are serious problems ahead because a large number of operators are over 50 years of age – and one of two have no plans for succession. Agreste estimates that, of 110,000 hectares (271,700 acres) of Bordeaux vineyard, the future of 30,000 hectares (74,100 acres) could be in doubt.
The difficulties Bordeaux is experiencing would be more severe if the Chinese market had not exploded since the mid-2000s to become the region’s number one foreign client with purchases of nearly 6 million cases. Asia now takes around 40 percent of Bordeaux exports by value. This offsets the marked decline in exports to longstanding European customers. The U.S. ranks sixth in volume in 2012 at 1.9 million cases. In value, the U.S. is fourth with 215 million euros while China is second at 338 million euros, after the U.K. (Conseil Interprofessionnel du Vin de Bordeaux).
Incredibly, France has an estimated 50 percent share of the Chinese market—compared to 4 percent of U.S. consumption. Early groundwork by French vintners has paid off, aided by the allure of French products—and specifically Bordeaux—in Asia. But China has leveled off, and future trends are difficult to predict, particularly as China initiated, in July 2013, an inquiry into unfair trading practices by France and Spain.
Part two of this article will run tomorrow, Wednesday, Jan. 22.
by Roger C. Bohmrich MW
Roger C. Bohmrich has enjoyed a long career in the wine trade, and he is currently an educator, speaker and consultant. Most recently, he set up and managed a retail entity affiliated with a Bordeaux-based merchant. Previously, he was a senior executive of a well-known importer. Bohmrich is one of the first Americans to earn the Master of Wine qualification. His website is www.vintrinsic.com.