War of the worlds

New World wines have been the success story of recent years but can they sustain their performance? Phil Mellows reports on new research which suggests they may not.

Is eastern Europe the new New World? For years the wine industry has been banging on to pubs about shifting the emphasis of their wine lists away from France and Italy and towards Australia and California.

Now wouldn't that be a bummer if, just as licensees were beginning to get the message, the wine market waltzed off again in the direction of Romania and Hungary?

Yet just such a comedy moment could be on the cards if the latest research is proved right.

In a provocative report commissioned by Brintex, organiser of the prestigious London International Wine & Spirits Fair, the cleverly acronymed WISE - Wine and Spirits Intelligence Services - charts the rise and anticipates the possible fall of the New World.

Against a background of UK wine consumption that has almost doubled over the last 12 years to hit an estimated 22 litres per head in 2002, wines from the New World exploded from almost negligible volumes to claim a 37 per cent market share by the end of the 1990s.

While the Old World also benefited from Britain's increasing taste for wine - only Germany failed to grow sales - it was on a much smaller scale. Between 1995 and 2000 alone its share fell from 75 per cent to 55 per cent.

The big winners have been Australia, which has overtaken Italy, California, which moves alongside Germany in the league table, South Africa and Chile, neither of which are very far behind.

Bucking the trend has been Spain which, although part of the Old World, has managed to more than double its share and now threatens to overtake Germany.

The anomaly is instructive. Spanish wine producers, perhaps with less to lose, have deliberately tried to create a New World feel for their products. It is a counter-attack strategy the rest of western Europe is only just beginning to employ.

While the New World shift is a global phenomenon, in Britain the flashy branding and innovative packaging is part of a broadening of wine's consumer base, attracting younger drinkers and dispelling wine's traditional stuffy, aristocratic image.

There are material reasons why it is Australia and California, and not France and Italy, which have been able to do this, as Frederic Julia, managing director of WISE, explained.

It comes down to a term familiar to the British pub and brewing industries - vertical integration.

"It is important to emphasise that the leading companies in the New World are, for the most part, heavily implicated in controlling their supply," he said.

"The top wine companies directly own an average of more than 40 per cent of the vineyard area used to supply their needs. In the Old World it is rare for a wine company to control more than 10 per cent.

"Also, the wine industry in the Old World is highly fragmented. In contrast, the New World is dominated by a few companies."

Vertical integration in the wine industry means a company is better able to determine production of styles of wine that fit trends in the markets it is selling to. It can be consumer-led rather than producer-led.

In Britain the growth of wine has in part been driven by a move away from the dinner party occasion towards anytime drinking, say, in the pub. This has created a demand for easier-drinking, fruitier wines and New World companies have adapted their products accordingly.

Another benefit of vertical integration is the improved ability of producers to control prices. This has been crucial to the success of New World wines and, if Frederic Julia is right, may have also sown the seeds for problems ahead.

When the New World made its first assault on the UK the strategy was to undercut the Old World. At today's prices you would find prices concentrated between £2 and £4 a bottle.

Since then, however, New World wines, following the consumer trend towards higher quality, have spread themselves across the marketplace and, according to WISE's own research, more than a quarter of wines from Australia and South Africa are found in the £7 to £9 bracket, a higher proportion than among French or Italian wines.

This has a number of consequences. One is that reinvigorated Old World wines are better able to compete. It depends, of course, on getting the marketing right, but Frederic believes "the Old World is definitely reacting".

In France the government itself has stepped in, inciting producers to create strong brands, adopt more ambitious, innovative marketing and recruit sales forces with experience in international markets.

"This new aggressive strategy could pay off rapidly," said Frederic. "Traditional wine producers have also reacted by adapting their production to the taste preferences of today's consumers. They have adopted new vinification techniques and have sometimes called upon wine makers from the New World!"

As New World wines have moved up-market they have also encountered a more discerning drinker, and quality has become more important. Frederic points out that, in a bid to find the right price-quality balance, Chile is already lowering its prices and Australian prices are flattening out.

But at the same time production costs are rising and the big New World wine companies are having to satisfy their shareholders' hunger for profits, meaning they have little scope, Frederic believes, for downward manouvre.

The upshot of all this is, he says, to leave the bottom end of the market wide open to wines from eastern Europe.

Countries such as Hungary, Bulgaria, Georgia, Romania, Moldavia and Russia, with the help of international banks, are investing in and restructuring their wine industries, calling on New World wine makers and marketers to replicate the success of Australia and California.

Surprisingly, as much as 18 per cent of the world's vineyard acreage is in eastern Europe - although at the moment the region produces only 7.4 per cent of the wine.

"They will need to change their image, to give an emphasis to quality, but they are good enough to hit the £3 a bottle market," said Frederic.

"They are also closer than the New World to the main consuming markets - including the UK - and the cheaper cost of transport could be an advantage.

"This year's London International Wine Fair will see an increased share of space given to East European countries and I can see eastern Europe targeting younger wine drinkers, people who aren't connoisseurs.

"That will leave the New World and the Old World to fight it out in the mid-market while the Old World continues to dominate the top end."

Such an argument is by no means won, however. Martin Pinner at wine wholesaler Waverley, which is in the middle of launching a new Australian wine brand, Moondarra, questioned whether New World wines in general really are destined for a mid-market status.

"The New World does not have a problem producing a competitively priced product," he said. "Neither does the market show any sign of slowing. Australian wine is growing at 12 per cent a year and if anything the opportunity is even greater.

"East European wines are poorly thought of. The consumer just doesn't want to know."

Sophie Gallois, an Old World person who, as marketing director for Pernod Ricard wines, is responsible for a best-selling New Worlder in Jacob's Creek, is not complacent, however.

As the British population grows older and wealthier, quality is the vital factor, she explained. "The UK wine drinker has learned a lot since the days of sweet German wines. New World wines in general, and Australian wines in particular, can answer this demand because they have invested huge amounts in viticulture and wine making and are now at the forefront of modern wine making.

"This is consistently reflected in an increase in quality,