Contents

Executive Summary 3

Introduction and Study Purpose 3

Background 4

Research Method 6

Findings 7

Recommendations 14

Executive Summary

Due to a decreasing internal consumption of local wines, Romanian wine producers are forced to look outside the domestic market for new demand for their products. Partly induced by recession, and partly due to competition from foreign wines, the decrease in local demand has determined Romanian firms to look to markets such as the US market for new opportunities.

To succeed in the US market, Romanian exporters have to understand what are the drivers for wine sales in the US retail market and distribution system, how is Romania, as a wine producing country, perceived by the US shopper, and how much is the US consumer willing to pay for a bottle of Romanian wine.

Conducted in two countries (Romania and the United States), this study is looking at opportunities and barriers for Romanian wines on the US market and offers recommendations to Romanian producers, trade associations, and US distributors and marketers interested in importing and selling Romanian wines.

Introduction and Study Purpose

Exporting wine to a foreign country has without doubt its intricate logistic challenges. The biggest challenge however, stands in finding and creating demand for the product. This is why marketing is a crucial complement to successfully entering a foreign market.

Romanian wine producers have expressed their interest to enter the US market because of the large potential regarding wine consumption (US is the second largest consuming country by volume worldwide) and because Romania has a neutral image in the United States (this allows Romania to build an idyllic image away from the barriers of a tarnished image in Europe). Also, the US market has been historically open to wines from all over the world with greater openness to wines regardless of country of origin. Such successful entrants include Australia, Chile, and South Africa.

This study’s purpose is to aid all players in the export chain (from producers to marketers) to successfully bring Romanian wines to the US consumer.

Objectives

·  To determine what are the drivers for wine sales in the US retail and distribution

·  Describe Romania’s image in the US (since wine is a product strongly tied to country of origin)

·  To determine the US consumer’s perception about Romanian wines

·  To determine purchase intent and price point for Romanian wines

·  Define distribution barriers and opportunities for Romanian wines in the US

·  Make recommendations to Romanian wine producers and parties involved in the distribution chain, as well as US marketers

Background

Industry

The wine industry is an extremely competitive industry. Despite the harsh nature of this industry, a large number of players (large and small) try their luck vintage after vintage. Some enter the wine business for the creative nature of it, for glamor, or family tradition.

The wine making industry has relatively low barriers of entry. Traditionally the industry has been dominated by small family vineyards. However, for the past three decades, a significant number of large companies such as Gallo or Constellation Wines are visible on the global wine scene. Mainly profit oriented, the giants of the wine business have wine production sites located across the world and have the advantage of sharing the know-how in wine making, marketing, and distribution between sometimes five continents. For the small producers on the other end of the spectrum wine making is a craft or family tradition.

Surviving in this industry is extremely tough due to the uncontrollable forces of the nature: disease, frost, or predators. However insurmountable these risks may be, the industry is admirable for the resilience with which year after year winemakers battle nature in their quest for beautiful wine. Their arsenal is patience, intuition, and continuously developing technology.

An external threat to the wine industry comes from other alcoholic beverages such as beer and mixed drinks. Complemented by food, the wine selection may in some cases seem too tough to navigate and despite efforts to make consumer friendly categories, the perceived intricacies of choosing a wine may alienate potential consumers. In addition, wines are often perceived as pretentious and that may give an advantage to other beverages in the competitive landscape.

Climate plays a major role in wine production. The “wine belt” is the stretch of land around the globe between 35th and 51th parallel of north and south latitude where the climate is favorable for growing wine grapes. Within the wine belt, the industry distinguishes between two major regions. The Old World which includes wine producing countries in Europe and the New World, where winemaking was introduced by European settlers. The Old World is characterized by rigid wine making laws and regulations while the New World is thought of as the avant-garde in wine making, free of tradition’s harness (Bartlett, 2009).

The Old World-New World division however, does not include emerging wine producing countries such China and India and does not account for particularities of Eastern European countries that have been isolated from Western Europe for over four decades due to Communism. In this context, the subdivision of the Old World would include Old-Old World (Italy, France, Spain) and the Old-New World (Romania, Moldova, Hungary). The New World can also be mapped as New-Old World (Australia, New Zealand, Argentina, United States) and New-New World (China, India)- see Figure 1, Survey.

The competitive landscape has been dominated for decades by Italy and France who have been battling for the top position in wine production, followed by Spain, United States, Argentina, and in recent years China. In consumption by volume, the leading countries are France, United States (surpassed Italy in 2007), Italy, Germany, and China. Per capita, the leading wine consumers are Vatican, Luxemburg, Norfolk Island, France, and Portugal (Trade and Data Analysis 2008).

Due to production-consumption gaps, wine producing countries compete on export markets worldwide. The most significant difference between production and consumption is in Germany and United States and noticeable in China and the Russian Federation where a growing middle and upper-class is increasing demand for wine -a status symbol in emerging markets (Figure 2, OIV 2011).

The top three producers are also the top exporters. Italy, Spain, and France are the leading wine exporting countries. Spain is behind France in production but ahead in export volume. (Figure 3, OIV 2011).

Not surprisingly, Australia, Chile, and South Africa surpass the United States and China in exports; this is the result of the domestic consumption being greater than domestic production in the US and China. At the same time Australia, Chile, and South Africa have a production surplus that is sold through export.

Romania as a wine producing country

In the global wine production landscape, Romania has fallen in the past couple of decades from the ninth place which it held right after communism ended, to a surprising sixteenth place in 2005 due to extreme rain conditions. With the exception of 2005 post-communist Romania has maintained a steady 12th place within the world wine producing countries.

Historically, Romania prides itself for the quality of its wines. This pride has been over inflated during communism when the quality of the wines produced was sacrificed over high yields. The popular belief among Romanians -that Romania is producing world class wines- is rooted in the post War World II period when Romanian wines were served and appreciated at the royal courts of Europe. Communism however, represented a major setback for the Romanian wine industry compared to its geographically proximate rivals in Western Europe and the intensely competitive rivals from the New World.

Efforts to revitalize the Romanian wine industry after several decades of competitive dormancy induced by communism include financial support from the European Union which Romania joined in 2007, a short-lived USAID and very little industry support from the Romanian government. Due to bureaucracy, the Romanian government impeded rather than helped the development because of delayed distribution of external financial aid resources. However useful the outside support has been, the funds allocated by the European Union were solely directed to vine replanting. Marketing and business development lagged behind mainly because of the threat of competition for established European players like France and Italy. Similar was the case of USAID which was ceased because of the threat of competing with US wines.

Romanian wines are predominantly consumed on the domestic market. This is the reason why a degree of complacency is noticeable among the top Romanian producers whose competitive advantage stands in production costs and a brand name that’s recognized by the domestic consumer. An altered appreciation and demand for sweet wines (that goes back to the communist years) and a bad country image in Western Europe, makes it extremely difficult for Romanian wines to compete on foreign markets. The comfort of satisfying domestic customers, lagging business practices, and a negative country image lead to a domestic entrenchment over the past two decades (Nakata, 2011).

The global economic crisis had a significant impact on the Romanian consumer as well. This denotes a decrease in the national wine consumption and an increase in price sensitivity. Pressed by the change in domestic demand, Romanian wine producers are forced to look to export markets in order to sell their product.

A simple fix for the export problem was to enter export to countries with large Romanian ethnic communities such as Italy or Spain. More distant markets like the United States also displayed a huge potential through Romanian ex-pats.

A second solution to export was to supply markets such as the Germany with bulk wine used in blends with local German wines and labeled as generic table wine. A Romanian wine maker called this the “Romanian magic drop.”

A third proximate solution to increasing export was to enter the markets of countries with which Romania had strong ties during communism. These countries include former communist countries in Eastern Europe and China. The largest export market in this category is by far China. China presents huge opportunities for Romanian producers because the demand for wine is not met by domestic production, there is a high demand for sweet wines by novice consumers who mix wine with colas, and most of all Romania has a favorable image due to historic ties through Communism. Romanian trade with China has materialized both through direct export and joint ventures with Chinese partners.

Outside of China, opportunities for Romanian wine makers lie in countries like Russia and the United States where the wine supply is below demand (Figure 3, OIV 2011).

Research Method

The study included two phases. The first phase was conducted in 2010 in Romania and included interviews with one to four senior managers at each of seven wine producing companies and four industry specialists. The interviews were conducted during a period of time of three weeks and included three major wine producing regions of Romania: Dealu Mare, Cotnari, and Tarnave. Interviews lasted between one hour and five hours (Figure 4).

The second phase was conducted in 2011 in the United States and included interviews with purchasing managers in wine retailing (a large wine shop and a boutique retailer), bar managers at two restaurants, and two wine distributors, all in Chicago. The second phase also included an online consumer survey. Eighty one respondents ranging from novice wine drinkers to wine experts between the ages of 21 and 75, residing predominantly in Illinois and Ohio completed the survey (see Appendix 1).

Findings

Drivers for Wine Sales in the US

The number one driver in wine retail is price. The global economic crisis has without doubt had a negative effect on the American consumer who became much more price sensitive. If previously, a wine boutique was able to sell wines in the 50 to 60 dollar range, that price point was reduced to 12 to 20 dollar bottles in the past couple of years. During the recent recession, a reasonable price for a standard 750 ml bottle of wine is considered to fall around 10 dollars. At a Chicago retailer over 100 bottles in the selection are priced at 9 dollars or less. The recession has also spiked demand for wines under 6 dollars but of questionable quality (private labels of blended low quality bulk wine).

Wine shops are not the only ones to see a dramatic drop in how much consumers are willing to pay for a bottle of wine. Restaurants and bars are also looking for value when assembling their wine lists. Their first consideration for choosing a wine to be offered on their list is price.

The fact that price is the number one driver on the US market is also supported by the 81% of the sampled individuals who said their wine purchase is based on price (Figure 5, Survey).

Not to say that all consumers are looking for wines priced under 20 dollars, there is still a large segment of consumers who are willing to spend between 20 and 100 dollars on a bottle of wine; this segment is being described as collectors and show-offs.