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Regulation

New Zealand Winegrowers has made two public statements regarding excise in recent times.  In the first it advocated shifting the accounting for excise to the retail end of the chain.  In the second it advocated that the Government give the annual excise increase due on 1 July next year a miss owing to the significant impact it would have on the wine industry.

There is an unfortunate irony in that I suspect New Zealand Winegrowers is hamstrung by the technicalities (in particular that the true cost is not simply excise) in respect of its public pronouncements.

The fact is that excise on alcoholic beverages is a multi-layered beast.  Demonstrating this may go some way to show why shifting excise to the retail end of the chain is both economically and ethically more desirable, and yet unlikely to happen.

Moreover, in pulling its punches New Zealand Winegrowers has refrained from pointing out the double up in the excise increase attributable to this year’s increase in the rate of GST.  In short, the 5% forecast level of CPI inflation by next year includes the 2.2% annual effect of the increase in the rate of GST from 12.5% to 15%, which increase has already been factored into the excise impost (if not in theory, very much so in practice).

Allow me to illustrate this.  The following table shows the impact on either the winery or the consumer (or, as often than not, both) in the event of a 5% excise hike next year.

Case Bottle
Current Excise 23.42 1.95
GST on Excise 3.51 0.29
Total Excise Impost 26.93 2.24
Add retail margin (e.g. 35%)
Excise portion of markup 8.20 0.68
GST on markup 1.23 0.10
Total Excise Impost incl margin 36.36 3.03
Adding a 5% excise increase
Resulting Excise 24.59 2.05
GST on Excise 3.69 0.31
Total Excise Impost 28.28 2.36
Add retail margin (e.g. 35%)
Exise portion of markup 8.61 0.72
GST on markup 1.29 0.11
Total Excise Impost incl margin 38.18 3.18
Resulting Increases
Ex-winery excise 1.17 0.10
Consumer excise (ex winery) 1.35 0.11
Consumer excise (retail all inclusive) 1.82 0.15

While the 35% retail markup is an approximation (as some distribution and retail combined mark ups will be less, and others more, depending on the channels supplied), the true impact at the consumer level will be greater when restaurant margins and other costs are added in.

Note also that the Government collects income taxes on the proportion of the margin on excise that may be retained as profits by the retailer.

Of course this is not the whole story.  The 2010 GST increase had the following impact on the ex winery (GST inclusive) excise impost:

Current Excise (ex winery) 23.42 1.95
2010 GST increase on Excise (ex winery) 0.59 0.05
Pre increase Total Ex-Winery 26.35 2.20

What this means is that when you add the double slab of 2010 GST and 2011 increase, including GST on the increase, you get:

Total GST (ex winery) 4.27 0.36
Total Excise Impost (2010 & 2011) 28.86 2.41
Total Increase from 1 Jul 2010 1.93 0.16
% Increase on 1 Jul 2010 7.3 7.3

So how might excise have risen over 7.3% in 12 months? It is the proverbial anomaly when you have a tax on a tax.

Of course, it is one thing to have a double up – where the increase in a tax causes the increase in excise and, therefore, in the tax on that excise.  The other question is the extent to which that reaches the consumer.  If the retailer refuses to pay a higher price or compromise on its margins, the economic cost to the winery for continuing to supply that retailer is not the level of excise it must absorb, but the level of excise including the GST on the cost that is not able to be passed on.

Based on the assumption that at present a little under 40% of New Zealand wine is drunk domestically (and therefore subject to excise), and that about two thirds of this is tied to “immoveable” price point structures, accordingly about 66% of the total increase in excise, plus GST, is worn by the industry, and a mere 1/3 (representing about 13% of total NZ wine production) will be passed on to consumers or borne in some proportion by retailers.

It is curious then that the Law Commission and other advocates for higher levels of excise as a consumer behaviour influencer have not wholeheartedly supported NZ Winegrowers on its stance regarding shifting excise payment to the retail end of the chain.  The fact that excise may be paid, by the winery, months or years before a bottle is sold is conveniently overlooked.  More importantly, the whole situation goes to show how impotent and irrelevant the present system is from the perspective of using excise as a tool to fight alcohol abuse.

Two reasons, both morally questionable and conveniently overlooked from a revenue perspective, why an excise shift won’t happen:

  • The tax on tax factor – Government would lose both the GST and income tax on the profit margin earned by downstream distributors and retailers on the excise charged as part of the price to them.
  • The breakages and losses factor – a certain amount of wine will always be damaged or stolen after it has left the winery.  The Government still collects excise on these losses.  There is no provision for reversal, since the people who handle wine after it has left bonded warehouses (usually the winery or storage facility) are not accountable to NZ Customs.

On closer inspection, however, are either of these actually material or true?

The breakages and losses factor is difficult to quantify without adequate data.  Assuming 2% as a breakages and losses factor (and I do not know if that is low or high) would mean a revenue loss of approximately $13 million on current excise estimates (including beer, spirits and other beverages also).

As regards the “tax on a tax” factor, if retail prices do not change from present levels, this need not be the case at all.  There will be a range of costs and savings shifted between the upstream and downstream sectors.  Retailers would be able to justify higher margins on the basis of taking on administrative costs (although in the age of GST compliance these should be not be onerous).

Let me illustrate. Under the present system, using a 35% indicative mark up rate, the general pricing economics look as follows:

Case Bottle Industry ($mil)
Case ex-winery 100.00 8.33 708.61
Excise 23.42 1.95 165.95
Total ex-winery price 123.42 10.28 874.56
Add retail margin (35%) 166.62 13.88 1180.66
Retail Price incl GST 191.61 15.97 1357.75
Effective total excise (incl GST) 26.93 2.24 190.84
Total value of GST 24.99 2.08 177.10

However, if the excise collection is shifted downstream, the same formulae would produce a different result:

Case Bottle Industry ($mil)
Case 100.00 8.33 708.61
Add retail margin (35%) 135.00 11.25 956.63
Excise 23.42 1.95 165.95
Retail Value (excl GST) 158.42 13.20 1122.57
Retail Price incl GST 182.18 15.18 1290.96
Effective total excise (incl GST) 26.93 2.24 190.84
Total value of GST 23.76 1.98 168.39

The level of total GST revenue lost is just $8.7 million under this scenario.

If, instead, prices are maintained at the same levels as originally, and we then work back to obtain the retailer margin:

Case Bottle Industry ($mil)
If price unchanged: 191.61 15.97 1357.75
Less GST 24.99 2.08 177.10
Price excl GST 166.62 13.88 1180.66
Less ex-Winery price 100.00 8.33 708.61
Less Excise 23.42 1.95 165.95
Retail Margin 43.20 3.60 306.10
Retail Margin (%) 43.20 43.20 43.20

While the percentage margin is expanded, the actual value remains the same so that, aside from shifts in compliance and funding costs, the net taxpayer position remains the same.

The biggest single added cost would be the transitional cost of establishing bonded storage areas and the downstream compliance regime – although this is no different to what a winery with a cellar door or restaurant operation already has to manage, and would continue to have to do so.

Overall, however, from a wine industry perspective the small reduction in compliance costs (since all would need to continue as bonded areas) is less important than the balance sheet impact.  Based on the (occasionally substantial but usually a matter of months) gap between incurring excise liabilities and receiving payment for most wine sales, the estimated working capital requirement incurred by the industry averages approximately $40 million and may well peak at closer to $50 million, not only incurring debt costs but also tying up valuable working capital that is not able to be utilised elsewhere.

At the present time, that release of overdraft working capital could mean the difference between survival and failure of many businesses under pressure from their banks.

One of the top wine stories in last week’s press in New Zealand, front page news in fact, was a report that wine prices (as a proxy for liquor in general) had fallen to such an extent over the last decade that they are now cheaper than bottled water.

The inference from this story was that the Government needed to act by increasing excise to stop the harm being caused by cheap alcohol.

This was of course the latest in a series of reports, this and several others emanating from the University of Otago, pushing the anti-alcohol agenda that dominates the Law Commission’s recent work (see https://doubtlesswinebusiness.wordpress.com/2010/07/23/the-tip-of-the-new-temperance-iceberg/ ).

Interestingly, the international press has cited the report as being “published in the New Zealand Medical Journal” when what was actually submitted to the Journal was a letter, meaning that it must have been accompanied by academic references (although presumably, as a letter, not subject to the standards of peer review required for full articles of scientific journals).  If it had been subject to such peer review it is surely questionable whether, on the grounds of either methodology, statistical sampling or analysis, it would have been accepted for publication.  Why? Simply because the article is patently polemical in nature and extraordinarily flimsy on each on each count as regards methodology or analysis.

By the next evening TV One News in New Zealand was already running a story scrutinising (and contradicting) the specific headline-seeking claims made in the report, even while missing the bigger picture analytical issues altogether.  The print media had missed this opportunity completely before going to print.

Of much greater importance is the stark reality that this type of lobbying, adopting an attitude of faux scientific rigour or justification, will continue to emerge and is frankly winning the publicity battle even if the Government has adopted a reform package missing some of the key Law Commission recommendations, such as huge excise increases.  Before that package is even fully in place, the anti-alcohol lobby is adopting a campaign designed to undermine confidence in the reforms (consistently criticised as inadequate even before there has been a chance to see if they have an effect).

What was claimed?

The headline was simple: alcohol is cheaper than water.  The report claimed that as a consequence of long-term trends alcoholic beverages could now be purchased for less than the price of water, the implication being, in other words, artificially cheap (because how else could it be cheaper than water, after all).

The published findings were that a 250ml glass of milk cost, and of bottled water cost “somewhat more at 67c a glass”.  By contrast alcoholic beverages, all cited as “standard drinks” rather than 250ml equivalents – a substantial difference in actual volume terms, especially as regards an “apples with apples” comparison – “can be purchased as low as” cask wine at 62 cents a standard drink, beer at 64 cents, bottled wine at 65 cents and spirits at 78 cents. The “can be purchased as low as” was strangely underplayed or missed altogether by much of the print media coverage.

It was conveniently pointed out by the report author, however, when queried by the TV News coverage, which found bottled water as low as 21 cents, cask wine at 71 cents and beer at $1.10,  that prices fluctuate and the low prices resulted from “specials” (which surely was worthy of having been spelt out in the original report if it was of such numerical significance).

In the meantime, the report, and its analysis, continues to gather international press coverage.

The Report Conclusions

Quite aside from the “results” of the analysis, the conclusions drawn in the press release have little causal nexus with the study itself.  A study purporting to be of the price of alcohol over time, and in particular as it compares with the average wage (presumably gleaned, unlike the price data, from Statistics New Zealand), concluded with a number of assertions including the need for an increase in tax on alcohol, restrictions on alcohol marketing and sponsorship, limiting off-licence premises and reducing the legal blood alcohol level for driving.

The news release on the report also referred to both the drink drive alcohol limit and binge drinking despite these being two quite different (and unrelated) forms of alcohol-based harm.

Professor Doug Sellman of the Alcohol Action Group (also an academic from the University of Otago) was quoted as saying the new study made the issue clear-cut – “No one can say you’re talking it up. Low prices equal harm.”  He may be an academic, but it would appear he is not a logician. The fact is that this analytical conclusion simply cannot be conclusively drawn from the study, regardless of the efficacy (or lack thereof) of the data.

Quite what several of the report recommendations had to do with the specific analysis is obscure.  In the absence of spelling out the causal relationships, it is difficult not to conclude that the research project suffered from analytical bias and predetermination of results.

For example, there is a strong appearance that the study avoided the lowest possible prices for bottled water but sought out the lowest possible prices for alcohol.  If so, this would amount to intellectual dishonesty.

Quite aside from the numbers (where different types of alcohol are priced), in the balance of the report alcohol is treated as a universal concept with no differentiation as regards the widely varied behaviour of different consumers of different alcoholic beverages in different settings.  The things that actually make up “drinking cultures”.

It is all the more a pity, because for some people this was really a missed opportunity to criticise the level of profiteering in bottled water prices (especially when compared with the low price of generally very reliable New Zealand tap water).

The two main flaws in the report are:

  1. Questionable methodology – not simply pricing water high and alcohol low, but the process of checking and verifying the alcohol prices.  Is wine really readily available (let alone sought out by binge drinkers) for $5.00 per bottle (65 cents per standard glass assuming 13% alcohol – probably high for most cask wine – and accordingly 7.7 standard glasses per 750ml bottle)?  Remember that at this level the ex-winery excise impost would be over $2.02 per bottle, including GST but before allowing for the fact that supermarket/retail margins are also marked up on the excise inclusive price they receive and if there is a distributor there would be an additional margin on excise as well.  The GST rate used here is 12.5%, presumably the level applied in the research despite the fact that this has increased to 15% since 1 October, and despite the fact that all wine will carry the additional GST on excise regardless of whether the price of the wine has been increased or not at retail level. 
  2. Lack of context. Given the sweeping pronouncements made regarding the price of different forms of alcohol, the fact of the economic environment was not mentioned in the University press release. The fact that the wine trade has been in the deepest recession in more than a generation is ignored, let alone the enormous implications this has for wine prices.  Not only is the industry globally dealing with issues of oversupply, but individual firms are responding with survival strategies that must affect pricing.  Ironically, the situation is exacerbated by the wine businesses that don’t survive, when the receivers and liquidators of such businesses drop stocks on the market at heavily discounted prices.  This is nothing to do with alcohol policy.  It is cold, hard reality. Having said that (and having seen examples of three such liquidation wine clearances in one supermarket today), I strongly question whether much if any of this wine has ended up being consumed as part of an alcoholic binge by a teenager or by someone older.  In the absence of any form of contrary proof, I must assert that the causal nexus of harm, surely fundamental to research of academic standards, is woefully missing.

While on this subject, the attack on supermarkets’ prices must also be scrutinised. Supermarkets have long been accused, sometimes with reason, of using alcohol as a loss leader to attract customers.  It is not so clear, however, how prevalent this practice is any longer.  Both the major supermarket chains in New Zealand now maintain that they refrain from using alcohol as a deliberate price loss leader.  Despite the occasionally very low (not $5.00 though) level of prices in supermarkets, this assertion is credible.  The vast majority of low priced wine (although not necessarily other forms of alcohol) in supermarkets is brought about by the factor discussed above – businesses competing by lowering prices, in order to move stock, in order to maintain cash flows, in order to survive.  Forcing minimum prices is simply going to cut off the short-term ability of some businesses to survive.  It is not going to solve any social problems.

In the meantime another argument is lost, and that is whether the sale of liquor (at the moment meaning beer and wine) through supermarkets is on balance a socially positive thing rather than a negative.  Quite aside from the views of many in the wider wine industry regarding supermarkets, the fact is that supermarket shoppers are more likely to be buying wine to go with food.  Surely that is something to be encouraged rather than discouraged? Surely that is a huge step toward a more responsible drinking culture, rather than the opposite.

Alcohol abuse, and its related problems, is not just a New Zealand issue but a global one.  Patterns of alcohol consumption are subject to changes in most countries over time.  It is tempting to state that such changes are almost tidal in nature, with consumption rising and falling gradually over time, subject in particular to the influence of generation change.

Forms of “anti-social” and potentially harmful drinking behaviour by young people, often referred to as “binge drinking”, have attracted significant media and public attention in several countries, including New Zealand.   As a consequence a number of countries have tightened laws in relation to a number of related areas, from advertising to licensing to excise and taxes.

Without going into specific details, there are some striking similarities in the global reaction to alcohol abuse, and in particular the calls for regulation and controls as a solution, with that of the temperance movement of the late 19th and early 20th centuries.  The most striking similarity of all may well be the degree of global co-ordination of the movement.

This is a factor that should not be under-estimated.  The liquor industries of that earlier time treated the temperance movement with ignorance and disdain, and came to pay an extremely high price for this arrogance in a number of countries.  Historically the different drinks sectors have often responded together to threats of regulation and blanket forms of special taxes and excises.  At some point, however, the wine industry in particular may need to be prepared to treat its liquor compatriots at a degree of arms length, and be willing to differentiate itself rather than be tarred by a collective brush of social harm.  The stakes are too high.  It took 70 years to remove many of the most socially and economically backward consequences of New Zealand’s near-flirtation with Prohibition in 1919.

The Law Commission Report

The New Zealand Law Commission, led by former Prime Minister Sir Geoffrey Palmer, was tasked in 2008 with conducting “a comprehensive review of the regulatory framework for the sale and supply of liquor”.

During 2009 the Commission produced a wide-ranging Issues Paper with the title “Alcohol in Our Lives” ahead of a submission gathering process and “information gathering” tour.  While NZ Winegrowers participated in this process, it seems that the industry rank and file and the wine drinking public were clearly less active responding than those critical of elements of drinking and alcohol abuse within New Zealand.  It seems that too many people thought this was a hot air exercise that would quietly go away.  While some probably still feel that way, it is a grave misjudgement.

The Commission, in its latest report entitled “Alcohol In Our Lives: Curbing the Harm”,  has identified the drinking culture of a large number of New Zealanders as a concern and a source of much of the identified harm related to alcohol abuse, and has gone on to make a slew of proposals (153 in all) for changes to the existing legislative and regulatory framework.  The problem, however, is the very weak nexus between culture as an identified problem and the efficacy of legislation/regulation to effect actual change in culture.  History has provided past examples, with 20th Century Prohibition a case in point, where legislating against perceived cultural harms drives seemingly unforeseen and clearly undesirable cultural changes.

Culture is built on attitudes, not just behaviour.  A great many factors go into any “drinking culture”, including history, traditions, climate, socio-economic  status and, of course, laws – although these tend more often to be reflections of societal attitudes than cultural drivers as such.

The Report has already garnered much comment, and this is not intended as the forum for a detailed analysis of its arguments and conclusions, but a number of serious concerns must be addressed nonetheless.

In particular there seems to be a degree of confusion about where harmful drinking is undertaken (such that at times the Report’s inference becomes that all drinking is harmful).  Despite attempts to place an onus on managers of licensed premises not to serve inebriated customers, it is clear that some excessive drinking does still take place in bars and other such locations.  On the other hand, the justifiable tougher enforcement of drink driving laws has acted as a balancing factor, affecting the amount of alcohol consumed in on licence premises and directing those with a will to drink to excess to drink elsewhere, not necessarily in safer locations.

There is also a lack of substantive evidence as to what drinks are at the core of abuse.  Is it beer, wine and spirits all together; primarily one or two of these; primarily RTDs; etc.?  It is not at all clear from the Law Commission Report, which is important given that there are already different rules as to what may be sold in different types of outlet (supermarkets are restricted, for example), and yet the proposals treat them all as equally culpable.  Indeed it is not really clear that this question was even asked at all.  For all the discussion of supermarket sales of alcohol, there is no substantive evidence that alcohol purchased in supermarkets is more or less responsible for problem drinking than that from other outlets.  Given that supermarkets do not sell spirits, for example, this is a very significant issue not to have been given serious consideration.  Moreover, a significant proportion of supermarket sales of alcoholic beverages are likely to be in conjunction with food sales, unlike most (but not all) other off licence premises.

Generic statistics, in particular, risk leading to either confusion or inadequately justified conclusions.

“Because the 1989 Act relaxed the criteria for granting licences there has been a proliferation of liquor outlets, with the number of licences more than doubling from 6,295 in 1990 to 14,424 in February 2010. Of this total, licences to sell liquor on premise more than trebled (2,423 to 7,656) while off-licences more than doubled (1,675 to 4,347).” (para 2.11, page 59)

There is a considerable risk in the use of these numbers of mistaking cultural change in respect of food and eating preferences for increased alcohol consumption (via the use of licensed premises as a proxy for consumption).  If in fact the number of restaurants and cafes has proliferated owing to a combination of factors (increased immigration, the impact of longer or more varied working hours on meal preparation, the loss of cooking skills in younger generations, etc.), then the commensurate increase in on premise licences is a reflection of these changes and may have little or nothing to do with consumption per se.

Indeed it is possible to argue that from a drinking culture perspective this is a positive development, rather than a negative one.  If the trebling of on premise licences supports a culture of drinking with food, rather than in the absence of food, this would seem to be quite the opposite of the “binge drinking” culture.  Indeed, it might alternatively be argued that if the proliferation of on premise licences has been contributed to by liberalisation of licensing laws, then those laws have indirectly contributed to a broader and deeper food culture in New Zealand.

It should go without saying, therefore, that material changes to the ability of food outlets to obtain on premise licences could be the cause of undesirable and unwanted consequences.

Lack of Discriminatory Analysis

One of the core problems with the report is the nature of the underlying analysis.  Typically the analysis is generic and non-discriminatory, with many “facts” taken at face value.  There is no satisfactory qualitative distinction made between beer, wine, spirits or other alcoholic beverages as to when and how these beverages are drunk, and as to whether or not there are differential degrees of abuse. The fact that there are different levels of elasticity of demand for different types of beverage is  discussed but without any credible attempt to explain the differences, or indeed to understand the consequences of these differences when related back to the core recommendations.

Conclusion: the underlying analysis is weak, but is used to justify broad brush proposals without considering the full range of potential outcomes.

The Report Language Raises Questions

The language of the report emphasises its self-importance.  Grand statements of sweeping banality make uncomfortable reading in what is supposed to be the serious recommendation of a Law Commission and not of ideologically-driven politicians.

“As a country at the start of the second decade of the 21st century, we face significant social and economic challenges. Meeting these challenges will require an educated, socially cohesive, productive and healthy population. Reducing the human and economic cost of harmful drinking will contribute to a better future for all New Zealanders and is within our reach.” (para 2.40, page 65)

One suspects this paragraph could have been written in almost any country at the cusp of almost any decade, and the words “harmful drinking” could be substituted with any social ill that could be named.

Nothing in the Report goes to the true core of how to change the culture of drinking: how to teach young (and old alike) to respect alcohol.  Alcohol is a substance that may be toxic if abused, and which does have the potential to cause a wide range of social and economic harms.  That cannot be ignored.  The wine industry (or most of it anyway) has long realised that the adage “drink less, drink better” is the key to far greater profits than the consumption of vast volumes of cheap wine. However “drink less, drink better” is only possible where quality is a goal and standards of education and drinker sophistication are rising. The Report discusses the wine industry as if it is an industry built on big profits (yes, most wine producers will laugh at the notion), strong arm lobbying, “vested interests” and has no real concern for its customers’ wellbeing if that would involve reduced sales.  This is clearly a view that has taken hold in a not insignificant portion of the community, and has not been successfully disabused or corrected.  The industry, collectively, must take some responsibility for this.

Most important of all, the New Zealand Wine Industry must not shut its eyes to what is going on within society at home and around the world of its customers.

Two years ago the New Zealand wine industry was drunk on its own success, so the NZ Herald’s “The Hangover” caption  (Weekend Herald 3 April 2010, http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10636005  and associated articles) is quite apt.  Nevertheless, hangovers, however uncomfortable, are merely a part of a recovery process.  The industry has been going through such a hangover ever since 2008.  Coming at the same time as the wider NZ economy is cautiously creeping out of its bunker, there should be more cause for optimism than for dread.

It is clear, however, that there are still severe structural flaws in the industry that have been highlighted by the market behaviour of many companies over the last year.  These structural flaws, and some of the market failures in the wider economy (especially with respect to financing capabilities), will affect where the industry heads over the next period.

Right now the companies in trouble are those that have been struggling to keep their heads above the water for the last two years – not those that are suddenly in trouble.  Who survives and who doesn’t will be down to the same combination of factors, such as management and marketing on the one hand, and uncontrollable events such as the dollar and the economic strength of export markets on the other.

As a consequence I believe there were a number of statements made or ideas floated in the articles that warrant questioning.

What is actually happening?

Yes, at the big picture level, there is a fundamental issue of supply exceeding demand.  As usual this hides a lot of detail at the “ground level”.  There are, of course, many companies in dire straights and others going great guns.  Some do not have enough wine to sell to meet the opportunities in front of them.  Should they really be cutting production because someone else has too much wine?

Anyone who has wandered down a supermarket wine aisle over the last year will know that there is a lot of discounting happening.  It begs the questions, though, as to who is discounting and why?  It does not take more than a cursory glance to figure that the companies leading the domestic discounting are several of the very largest companies in the industry.  This should hardly be surprising because many have been publicly at the forefront of cutting grape purchase contracts and stating the need to cut high inventory levels clogging their warehouses.

Logically these companies will have experienced much higher overall market shares as a consequence of discounting.  However, also logically (since discounting is not exactly a good thing for consumer loyalty), the retail market share of these companies will probably drop sharply in the foreseeable future.  Once stock levels are down there will be no reason to discount in the same way any longer.

However, what the big company discounting has done is squeeze the sales of everyone else in the market, and this is what has flowed through to affect other companies.

At the other end of the food chain many growers are seeking to sell up and leave the industry.  The number of wineries selling up, as opposed to vineyards, still seems surprisingly small, although more will likely follow.  However, the question of who will buy the assets now on the market warrants serious consideration. 

Is there really a group of big overseas-owned corporates hovering and waiting for the chance to buy up the industry for a song?  This doesn’t exactly seem plausible.  The existing big companies are the ones that have been selling discounted wine furiously to try and get their balance sheets back in order.  The overseas parents have been selling assets for the last couple of years, not buying.  The idea of these companies suddenly going on a New Zealand spending spree does not seem likely.  There will be overseas investors moving in, such as the Foley group that recently acquired local assets, but these are the exceptions rather than the rule.  Groups like that may cherry pick some assets in future, but this is not a trend in the making.

The most logical buyers of most assets will either be existing financially strong grape growers looking to expand and gain efficiencies, or second tier wine companies with growing market strength that need to support their growth.  Of course the fundamental problem faced by New Zealand-owned companies as buyers is whether they have adequate access to capital.  Falling vineyard prices will not help the already difficult ability to access bank funding.

Export Success

Philip Gregan’s very pertinent observation that selling 30% more sauvignon blanc in the last year “is good news” seems to have been lost in the current of the story.  The truth is that 30% increase in volumes sold is a phenomenal outcome.  Indeed, the situation would be truly dire if we had merely held on to market share.

One issue affecting producers today is how to price into the UK market given the rise of our dollar against the pound.  However, it is interesting to note that most other countries are asking the same question – it is the weakness of the pound that has created this situation rather than the strength of the NZ dollar.

It is also no secret that a certain volume of New Zealand wine has been leaving our shores in bulk shipping containers.  It is therefore also no secret – in fact it has been recorded in the published statistics – that the average export price for New Zealand wine has fallen – as it must do since the lower productions costs in the absence of packaging and labelling mean that any seller would be expecting a lower price, regardless of whether the wine is qualitatively inferior or not.

Of course given the lower cost of production of bulk wine shipped in plastic bladders, let alone the fact that such wine is not carrying branding or other value added components, it is logical to expect a decline in value per litre of exports – but then again this is hardly comparing apples with apples against past prices for exports of bottled wine.

However, on looking more closely at the data, the fact that the decline has not been greater actually suggests that overall pricing has held up far better than expected.

  1. Over a long period the average price has been maintained as high as it has given the overall level of growth; and
  2. Even in the short-term analysis, the rate of decline of the average export price/litre has been far less than might have been expected given the anecdotal evidence of the volume of wine exported in plastic bladders.

Now 2010 is supposed to be the vintage when voluntary yield cuts pulled production levels down, closer to balance with demand.  So what has happened to render fruit discounting still necessary?

The data tells some of the story:

Year to 30 June 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total Production (mil litres) 60.2 53.3 89.0 55.0 119.2 102.0 133.2 147.6 205.2 205.2
Domestic Sales of NZ Wine (mil litres) 41.3 36.2 32.6 35.3 35.5 45.0 50.0 51.0 46.5 59.7
Export Volume (mil litres) 19.2 19.2 23.0 27.1 31.1 51.4 57.8 76.0 88.6 112.6
Total Sales Volume (mil litres) 60.5 55.4 55.6 62.4 66.6 96.4 107.8 127.0 135.1 172.3
Domestic % 68.3% 65.3% 58.6% 56.6% 53.3% 46.7% 46.4% 40.2% 34.4% 34.6%
Export % 31.7% 34.7% 41.4% 43.4% 46.7% 53.3% 53.6% 59.8% 65.6% 65.4%
Sales/Production ratio 1.005 1.039 0.625 1.135 0.559 0.945 0.809 0.860 0.658 0.840
Sales/Production prior vintage   0.920 1.043 0.701 1.211 0.809 1.057 0.953 0.915 0.840
Aggregate incremental stocks over 1999 levels (mil litres)* -0.3 -2.4 31 23.6 76.2 81.8 107.2 127.8 197.9 230.8
Incremental stocks/Export volume 0.0 -0.1 1.3 0.9 2.5 1.6 1.9 1.7 2.2 2.0

*does not take account of volumes lost/ullage/dumped/samples etc)

This table shows the history of production and sales for the last 10 years according to statistics published by NZ Winegrowers.  It is interesting that the ratio of sales to production has been far worse earlier in the decade than in the last 2-3 years, although obviously that was not in a global market quite like that of the present. (I have presented the ratio both in terms of same year sales and also year ahead sales – when, of course, much of a given year’s wine will actually be sold, and especially so for sauvignon blanc).

Interestingly, while there were prominent sceptics several years ago regarding how difficult it would be to sell the excess stock levels early in the decade (2003/2004), those levels pale in comparison to current levels -especially when the proportion of bulk sales is built into the equation.

Year to 30 June 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Export Value (millions of NZ$ FOB) 168.6 198.1 246.4 281.9 302.6 434.9 512.4 698.3 797.8 991.7
Export Value/litre NZ$ 8.78 10.32 10.71 10.40 9.73 8.46 8.87 9.19 9.00 8.81
in US dollars 4.42 4.38 4.62 5.43 6.11 5.89 5.93 6.31 6.92 5.34
in UK pounds 2.78 3.02 3.20 3.42 3.51 3.17 3.34 3.26 3.45 3.31
Increase/decrease % NZ dollars   17.5% 3.8% -2.9% -6.5% -13.0% 4.8% 3.6% -2.0% -2.2%
in US dollars   -0.9% 5.4% 17.5% 12.7% -3.7% 0.7% 6.4% 9.7% -22.8%
in UK pounds   8.8% 6.0% 6.8% 2.8% -9.8% 5.3% -2.3% 6.0% -4.1%

 

Despite the not insignificant volumes of bulk wine sales before June 2009, it must be acknowledged that the proportionate rate has increased and so average pricing fallen in the period since.

A quick glance at the December export data confirms that the rate of annual volume growth is approaching 30% over June 2009 levels, although total export values are only up 10% in NZ$ terms.

However, taking a step back and assuming for the sake of analysis that the anecdotally reported amount of bulk wine is 25% of total sales volumes, then if it is assumed that bulk wine sells for the equivalent of US$2/litre (as reported for some volume sales in Asia) it implies that the per litre value of bottled wine has actually risen over 10% in NZ$ terms, but fallen slightly (9%) in US$.  Switching this analysis the other way around, if NZ bottled wine leaves the shores at the same price as it did 12 months before it means that 25% bulk wine is averaging prices closer to US$3.70/litre or NZ$6.15.

Is this too good to be true? Or are the assumptions wrong?

I suspect that the answer is a combination of three factors: (1) the prices of NZ bottled wine have held up relatively well, assisted by an improved quality mix (including more pinot noir and higher value red wine, for example); (2) some of the bulk container product has actually been higher quality product being shipped for bottling and labelling elsewhere to reduce carbon footprint; so that (3) the actual “bulk” wine exports are smaller than reported.

This is not as bad an outcome as might be otherwise interpreted simply on the face of the data, and I am not ignoring the fact that the backward looking stats will get worse before they get better – such is the “lag” built into rolling period numbers.

In fact, if current sales volumes are maintained, New Zealand will sell more wine (approx 206 mil litres) than it produces in the year to June 2010 (estimating total production between 180 to 200 mil litres), the first time since 2003; the level of stocks as a ratio to export volumes will also drop to its lowest level since 2003. 

This raises the question whether bulk sales should actually be a more permanent feature of the marketplace.  All of the other major wine producing nations export bulk wine.  There has long been an active market for surplus wine between wineries within New Zealand.

Of course it will be argued, with some justification, that New Zealand is a small wine producer and cannot achieve the economies of scale that many other countries possess.  While this is true of most NZ wine production, there are grounds to argue otherwise with regards to sauvignon blanc.  Our production is larger than so called efficient competitors such as Chile and South Africa (and our yields have often been higher), our vineyard management costs much closer (partly owing to much higher mechanisation, offsetting cheaper labour) to the supposedly cheap competitors, and our processing costs not so much greater as to completely overwhelm the other factors.

The real question is whether we want to compete, even if it means marketing our bulk wine as being a cut above other countries’ bulk wine.

Since getting true supply/demand balance “right” is next to impossible, maybe New Zealand should consider that there is a place for developing markets for bulk wine into areas where the product is not carrying the NZ Brand message (with risk of consequent damage).  This at least may help keep our industry-wide production scale more competitive and help to cushion the risk of margin squeeze on bottled wine exports in future.

The Varietal Exposure

New Zealand does far less than Australia to explore alternative varieties and to try and find out if there are new varieties that we could find a starring role for.  We seem happy to define our strengths as being those things we have done before, not what could be done in future.

Is sauvignon blanc just a fashion story that could fall over tomorrow and leave us even more exposed?  The answer is probably a bit yes and a bit no.  Whenever sales of a particular style of wine take off dramatically over a short period of time, it would be foolish not to assume that fashion is a big factor.  There are, however, other trends going on.

One of the issues New Zealand faces is the fact that the vast majority of our total wine sales are to English-speaking countries and cultures.  There is a sameness about consumers in these markets that stands at odds with consumers in different parts of Europe, for example.

One of these factors is that white wine makes up very roughly a little over half of all wine sold in these countries and that three grape varieties completely dominate consumption of varietal labelled white wine: chardonnay, sauvignon blanc and pinot gris.  Riesling and other varieties are typically a long way back.  There is an increasing trend for broader market consumer fans of one of the three to express dislike of the other two, resulting in a sort of three way polarisation of taste.  In the English-speaking world a large number of consumers identify themselves as chardonnay or sauvignon blanc or pinot gris/grigio drinkers and the degree of interchangeability is falling.

This probably means that if New Zealand can produce and market all three varieties in the face of competition from other producers, there should be a reasonable expectation of holding our own in all volume terms. 

This does not mean that we should not continue to explore alternatives.  The current big three whites haven’t always been so, and will not always be either.

Regulation

“Be careful what you wish for, as you may well receive it” (Anon., proverb)

The last time any industry should consider regulation is as a corrective measure after that industry has experienced problems.  It is like another well known proverb, that regarding the subject of “closing the stable door”.  Were regulation desirable, it might have had an effect if it were enacted three years ago, but not now.

The very fact that producers in overseas countries with strong wine industry regulation make no secret of the fact that they envy our lack of similar regulation, and the freedoms and flexibility that go with not being regulated, ought to be the single most conclusive reason for not doing the same thing.

However, experience with regulatory impacts on industries in general, and on the wine industry internationally in particular, suggests other reasons for extreme caution.  Regulation acts as a form of safety blanket, but has a number of important consequences.  Regulation most often serves to protect the interests of the biggest existing players.  It makes it harder for others to join them.  In general it results in a reduction of competitive pressures and so would rarely be regarded as a good thing for consumers.  It tends instead to make life easier for regulated producers, reducing their risks and tending to result in lazy and inefficient businesses.

These are, of course, generalisations and would never apply to all producers.  However, they can be defended based on the experience of comparable wine producers such as those of Europe.   

There are also some significant practical issues raised by the suggestion of regulation.  What would actually be regulated, and how, are both serious concerns.  Yield limits in other countries are often a joke, or else produce the wrong outcomes – a quality producer with well balanced vines could be forced to drop large volumes of grapes one year, while the sloppy next door neighbour comes in just under the limit and sell its entire production of under-ripe, rot infected, lower quality wine.  Even within Marlborough, different vineyards or sub-districts have historically been cropped at different yields for different price points.  Access to water makes a substantial difference alone.

Then again, should the same yield limits be promulgated for different varieties?  Some varieties will never produce a quality wine at crop levels even close to the cut down yields of sauvignon blanc this year.  Then again, different varieties will crop at different levels given the different soil types and climates of different regions.  It’s not just that one size won’t fit all nationally, but one size won’t fit all even for a single variety in a single region.  In Europe the individual regions tend to make the key decisions for their own members – so the idea that a Hawke’s Bay or Central Otago representative body would make decisions governing all production within their respective regions should give hints as to the nature of the disputes (or open civil war) that could result from competition between different interest groups.

The more serious issue is the loss of future flexibility, such that if New Zealand is exposed to the risk sauvignon blanc is a global fashion that might wear off, the Muller Thurgau of the 21st century, regulation will result in our being less able to change.  Regulation severely handicaps adaptability – it is anathema to industry evolution.  It is ironic that in parts of France, and especially in Italy, it is the regulations that have needed to be changed to adapt to the fact that quality producers have repeatedly considered themselves forced to opt out of the protections that go with regulatory compliance.

Of course, the very fact that total production is down this year, despite as much as 2000 additional hectares coming into production, suggests that despite the disaster that was 2008, when greed was the defining factor in over-production of often poor quality sauvignon blanc wine (triggering a domino effect onto other sections of the industry), self-regulation has not exactly been a failure since.

The comments attributed to Oz Clarke regarding New Zealand’s increasing maturity (industry, if not vinewise) and that it is “entering into the next stage of its development in contemplating and legally recognising its terroirs” are very valid observations, but I do not think that the notion that the country is therefore shaping up to go down the full-on appellation route with associated detailed legal prescription and enforcement is quite what Mr Clarke meant. (See http://www.decanter.com/news/news.php?id=294045 ).

In common with other countries, and in response to the treaty-driven need for reciprocal geographical indication enforcement regimes, New Zealand is in the progressive process of creating its own structure of geographic names that may be represented on wine labels.  Individual wine regions are going through the process of determining names and boundaries to apply to their areas.  The existing list of approved names reflects the fact that some regions (such as Auckland, Waikato/Bay of Plenty and Canterbury) have made some at least initial decisions regarding their own sub-regions.  Other regions are still in the pipeline, so to speak.

However, I am less sure that this was what Oz Clarke was really referring to.  Certainly in many of the larger or more developed wine regions, especially Marlborough, Hawke’s Bay and Central Otago, there is a sense of increasing consensus regarding several vineyard sites or formations that are regarded as being a little more special than others.  Certain vineyards “of distinction” are clearly evident, even though the New Zealand experience tends to be that superior sites are more often owned by winemakers rather than purely growers, so that the Burgundian and sometimes US experience of many wines being made from the one vineyard location are relatively rare. (The recent multi-releases of identified wines from the highly regarded Calvert Vineyard in Central Otago stands as one of a handful of notable exceptions; a number of top Gisborne growers also supply several wine companies with grapes of acknowledged quality, for example).

There is clearly interest in the regions mentioned and in other areas for ways to reflect the status of unique or superior grape growing sites.  Whether this means going down the Gimblett Gravels route and creating a membership delimited organisation to provide de facto controls over production and labelling is not clear.  The likelihood of adopting a sub-appellation form of delimitation based on a perceived or actual qualitative basis is less likely in egalitarian New Zealand, and probably best avoided.

“Beyond GI” Part 3

Transition of the New World

One of the delaying impediments to adoption of similar regimes in the New World has been the greater focus on varietal and branded wine labelling, with origin long deemed secondary by many producers and, indeed, also by most consumers. By contrast, in much of the “Old World” of Europe the actual grape varieties, although restricted in regulatory terms, have long been considered secondary to the notion of terroir.  It perhaps says much that prior to the institution of the appellation d’origine system that there was almost certainly greater varietal change and adaptation in parts of France.  The current varietal mix in Bordeaux, for example, is quite different to that of the mid-19th century prior to the arrival of phylloxera and the mildew infections later that century.

It is open to surmise that climate change may not only allow quality wine grapes to be produced in areas where no grapes have been grown before, or for a considerable period, but that it may also cause existing grape varieties, presently required under restrictive appellation laws in France, for example, to become unsuited to fine wine production.  It may become optimal from a quality perspective to adopt alternative varieties when changes to viticultural practices (which themselves may require legal flexibility) are inadequate to cope.

Practical Lessons From Afar to Apply to New Zealand

Avoid too many GI designations (especially if they are not distinctive)!

In some regions this is a relatively simple situation – as those regions are either relatively small or clearly demarcated from a practical geographic perspective, there are not too many identifiable and distinctive growing districts within them.  Such examples would appear to include the largest in New Zealand: Marlborough, Hawke’s Bay and Gisborne.

Other parts of New Zealand may be smaller in the context of total production, but that production is also more dispersed.  These may indeed be the areas at risk of over division into sub-regional designations.

One of the most obvious examples is Auckland.  Where once Auckland dominated the industry, it now comprises just 2% of national production and that is also highly dispersed among a large group of generally very distinctive sub-regions (including, at the risk of omission: Kumeu/Huapai, Matakana, Clevedon, Waiheke and several others). 

At the present time few, if any, Auckland producers use Auckland as a source description on their labels.

The Waikato/Bay of Plenty region is even more difficult, in part because from a legal territorial as well as historical perspective it is not a single region at all, while the effective boundaries are different for different purposes.  The difficulties of this region are exacerbated by the fact that production is both small and very widely dispersed.  It may be logical to divide the region, given that the Waikato and Bay of Plenty regions have little in common other than being neighbours.  To date no one has, and it is extremely unlikely anyone would ever use “Waikato Bay of Plenty” as a label designation. 

Issues abound elsewhere.  While Gisborne, Hawke’s Bay, Marlborough and Nelson, for example, are relatively easily defined, subregions within these districts are either well defined already or are becoming so.  By contrast the region known as Waipara, while from a local Government perspective falling within Canterbury has for some time sought to have itself defined very separately. Must it go backwards to go forwards?  And, if so, how does it build its own hierarchy of sub-areas, should it wish to do so?  What also of the very new producing areas, such as the Waitaki Valley, or even the likes of the Cheviot Hills, each falling within wider territorial regions as do larger and better known wine regions, but nevertheless quite unique should they continue to grow and develop.

The corollary risk, however, is that of “over designation” that could result if too many single producer districts emerged instead, in turn leaving huge potential gaps on the map that might create problems for the next generation of pioneers.

The message then is clearly to avoid defining sub-regions too narrowly.  This has the potential to stifle future development or innovation.

Just as important, it is essential to avoid where at all possible the overlay of other restrictions or regulations.  This is a difficulty when there may be an urge to treat a hierarchy of designations as requiring qualitative delineation.  Even minimal regulations inevitably grow over time.

It is essential that designations must be able to be mapped definitively.  This was a difficult issue in Coonawarra, and consequently may be a difficulty to flag in future for areas such as the Gimblett Gravels and Martinborough Terrace should soil be used as a basis for delineation.  Moreover, Gimblett Gravels raises the question of whether access to a designation should be dependent on “membership” of any association or other legal body?

The risk of using designations that cover too small a pool of complying producers or properties cannot be ignored as it has frequently created problems in Europe.  The only exception may be those cases of very special circumstances should there be a minimum number of qualifying (and agreeing) producers.

Conclusion

While trade pressures, rather than qualitative or market protection imperatives, have dominated the geographic indications agenda through most of the New World wine producers, that does not mean that value cannot be gained from the exercise. However, the experience of European and New World experience of geographic indications must be reflected on as part of the process for adopting a new system.  That experience includes controversy and provides salutary reminders that while there may be market benefits there are also associated risks, especially on market structures.  These risks must be reflected in the practical details of how implementation is executed in New Zealand. 

What must further be reflected on is the extent that geographic indications systems turn regional industry bodies into de facto regulators and, ultimately, may elevate the regional marketing imperative over that of national brand marketing.  There are already the signs of this process developing.

“Beyond GI” Part 2

The International Precedents in Context

The reason it is appropriate to consider the issues arising from the implementation and development of geographic indication systems and associated regulations in place in other countries is because of the insights it may offer as to how and why things might develop in New Zealand, and also in Australia, in the future.  It is to be hoped that understanding such issues and why they have arisen will assist with the future management of designations and labelling regulations, and consequently help to ameliorate future pressures in this country.

In its European “Old World” forms, Geographical Indications have come to place considerable (but not universal) emphasis on the initial “C” such as in the AOC and DOC/DOCG regimes of France and Italy.  Going beyond simply specifying production boundaries, regulations associated with the regimes include controls over allowed varieties (and blend proportions), yields, irrigation, alcohol levels, viticultural practices and also winemaking practices (ranging from minimum aging periods to the applications or otherwise of sugar, acid and other additives).  To be able to use the local geographic labelling, the other technical requirements must also be strictly followed.  In many areas a wine must also be submitted for tasting prior to label approval.  Failure to comply with requirements may result in either declassification to a lesser regional designation, or, worse, declassification to a label category for which any form of regional association or claims will be illegal.  The potential consequences of non-compliance may be severe, including financial penalties and even imprisonment for label fraud, not to mention the consequences of negative publicity.

This system has not been without its tensions.  Such tensions typically arise when either regional complacency creeps in, aided and abetted by the evolution of ever more stringent layers of rules, such that quality-oriented producers may even consider themselves to be forced to step out of the system.  Tensions may also arise when the system fails to allow for pioneers of new varieties or types of wine or pioneers in new areas; or in circumstances such as may result from climatic change, major disease events, technological changes, economic adjustments or other dramatic changes.

From an historical perspective it is important to recognise that the AOC and DOC regimes in France and Italy did not arrive at their current, relatively extensive forms from the outset.  Both have evolved in terms of geographic coverage.  The French AOC system has been built on a progressive process of addition of new appellations ever since the first, Châteauneuf-du-Pape, was promulgated in 1923.  Since that time the number of controlled appellations has grown to 253, and the number of vin de pays designations to 153.

In some regions the historic patterns of grape growing changed with the sequential scourges of mildew, oidium and phylloxera.  One of the features of the recent moves to expand the list of communes entitled to grow grapes for the production of AOC Champagne has been the number of candidates pointing to the fact that grapes were grown in those areas until relatively modern times, but were simply not replanted between the outbreak of phylloxera and the adoption of the existing appellation boundaries.

Today other factors need to be taken into account, such as climate change and the expectation that growing may recommence in areas that have not grown grapes for wine for several centuries but may now again be suitable, with this suitability needing to be recognised in a legal form. 

In Italy there have been many notable instances of renegades rebelling against the structures of the system.  The so-called Super Tuscans arose at one time from the way that the rules governing production of Chianti had the (no doubt unintended) effect of imposing mediocrity, or worse.  There was no way within the system to experiment with new grape varieties – for better or for worse.  Ironically the first wave of super Tuscans was superseded by another that rebelled against blending rules that prevented the creation of Chianti wines using 100% of the most notable local grape variety: Sangiovese.  For many years these producers were forced to label their wines – often the highest priced wines they bottled – with the lowest label designation allowed: vino da tavola.  It took almost two decades before the authorities responded with a broad regional designation that also allowed a degree of freedom – Indicazione Geographica (with the name of the wider region appended) – equivalent to the French vins de pays designation; and also, separately, with more flexibility as to the constituents of wine labelled Chianti Classico.

However, this is far from the end of the changes within Italy as many quality producers continue to feel constrained by the rules.  High profile cases in recent years have included Angelo Gaja’s decision to opt out of the Barbaresco and Barolo DOCG designations for his top cru wines and at a different level the decision of Antinori to opt out of the Chianti Classico DOCG for its high volume Villa Antinori label.

In some regions there are qualitative benchmarks for a producer to gain permission to use the geographic designation.  Such qualitative overlays may be policed by tasting panels.  While such panels are usually comprised of professional tasters, they are typically dominated by locals and this has often given rise to disputes when a grower’s wine is ruled unsatisfactory.  Accusations of political bias or of the abuse of panels for competitive reasons are not uncommon.  Even more common is the dispute over the acceptability (or otherwise) of divergent wine styles, especially if tasting panels are dominated by proponents of one style over others.

France – Appellation D’Origine Controlee

The driving intent behind the first and defining geographical delimitation regulatory regime, appellation d’origine in France in 1919 was to fight against rampant label fraud whereby poor quality wines were being labelled as coming from highly reputed regions.

Even in France the process of overlapping geographical delimitation with qualitative delimitation (e.g. the system of Grand crus or similar) has been fraught with endless debates and legal challenges.  The methods employed are invariably policed locally.

Another criticism that has become more trenchant of recent times is that in many regions the system has become overly complex, with too many sub-regional designations and sub-sub-regional designations, as well as criticism regarding the inflexibility of the production requirements associated with the qualitative pyramid overlaid on top.  Limitations with regard to aspects such as sugar (potential alcohol) levels, chaptalisation (in some regions), acid adjustment, oak barrel and bottle aging requirements.

European Reform

Since 2002 the European Community has been undergoing a wide-ranging process intended to unify the varying national regulatory systems into a new community-wide system.  Inevitably this process has invited controversy, both from conservatives unwilling to allow changes from the regimes in each country, and especially those in the countries that have previously adopted systems more at variance to the “simple” region of origin-type regulatory approach; and also from those who consider that, rather than resolving some of the marketing issues sometimes considered to be in large part responsible for the loss of market competitiveness of European wines, the result may be more likely to be a “dumbing down” of quality standards that will lead to even greater competitive risk.

Since the passing of the European Union wine law of 1999, the pre-existing national systems for recognition of geographic origins had been adopted and mutually recognised by the wider EU. By 2008, driven not only by the background of an increasing lattice of mutual recognition treaties with other wine producing countries but also by the growing “wine lake” and by evidence that the EU regulatory system was acting as a constraint for finding market-based solutions for wine market problems such as falling exports, falling prices and increased rural unemployment, the EU’s Agriculture Commissioner was ready to announce a new legal framework to replace the 1999 law.

The initial result in terms of framework was Council Regulation 479/2008.  This law set out a range of overriding principles covering areas such as support measures, regulatory powers, third country trade provisions including licensing, plus wider provisions governing matters such as legislated control on plantings. 

With this framework in place the focus has shifted to the detail, in the form of a series of regulations of which some have been highly prescriptive in nature (such as the controversial proposal to ban the production of rose wines using blends of both red and white grapes).

 In July 2009 a new law was enacted that will lead to the re-writing of some portions of the existing geographic designation regimes through bringing the different national systems under the auspices of a more unified EU-wide regime.  One of the fundamental underlying criticisms of the existing system that has led to this new initiative has been the perceived excess of detail and of definition to excess, and that this was inducing market stasis.  The new law reflects a desire for greater simplicity and flexibility – in other words a step back from the former level of prescriptive detail.  A very small step, of course, given that the final details reflect the intense heat of lobbying that could only be expected in the face of an initiative that threatened to undermine an industry of bureaucracy.

 As a consequence, the final outcome remains fluid.