German Wine Market Opportunities
28 May 2013 | Philip Ammerman
The German wine market offers an attractive outlet for international wine producers taking into account market size and relative economic stability, the opportunity between German tourism trends and follow-up wine sales, and the long-term business approach taken by German wine importers. These factors all offer a strong foundation for international wine producers.
Navigator recently finished a sectoral survey for the Cyprus Chamber of Commerce and Industry, designed to support Cypriot wine exports to Germany. The conclusions of the study are presented here in Summary. For further information, please contact Philip Ammerman on firstname.lastname@example.org.
Wine producers and exporters trying to export wine to German market face a number of challenges. These include:
Practical logistical difficulties due to high transport prices and the need to either share a container, or fill an entire container. Together with the small size of production runs as well as the high costs of imported inputs (bottles, barrels, etc), this creates higher costs per unit and difficulty in supplying large wholesalers or supermarkets. This puts Cypriot producers at a competitive disadvantage against larger scale French, Italian, Spanish or Greek producers, who have road access links, or larger volume Australian or Chilean producers.
The Cypriot brand is not well established in the German market. Unlike Greek, French or Italian producers, there is no equivalent brand multiplier (such as Greek or Italian restaurants). Moreover, incoming German tourists are a small part of Cyprus’ total tourism mix, and the brand impact of Cypriot wine is usually diluted by hotels and restaurants which use own label wine, usually of an inferior quality. Most Cypriot producers are too small to systematically develop their brands in Germany; the Cypriot authorities have not made a systematic or meaningful effort to do so either.
As with Greece, the general Cyprus “brand” or identity is being tarnished by accusations of money laundering and tax evasion, which are being actively distributed by a segment of Germany’s press and political system. It is imperative that Cypriot wineries—as well as the government—act systematically to counteract this image.
Although it is a large market, a large share of the German wine market is dominated by lower-cost products sold through discount supermarket chains which have excessive customer power over wine suppliers. Although Cypriot producers have the potential to enter such customer segments, their order profitability will be low or negative, and such orders would absorb a high share of the production run of any one brand. This price sensitivity of German wine consumers affects on trade and off trade sales: unless the product / supplier and national brand can be developed, it will be difficult if not impossible to grow out of the “value” price segment.
German consumers are incredibly price sensitive (although they are willing to pay for premium and luxury products). This tendency is exacerbated by the control of large retail networks and discounters on household wine consumption.
Germany Macroeconomic Profile
Germany is the largest EU Member State, with 82 million inhabitants and the largest EU economy, with a Gross Domestic Product (GDP) valued at EUR 2.6 bln in 2012 (GDP at market prices). It is the fourth largest economy worldwide, following the United States, China, and Japan $ 3.5 trillion.
Despite this apparent national prosperity, a large number of Germans are considered working poor thanks to the labour reforms passed by Chancellor Gerhard Schroeder (1998-2005), which are described in more detail below. This large segment of working poor, together with a wider tendency towards saving money, mean that the majority of German consumers are extremely price conscious in all categories of food and wine consumption.
This price sensitivity is reflected in GDP per capita figures. Although Germany has the largest GDP in Europe, its high population means that in terms of GDP per capita, it is not at the top of the list.
Table 1: GDP per Capita, Selected Countries
Moreover, the current political situation in Germany is more fragile than it appears, and this affects both political outlook as well as decision-making in critical policy areas, such as the Cyprus bail-in decision. A bit of recent background is worthwhile here.
Since 1990, Germany has lived through two momentous events:
The reunification of East and West Germany. Known as the Wiedervereinigung, this process saw a wrenching change on two levels. In West Germany, it led to the massive rationalisation of public sector organisations. A large-scale search for efficiency occurred, leading to the merger of state organisations, the closure of cherished institutions such as state operas, and other cutbacks. In the East, the process was even more drastic, as the entire state-run economic apparatus was dismantled. During this time, publications such as The Economist referred to Germany as the “sick man of Europe”, in reference to its high unemployment and low GDP growth. The costs of reunification are estimated to be as high as $ 2 trillion, and it is important to remember that this cost was born almost entirely by the former West Germany.
The end of the Deutsche Mark and the adaption of the Euro, in 2002. Outside observers tend to overlook the role Deutsche Mark stability has in the German consciousness. One of the primary lessons taught in the German school system is the hyperinflation in the Weimar Republic in the 1920s was a direct cause of Adolf Hitler’s accession to power. In 2002, when Germany voted to end the Deutsche Mark and adapt the Euro, the German voters believed that they were changing one stable currency for another. The reality is quite different, as high public and private expenditure in the Eurozone periphery was driven by low interest rates, and has resulted in no small part of over-indebted sovereigns and households. Many German voters resent both the fact that they are being asked to “bail-out” profligate countries, but are also exposed to so-called Target-2 payment obligations in the European Central Bank clearing system. This is a complex issue, but the fact that Germany is already a high-tax country, with a high poverty level and job insecurity (see below), means that popular anger against European bail-outs is rising.
Between the “finalisation” of reunification and the adoption of the Euro, a set of labour market reforms were launched by the government of Chancellor Gerhard Schroeder in the late 1990s. Known as the Harz reforms and finalised in 2003, these had the objective of making the labour market more flexible in an attempt to reduce chronically high unemployment and low average growth.
Some of the main elements of the Harz reforms include:
The reduction of unemployment and welfare assistance to approximately EUR 382/month for a single person, with additional stipends for housing and childcare;
The restriction of unemployment insurance to no more than 12 months;
The introduction of temporary contracts, known as “mini-jobs”
The reform of vocational education and training.
The Harz reforms have had a mixed impact on Germany. On the one hand, these have reduced the cost of labour for German firms, which have taken advantage of the new laws by introducing temporary work contracts. This enables German manufacturers, for instance, to scale up and scale down employment based on orders, and to avoid high fixed costs.
On the other hand, this has had several gravely negative effects on employment and consumer income:
There is no minimum wage in Germany. The growth of temporary jobs means that millions of workers are employed in insecure contacts, often earning less than EUR 1 per hour
The fact that people are either “employed” in vocational training, or in “minijobs”, means that they do not count on unemployment roles. Yet given low pay and low opportunities for advancement, the economic impact of this “working poor” employment is no less critical for the economy.
Low-wage jobs now account for 20% of total jobs in Germany, compared to 8% in Italy. The “minijobs” enable the job holder to claim up to EUR 400 per month in tax-free income, to which they can add social assistance.
Of Germany’s 82 million population, 15.8% were at risk of poverty in 2012, according to Eurostat. In France, the comparable figure is 14%, while in the EU-27 it was 16.9%.
German consumers are increasingly worried about job security. They exhibit high price sensitivity and avoid making expensive purchases, particularly for discretionary items such as food. There is a high rate of closures of restaurants, small retailers and other businesses relying on consumer spending. In their place, large discount supermarket chains such as Aldi and Lidl dominate food purchases.
This is confirmed by Eurostat research on final consumption expenditures on food and housing. Table 2 shows a comparison of final consumption expenditure on food and non-alcoholic beverages across the EU. Predictably, German consumers have far lower expenditure on these two categories than Greeks or Cypriots.
Table 2: Eurostat Cross-Country Comparison of Final Consumption Expenditure
The German Wine Market
Although not a traditionally wine-drinking nation in the manner of France or Italy, over the last 20 years wine has become firmly established as an integral part of personal and business consumption. In particular, German consumers have been important early adapters of New World wines, while premium French, Italian and Spanish wines have maintained and expanded their respective market shares.
Nowadays Germany acts as a wine producer, exporter and importer. In 2011, Germany produced approximately 9.131 million hl, representing 3.5% of global production, and placing it 8th place for wine production worldwide. Despite its local production, it remains an importer of wine. In 2010, domestic production accounted for 54% (in value) of national consumption, with 48% (in value) of consumption was accounted for by imports.
In 2011, Germany imported a total of EUR 2.24 billion of wines, amounting to 15.2 mln hl. Of this, red wine accounted for EUR 1.16 billion, or 8.5 mln hl, while white wine accounted for EUR 496 mln, or 4.85 mln hl. Sparkling wines were also an important import category. Import values and volumes have grown between 2009 and 2011.
The big three “old world” wine producers Italy, France and Spain accounted for the top three sources of wine supply to Germany in 2011. Italy was the largest supplier in volume at 6.3 mln hl, but the average price/bottle was relatively low, and total value was EUR 756 mln. France, as expected, had an average value/bottle twice the value of Italy.
Interestingly enough, Greek exports have fallen a bit, from EUR 23 mln in 2009 to EUR 20 mln in 2011, while average value/hl rose slightly.
Table 5.2: German Wine Imports by Source Country
In 2011, Germany exported 1.54 mln hl, worth EUR 349 mln. Quality and bottled wines dominated in exports. The value of white wines, however, was EUR 308 mln, while the value of red wines was only EUR 41 mln. This shows the higher market value of German white wines, which are re-establishing their brand value after some years of being absent from the markets.
The main export destination for German wines is the USA, followed by the UK, Netherlands, Norway and Russia, in volume terms. The United States is particularly important, as the total value of German wine exports were EUR 103 million for 297,000 hl. The UK, by comparison, saw exports of 223,000 hl, but valued at EUR 38 mln. Industry analysts point out that the UK trade is dominated by large retail networks which put significant pricing pressure on suppliers.
The German national consumption of wine is estimated at 19.7 mln hl in 2011. This amounts to per capita consumption of 24.1 litres, of which 8.5 l is wine of German origin, 11.7 l is imports, and 3.9 l comprises sparkling wine.
The German consumer tends to be price sensitive. According to Weinwirtschaft magazine, the average price of wine in the retail sector (including discounters) for a 0.75 litre bottle wine was EUR 2.08 in 2009. German average bottle prices were EUR 2.11/bottle, while average imports were EUR 2.06/bottle. These prices are extremely low when compared to other European countries such as the UK (average price per bottle EUR 4.97) or Denmark (EUR 7 per bottle).
This price sensitivity is a major barrier to most producers / exporters. In order to succeed, most Cypriot producers will likely need to avoid mass market channels, and specialise in high street wine shops and other specialists.
The distribution structure of retail wine purchases in Germany is estimated as follows:
72% bought from mass market retailers
19% bought directly from vineyards
9% via specialist retailers and internet
The German wine market presents significant opportunities for European and New World wine producers. Its large size and its relative economic stability provides a strong foundation for growth. Yet the market is tremendously varied, and the high costs of market entry, together with low pricing and high competitions, means that a regional market strategy is required, possibly in conjunction with other European markets which may be easier to enter.
Navigator Consulting Group provides a full range of services to wineries and food producers in export development, online marketing, business planning and investment advisory. For additional information, please contact Philip Ammerman at email@example.com.
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