The Economic Transition hypothesis seeks to explain long-term trends in global wine consumption in terms of two interrelated forces: the changing economic function of wine and changing patterns of and expectations for economic growth.
Changing Economic Role of Wine
Wine is never just one thing, so it is not a surprise that its economic function may differ over time and space. If we zoom back 100 years and look at Old World countries, which are now and were then the largest wine consumers, the bulk of wine sold had a different purpose than most wines do today. Wine was a cheap source of calories for workers who could not afford a better diet.
Wine = cheap calories? There really isn’t a better explanation of the very high per capita levels of wine consumption reported by Kym Anderson and his colleagues in their Global Database of Wine Markets, 1885-2019 (Reference: Kym Anderson and Vicente Pinilla (with the assistance of A.J. Holmes), November 2017, revised and updated August 2021). France topped the table with average consumption of about 150 liters per capita, which is more than three times the per capita consumption today. Wine’s contribution to total caloric intake was very high and of course, the level of alcohol consumption associated with it was far from healthy.
While Old World per capita wine consumption has been falling for 100 years, the chart above shows that New World per capita consumption has risen. The U.S., while still modest by per capita standards, is now the world’s largest market for wine. What accounts for these differences?
In the Old World case, I would argue that as incomes grew, especially in the post-WWII era, workers and their families slowly and then suddenly became able to afford better diets, and the old role of wine as cheap calories became less and less important. Wine, for these consumers, was an “inferior good” where demand fell as income rose and better substitutes entered the choice space.
I am tempted to call this situation the “economic transition” in tribute to the economic theory of the “demographic transition.” The demographic transition theory posits that once income reaches a certain point, poor families switch survival strategies from having many children (to increase the odds that some will survive to support them in old age) to making greater investments in a smaller number of children. My Economic Transition idea is that when income reaches a certain point, cheap calorie wine is replaced by a better diet and a smaller quantity of better wine.
Wine as Aspirational Product
By the time we pick up New World wine consumers in the second graph above, the economic role of wine has changed again. It has become a discretionary purchase and, for many consumers, an aspirational item in so far as it represents an important component in an elevated lifestyle. Magazines such as Wine Spectator and Decanter appeared in the 1970s and soon began to grow in popularity by presenting wine at the center of a luxury lifestyle that includes food, travel, and celebrities.
The Global Financial Crisis may have magnified an already emerging split in the wine market by further increasing income inequality. The gap between those who merely aspire to a higher lifestyle and those who can actually afford to enjoy it increased. This trend helped fuel the premiumization of the wine market as luxury sales grew faster than aspirational demand, which of course still grew faster than the “normal good” demand for wine as a quotidian beverage.
The wine market could have chugged along quite well, I think, with premiumization driven by aspirational purchases and luxury consumption, but the global economy has shifted and its momentum is fading. Stagflation seems to have hit every part of the wine market quite hard. Low-income buyers are really feeling the inflation pinch. Those dollar stores that focus on sales to low- and moderate-income families find themselves under pressure to cut prices and cut costs. Shoplifting is up, we are told.
Aspirational products in general suffer when economic conditions and expectations force consumers to rein in their aspirations. That’s one problem that wine faces today.
Luxury buyers are still there, but here again, the momentum has shifted. Only the very top luxury brands are doing well as buyers — even relatively affluent ones — shift their purchases down a step (or two). Want proof? See what kinds of cars you find at your local Walmart superstore.
Aspirational buyers are the biggest problem. Their purchases are based on both their living standards now and the lifestyle they expect in the future. With the global economy stalling and pandemic-era aid balances evaporating here in the U.S., aspirational buyers confront a reality check. This factor, I suspect, is very important in the collapse of wine buying in China.
Implications?
So this theory argues that changes in the economic nature of wine consumption combined with changes in patterns of and expectations for economic growth can help explain many important trends in global wine consumption, including both recent premiumization patterns and the sudden decline in purchases by aspirational consumers.
This economic theory obviously isn’t the whole story when it comes to explaining the global wine glut, and it intersects with the generation gap theory in some respects since many younger people are the “aspirational consumers” who find that economic conditions have taken away some of their hoped-for prosperity. They’ve cut back aspirations for wine (and home ownership and paying off college debt and …) as inflation and slow growth put on the squeeze.
Is this the whole story? Of course not. But it is important to consider that the economic decision to purchase wine (or not) is affected by economic conditions. The best thing for wine, in this framework, would be a return to a more prosperous global economy and that is not something the wine industry can accomplish on its own. So the wine industry has an enormous stake in efforts to bring inflation under control and return key economies to a stable growth path.
In the meantime, I suspect we will see even more consolidation in the wine sector, with large players expanding and fine-tuning their portfolios to prepare for future growth while small producers (and most wineries in the U.S. are very small) seek out aspirational and luxury buyers in local markets.
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For a more thorough economic analysis of global wine trends I recommend a recent article by Rafael del Rey and Simone Loose. Here is the reference: del Rey, R., & Loose, S. (2023). State of the International Wine Market in 2022: New market trends for wines require new strategies. Wine Economics and Policy, 12(1), 3–18. https://doi.org/10.36253/wep-14758
Before you leave this page I’d like to draw your attention to one aspect of the two graphs above: global convergence. The top graph shows the trend of declining per capita consumption in traditional (a.k.a. “Old World”) wine countries (including Argentina and Chile) versus the rising per capita consumption in New World wine countries. Note that the two graphs have very different scales, however. Rising New World per capita consumption and falling Old World consumption seem to be converging (with Portugal and to a lesser extent France remaining outliers).