The difficulties to stay the leader on a market: The French Wine Industry and its fragile economic position

Résumé du document

• Recent events: Numerous violent strikes were organized by the wine growers to draw attention to their difficulties; for instance, they demanded more assistance following the bad weather conditions that ruined the annual harvest.
• A succession of demonstrations: It is a traditional economic crisis, reminiscent of the 1970s and 1980s; these protest movements show us the extent of the current wine crisis.
• The crisis' perception: Wine consumption, like a lot of agricultural produce, is "inelastic" (i.e., the quantity total consumed does not increase when the prices are lowered). Consequently, any surplus of production creates reduction in price - stocks rise and prices decrease. The "law of variable proportions", well-known by the agricultural economists, comes into play. This expression can be summarized by: "beyond a certain quantity produced, any offer's increase results in an income fall, which is higher than the rise of the sold quantities".
• Who are affected?: In this context, all the producers are not affected by the same problems. The wine growers who are not completely dependent on wine (those who work part-time, those who have already reached a certain financial maturity and finished paying their land capital and only need to finance the variable loads) can have a real aptitude for an "economic resistance". Moreover, contrary to the majority of Italian or Spanish producers, the French wine growers have always been specialized in their activities. During the bad years, they could not fall back upon compensation from other agricultural incomes. The combination of farming-breeding is not very prevalent in specialized wine areas. On the other hand, the wine growers solely dependent on wine operations, and who have incurred debts, are directly affected. The professionals, who are perfect models of the economic dynamism because they followed the recommendations of the agricultural advisers and the State, and started to invest in the marketing, are the most affected! The fall in income leads to the aggravation of their debt. Faced with the threat of liquidation, they are now demanding explanations from the government.

Extraits

[...] The self-financing capability renews only the gross fixed assets (being twice more than the net fixed assets registered in the balance sheet) every 30 years for the wine vrac” company and every 17 years for the company which sells in bottles. With result so low, the self-financing capability is only build with the depreciations. These depreciations has been very high in parallel with the invest effort for the quality which made by the vine growers for few years. In summarizing, the owners who would settle with these conditions it would be better that they invest in a saving bank than in a wine firm: - The saving bank is an investment without risk which will pay net, i.e. [...]

[...] The request with a slightly increasing tendency on mid-term of per year is 0,75Mhl. It amounted to 233,7Mhl in 2003. Thus, the difference would be close to the 60Mhl. The normal difference between the production and consumption is estimated on average period at approximately 35-40Mhl. The surplus of real offer would reach 20 to 25Mhl. It is the principal cause of the current crisis (figure 1). Figure Difference wine world production and consumption In the same way in Europe the harvest will be a record. [...]

[...] However, many wholesalers started a movement of concentrations with competitors developing their activity in various States. The complexity of the legislation of each State (control of the consumption and the alcoholic drink advertising) as well as the difficulties to make forward the wines between States (for example the result of the law on the «bio terrorism») increase the dependence of the wine's FMN compared to these operators at the bottom. Lastly, many or wines are sold by a limited number of specialized companies (such as Sotheby' S and Christie' S). [...]

[...] However, this movement was followed by a significant fall of the PIO number. This evolution is due to the financial markets' behaviour, in addition to specificities of the wine sector. Indeed, the progressive implement of the wine FMN, at a world level, caused a decrease of the firms number having a sufficient size to enter the stock-exchange markets that benefit from a stronger notoriety. Essentially, they are "first markets", such as NASDAQ, Australian Stock Exchange, London Stock Exchange, where the access criteria are also much more constraining. [...]

[...] The indication of the leaders' intentions on the market uses less the dividend distribution and the share repurchases. The external growth is significant . The partly controlled FMN indicates a weak executive's influence and a strong investors' influence (the financing is moderated, as in the type of preceding FMN, but because of the behaviour of the investors). This type of FMN is less fixed with the pressures of the financial markets, because of their quotation on markets relatively less exposed to the influence of the international investors, from the stability of their shareholding (Concha y Toro, Lion Nathan), or because of the dispersion of their capital (Brown-Forman). [...]