Small wine producers in fear of globalization: is Italy missing an opportunity?

Despite being the first [1] wine producer of the world [2], Italy’s wine sector lacks a long-term and wide-ranging strategy capable of addressing competition in the globalized market, competition which is mainly driven by the large consumer countries.

Italy, together with France, represents more than fifty percent of the total exports of wine (by value). On the other hand, the main consuming countries are the USA, UK, Germany, Canada and China.

Considering that exports represent the main driver of the Italian industry, accounting for around 50% of the entire production, the need for a long-term strategy built on solid corporate structures and sound marketing skills are clearly necessary.

The Italian wine making sector is characterised by a high number of small or mid-sized players, –mostly cooperatives or family owned companies– unfit for the challenges of the current market, where consumption trends are both moulded and imposed by large global enterprises in the wine and alcoholic sector.

In fact, the vast majority of Italian wine companies are single person enterprises, which is the simplest judicial structure in Italy (92.8% in 2008), or by agricultural partnerships (società semplici agricole), which require all the shareholders to be jointly and personally liable for the obligations of the company and the objects of the company must be limited to an agricultural activity. These partnerships are not obliged to prepare financial statements.

The size of 74% of Italy’s vineyards does not exceed 2 hectares and 81% of the wineries produce less than 100 hl of wine per year. The weight of the top 5 companies in the Italian wine industry in terms of national turnover is approximately 5%, indicating a low concentration at the national level.

Weak corporate structures, resulting from the fact that more often than not, the farm owner is also the winemaker and the grape grower, along with the lack of management and marketing knowledge, are a significant brake on the potential for growth of the Italian wine industry.

This quick overview of the organization of the wine industry for the purposes of international competition cannot ignore the weaknesses in the organisation of farming in Italy affecting the purchase and consolidation of Italian wine companies.

Italian real estate provides that a lessee, who is also the direct grower (coltivatore diretto) of land, has a pre-emption right, if certain conditions are met in the sale and purchase of land. This pre-emption right has been extended to the agricultural partnership where half of the shareholders are direct growers. In other words, farmers adjacent to agricultural plot to be sold have a right of pre-emption thus complicating any sale of land.

Even though there are the beginnings of change – there have been a number of IPOs (Masi Agricola S.p.a. and IWB S.p.A. in 2015) and some M&A transactions (Sella & Mosca sold by Campari to Terra Moretti distributor in 2016, Masi Agricola bought a 60% stake in Canevel Spumanti in 2016, Biondi Santi sold to Piper-Heidsieck and Rotkäppchen-Mumm bought Ruggeri earlier this year)– distributors worldwide are becoming larger by the day (thus increasing their bargaining power) leaving Italy’s family-owned companies behind.

Rabobank’s most recent quarterly wine report shows that the majority of the most successful companies in wine sector were those investing and building up an asset base not just staying on the side-lines. Conversely, the maintainers, those who did not expand or downsize, saw revenue and EBITDA margins decrease over the seven-year period examined in the study.

It’s time for Italian wine sector to start consolidating in order to achieve the sort of size which enables the exploitation of economies of scale, not only in cultivation and wine making, but also in research and development of viticulture and oenology, brand promotion and other marketing activities, as well as distribution.

In conclusion, as long as the Italian industry remains fragmented, Italy cannot achieve the necessary volume and bargaining power that is required, nowadays, to compete in global markets.

The contents of this article are purely informative and are not in any way to be considered a professional opinion. For further information, contact: Lukas Plattner and Sara Pietra Rossi.

News e approfondimenti[1] According to 2017 OIV’s Statistical Report on World Vitiviniculture.

News e approfondimenti[2] Followed by France and Spain with, respectively, 43.5 and 39.3 million of hl.