FOREIGN DIRECT INVESTMENT FOREIGN DIRECT INVESTMENT

IN THE WINE AND SPIRITS SECTORIN THE WINE AND SPIRITS SECTOR

EUROPEAN ASSOCIATION OF WINE ECONOMISTS (EuAWE) ANNUAL CONFERENCE,

Œnométrie XXILYON – FRANCE, 21 to 24 May 2014

IN THE WINE AND SPIRITS SECTORIN THE WINE AND SPIRITS SECTOR

J. François Outreville

FOREIGN DIRECT INVESTMENT IN FOREIGN DIRECT INVESTMENT IN

THE WINE AND SPIRITS SECTORTHE WINE AND SPIRITS SECTOR

� The world wine market

An investigation into the determinants of most-favoured locations

� The world wine market� The world’s largest MNEs in the wine

industry� The international presence of the

largest MNEs� Determinants of international presence

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Wine is a global business

Globalization impacts markets in terms of the concentration of production and consumption at the international level.

According to Heijbroek (2003), the concentration of the top firms in the beverage industry was as follows: wine (7%), spirits (25%), beer (28%) and soft drinks (80%).

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wine (7%), spirits (25%), beer (28%) and soft drinks (80%).

Despite the interest in the geographic or location aspects of international business, there is to our knowledge no empirical work that focuses on the location of investments in the beverage sector. In this study, we focus on the location-specific advantages of the host country as determinants of foreign direct investment (FDI).

OIV Statistics, 2012 rankingsProduction and consumption

Wine is a global business

FranceItaly

FranceUnited States

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ItalySpainUnited StatesChileArgentinaAustraliaSouth AfricaGermany

United StatesItalyGermanyChinaUKArgentinaSpainRussia

OIV Statistics, 2011 rankingsImports and exports

Wine is a global business

Foreign trade

Germany ItalyFrance

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GermanyUKUnited StatesRussiaFranceNetherlandsCanadaBelgiumSwitzerlandSweden

FranceSpainAustraliaChileUnited StatesArgentinaGermanyPortugalSouth Africa

The world’s largest players

Limitations:Limitations:

• Data on foreign activities may not be reported

• Most groups have diversified activities and a

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• Most groups have diversified activities and afew are specialized in wine only

• Private family-owned groups are not available

• Major cooperatives are generally not international players

LARGEST IN WINE ONLY

Company Home Country Total Assets Total Sales

% Wine

in the

portfolio

Total

sales in

wine

Nb of

host

countries

Constellation Brands, Inc. United States 8094.3 3346.2 87 2928.0 6

LVMH Moet Hennessy Division France .. 3808.6 47 1790.0 7

Pernod Ricard S.A. France 33168.1 8664.3 20.2 1750.2 25

Foster's Group Australia 6283.9 3347.4 42.3 1415.9 11

Les Grands Chais de France France .. 1028.2 100 1028.2 0

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Les Grands Chais de France France .. 1028.2 100 1028.2 0

Diageo PLC United Kingdom 29081.8 14620.1 6 877.2 10

Sektkellerei Henkell & Co AG Germany .. 873.7 80 699.0 9

Vina Concha y Toro S.A. Chile 1008.0 643.0 100 643.0 7

Distell Group Limited South Africa 1068.9 1539.1 40 615.6 6

Belvédère Group France/Poland 999.2 886.2 44.8 397.0 16

Lanson-BCC France 1199.0 395.2 100 395.2 1

Sektkellerei Schloss Wachenheim AGGermany 397.5 391.3 100 391.3 6

Vranken-Pommery Monopole France 1526.3 386.3 100 386.3 9

Peñaflor Argentina .. 273.0 100 273.0 0

AdVini (JeanJean/M.Laroche) France 194.7 243.4 100 243.4 6

LARGEST IN WINE ONLY

Citic Guon Wines China 487.8 .. 100 .. 0

China Tontine Wines Group China 156.4 .. 100 .. 0

Bodegas Esmeralda Argentina 117.2 .. 100 .. 0

Bodegas Riojanas Spain 74.8 .. 100 .. 0

Vinedos Emiliana Chile 68.7 .. 100 .. 0

Ktima Kostas Lazaridis Greece 60.8 .. 100 .. 0

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Ktima Kostas Lazaridis Greece 60.8 .. 100 .. 0

Freixenet S.A. Spain .. .. 100 .. 20

E&J Gallo Winery United States .. .. 100 .. 0

Kendall-Jackson Wine Estates, Ltd.United States .. .. 100 .. 0

Groupe Castel France .. .. 100 .. ..

Hess Family Estate Switzerland .. .. 100 .. 0

Casella Wines Australia .. .. 100 .. 4

Codorniu Spain .. .. 100 .. 8

Miguel Torres Spain .. .. 100 .. 4

THE INTERNATIONAL PRESENCE

Transnationality IndexTNI = Foreign accounts/ Total

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Internationalization IndexII = Foreign affiliates / Total

Geographical Spread IndexGSI = SQR(II x Nb host countries)

The (14/25) world’s largest players by number of host countriesCompany Home Country

1 Brown-Forman Corporation United States 26 45 73.3

2 Pernod Ricard S.A. France 25 97 86.6

3 Freixenet S.A. Spain 20 34 58.8

4 Davide Campari-Milano S.p.A. Italy 17 30 80.0

Rank

Nb of host countries

Nb of affiliates or subsidiaries

% of foreign

affiliates

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4 Davide Campari-Milano S.p.A. Italy 17 30 80.0

5 Belvédère Group France/Poland 16 65 49.2

6 Foster's Group Australia 11 40 35.0

7 Diageo PLC United Kingdom 10 11 81.8

8 Sektkellerei Henkell & Co AG Germany 9 15 60.0

9 Sogrape Portugal 9 15 73.3

10 Vranken-Pommery Monopole France 9 26 53.8

11 Kirin Holdings Company, Limited Japan 9 33 39.4

12 Cordorniu Spain 8 n.a. n.a.

13 Vina Concha y Toro S.A. Chile 7 23 43.5

14 LVMH Moet Hennessy Division France 7 n.a n.a

Statistics

Sample:25 groups which have at least one affiliated majority-owned company/subsidy in at least 2 foreign countries (host countries).

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Top 5 are on average present in 21 countries

Top 5 have on average 54 affiliated entities

France has the largest number of groups in the list (8) and overall Europe has 13.

The (15/30) most-preferred locations

Rank

1 United States 63.6 14 222 United Kingdom 50.0 12 283 France 47.1 8 124 China 40.0 10 17

Host countryNb of

groupsNb of

affiliatesLocation intensity

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4 China 40.0 10 175 Australia 39.1 9 296 Germany 39.1 9 97 Canada 32.0 8 188 Brazil 32.0 8 109 Japan 30.4 7 8

10 Poland 29.2 7 1511 Italy 29.2 7 812 New Zealand 28.0 7 1613 Switzerland 28.0 7 814 Argentina 24.0 6 1215 Sweden 24.0 6 8

Concept of location intensity

Example:

United States is a preferred location for 14 groups. But there are 3 groups housed in the US in the list of 25.

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the US in the list of 25. Location intensity for the US is

14 / (25-3) = 63.6

The determinants of international presence

• Foreign direct investment (FDI)• Characteristics of recipient countries

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• The OLI paradigm:Dunning(1977, 1988, 1995)

• UNCTAD: World Investment ReportPush factors (market size, costs of production)Pull factors (local determinants)

Other factors: country risk and governance

� Continuing liberalization and improvement of investment environment

Key explanatory factors include:

investment environment� Regulations, transparency and enforcement� Economic and political stability� Management capabilities� Accountability of government

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Determinants of wine FDI

Resource-seeking variablesWine productionWine exports

Market-seeking variablesSize (population, GDP)

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Size (population, GDP)Wine consumptionWine imports

Efficiency-seeking variablesGovernanceTrade facilities

STATISTICAL ANALYSIS

Spearman rank correlationsVariable Rho

Production (PROD) 0.1473 *

Exports (EXPORTS) 0.0257 NS

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Population (POP) 0.4333 ***

GDP per Capita 0.3824 **

Consumption 0.3898 **

Imports (IMPORTS) 0.5648 ***

Governance (GOUV) 0.3962 **

Trade (TRADE) 0.407 **

Note: significant at 1% (***), 5% (**), 10% (*)NS = not-significant

REGRESSION ANALYSIS� Resources seeking factors are related to wine production in

millions of hl (PROD) of the host country. � Production intensity is also associated to the vine area of

production to determine a factor of quality (QUALITY), i.e. it is assumed that the more vine is produced per ha, the lower is the quality (Combris et al., 1997; Landon and Smith, is the quality (Combris et al., 1997; Landon and Smith, 1998; Lecocq and Visser, 2006; Ashenfelter, 2008).

� Market-seeking factors are related to the size of the host country measured by the size of the population (POP). The size of the potential business is measured by wine imports (IMPORTS) in the country.

� Efficiency is measured by Governance (Government effectiveness index) and Trade efficiency.

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REGRESSION RESULTS

Variables Coeff z-test Coeff z-test

C -9.116 -53.92

Log (POP) 5.691 4.312 *** 5.151 3.987 ***

The dependent variable (Location Intensity) is ordered and bounded.The estimation procedure is a censored Tobit analysis (Maximum likelihood).

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Log (POP) 5.691 4.312 *** 5.151 3.987 ***

PROD 0.0081 2.376 ** 0.0079 2.284 **

QUALITY -0.0076 -2.001 * -0.0076 -1.953 *

IMPORTS 0.008 1.718 * 0.0083 1.75 *

GOUV 9.207 4.351 *** ..

TRADE .. 12.053 4.131 ***

Note: significant at 1% (***), 5% (**), 10% (*)

FOREIGN DIRECT INVESTMENT IN THE WINE

AND SPIRITS SECTOR

Thank you for your attention!

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Thank you for your attention!

J. François OutrevilleJf.outreville@laposte.net