Economic impact of the New Zealand wine industry

Transcription

1 Economic impact of the New Zealand wine industry An NZIER report to New Zealand Winegrowers April 2009 Image courtesy of Seifried Estate

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3 Image courtesy of Palliser Estate Wines of Martinborough About NZIER NZIER is a specialist consulting firm that uses applied economic research and analysis to provide a wide range of strategic advice to clients in the public and private sectors, throughout New Zealand and Australia, and further afield. NZIER is also known for its long-established Quarterly Survey of Business Opinion and Quarterly Predictions. Our aim is to be the premier centre of applied economic research in New Zealand. We pride ourselves on our reputation for independence and delivering quality analysis in the right form, and at the right time, for our clients. We ensure quality through teamwork on individual projects, critical review at internal seminars, and by peer review at various stages through a project by a senior staff member otherwise not involved in the project. NZIER was established in Authorship This report has been prepared at NZIER by John Ballingall and Chris Schilling and reviewed by Jean-Pierre de Raad. The assistance of Kristy Newland, John Barker and Philip Gregan of New Zealand Winegrowers is gratefully acknowledged. 3

4 4 Photo courtesy of Te Mata Estate Winery Ltd

5 Contents Key impacts of the New Zealand wine industry 6 Background 8 National impact analysis: overview of methodology 12 National impact analysis: results 14 Regional impact analysis 16 Wine industry R&D expenditure and promotional activities 20 Note on the economic crisis 24 Conclusion 25 References 26 Appendix A Methodology and data sources 27 Appendix B Multiplier analysis caveats 31 Figures Figure 1 Number of wineries 9 Figure 2 Exports of wine 9 Figure 3 Wine export share 9 Figure 4 Goods exports: rank and growth 11 Figure 5 Export dollars per hectare 11 Figure 6 Wine industry by region 16 Tables Table 1 Summary of economic impact of New Zealand wine industry Table 2 Export growth comparison 9 Table 3 Direct, indirect and induced effects 13 Table 4 National multipliers 15 Table 5 Economic impact of the wine industry Table 6 Marlborough regional multipliers 17 Table 7 Regional economic impact of the Marlborough wine industry 2008: 18 Table 8 Regional economic impact of the Hawke s Bay wine industry 2008: 18 Table 9 Summary of regional economic impact

6 Key impacts of the New Zealand wine industry The New Zealand wine industry makes a significant contribution to the New Zealand economy in terms of output, GDP and employment. This impact extends well beyond its direct sales and employment activities due to its strong links to other sectors in the New Zealand economy such as tourism, retail sales and bars and restaurants. A summary of the industry s economic contribution is shown in Table 1. After taking into account the New Zealand wine industry s interlinkages with the rest of the economy, the industry contributes over $1.5 billion to New Zealand s GDP and supports over 16,500 full time equivalent jobs. The industry generates over $3.5 billion of revenue through its own direct sales and the sales it induces from related sectors. In addition to the impacts listed in Table 1, the New Zealand wine industry: Has experienced export growth of nearly 24% per year over the past twenty years, compared to just 5.9% growth for all merchandise exports. Has contributed around 5% of New Zealand s total good exports growth over the past five years. Plays a pivotal role in some of New Zealand s regional economies: - It accounts for around 20% of the Marlborough region s economy and creates around 4,000 full time equivalent jobs (2,543 directly and 1,449 indirectly). - It accounts for around 2% of the Hawke s Bay region s economy and creates around 1,600 full time equivalent jobs (840 directly and 757 indirectly). Makes an important contribution to marketing and promoting the New Zealand national brand in overseas markets by presenting New Zealand s credentials on every bottle sold and generating media exposure. As one indicator, media coverage of New Zealand wine in the UK in the past 12 months can be roughly estimated to have an advertising value of around 650,000. The wine industry also adds to New Zealand s reputation as a clean, green, sustainable producer. 6

7 Table 1 Summary of economic impact of New Zealand wine industry 2008 Measure Value Direct employment impact (FTE) 5,940 1 Total employment impact (FTE) 16,568 Estimated Wages $168 million Number of wineries 613 Number of grape growers 1,073 Productive hectares 29,810 Export sales value (FOB) Estimated cellar door hospitality sales Estimated winemaking sales Estimated grape growing sales $899 million $80 million $1.22 billion $614 million Estimated number of wine-related tourist visits (2006) 225,000 Estimated expenditure of wine tourists Estimated excise and ALAC levies Direct contribution to gross output Total contribution to gross output Direct contribution to GDP $907 million $126 million $1.28 billion $3.53 billion $454 million Direct contribution as % of GDP 0.25% Total contribution to GDP $1.52 billion Total contribution as % of GDP 0.84% 1 The 2006 Census provides detailed employment data for grape-growing and wine manufacturing. However no data is available for the cellar-door sub-sector. We note that our cellar door employment estimates (see 8.A.5.3) may not fully capture cellar door employment levels. Source: NZIER 7

8 Image courtesy of Terrace Heights Estate Background The wine industry is a very important contributor to the New Zealand economy. The basic facts and figures will be familiar to many in the industry, but are worth repeating here for a broader audience. The number of wineries in New Zealand has risen from below 250 in 1996 to around 600 in 2008 (Figure 1). The wine producing area has more than quadrupled over the same period and now stands at around 30,000 hectares. The value of New Zealand wine exports has now reached $900 million (Figure 2). Export growth was 18.6% in 2008 and has averaged 23.8% per year for the past 20 years (Table 2). By comparison, New Zealand s total goods have experienced average annual growth of around 5.9%. As a result of this consistently spectacular growth, wine has significantly increased its share of New Zealand s total goods exports. In the 2008 calendar year, wine accounted for 2.2% of New Zealand s total exports (Figure 3). 8

9 Figure 1 Number of wineries Source: New Zealand Winegrowers, 2008 Figure 2 Exports of wine Value, $ millions $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 Total goods exports (LHS) Wine exports (RHS) $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $10, $0 Source: New Zealand Winegrowers, 2008 Figure 3 Wine export share % of total goods exports 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: Statistics New Zealand 9

10 As Figure 4 shows, wine now ranks as New Zealand s 12th largest goods export item, and is moving rapidly up the rankings. In 2003, wine was the 19th largest export sector. Only mineral fuels (primarily oil from the Tui oilfield) and cereal preparations (largely milk powder) have shown faster growth since Over the past five years, wine has contributed about 5% of New Zealand s total goods export growth. Grape farms account for 0.4% of agricultural land use in New Zealand, compared with beef (45%), lamb (22%) and dairy (13%). A simple analysis suggests that the exports generated per hectare of grapes is around $28,000 considerably higher than other primary sectors such as dairy, sheep and beef and forestry. 1 Wine tourism is becoming an increasingly vibrant part of the New Zealand economy. It is estimated that 225,000 international wine tourists visited New Zealand in The economic impact of wine tourists 2 is somewhat different to that of the average tourist. Wine tourists tend to stay longer in New Zealand (average length of stay of 25 days, compared to 20 days on average) and spend more per night ($157 compared to $140) and in total ($4,030 compared to $2,850). Based on these (somewhat out of date) estimates, it can be estimated that international wine tourists spent around $907 million in New Zealand in Note that this does not mean that the wine industry causes tourism, but it is one of the reasons why tourists want to visit New Zealand. It would be fair to say that the wine industry benefits significantly from the tourism sector as well as the other way around both sectors are closely linked. Research on wine tourism is still in its infancy, both within New Zealand and globally. However, one study found that 5 months after visiting Australian wineries, 1 in 5 visitors reported increased wine consumption (volumes) and 73% bought better quality (Mahony et al, 2006). 1 This land also generates revenue from domestic sales, although this is not covered in the calculations here. 2 Defined as international and domestic visitors, aged 15 years and over, who visit a winery at least once while travelling in New Zealand (Ministry of Tourism, 2007). 3 This figure represents all of the expenditure across all sectors of the New Zealand economy by tourists defined as wine tourists using the definition above. 10

11 Table 2 Export growth comparison Compound average growth rate in nominal exports Wine exports Total goods exports Calendar Year % 17.6% Past 5 years 27.3% 8.6% Past decade 22.7% 6.6% Past 20 years 23.8% 5.9% Source: Statistics New Zealand, NZIER Figure 4 Goods exports: rank and growth Value of exports (LHS), Annual growth (RHS) $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- 13.4% Dairy 2.6% Meat 31.7% Mineral fuels -3.5% Wood 7.1% Machinery 8.3% 5.9% Aluminium Fruit & nuts 1.8% -0.9% -1.5% Fish Starch Electrical mach 27.3% -3.9% 35.0% 7.8% 13.4% Export value (LHS) Growth (RHS) 8.6% 6.5% -3.0% 10.9% Wine Wool Cereals Pulp Iron and steel Other vege goods Photographic Paper Semi-precious items Hides % Source: Statistics New Zealand, NZIER Figure 5 Export dollars per hectare Value of 2008 exports based on 2007 land use estimates Kiwifruit Wine Dairy Forestry Citrus Sheep and beef $- $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 Source: Statistics New Zealand, NZIER Note: Land use figures do not include non-productive land such as scrub/ bush 11

12 National impact analysis: overview of methodology Looking at wine industry statistics alone does not give a full picture of the contribution of the sector to the New Zealand economy. The wine sector (and the various sub-sectors within it) is heavily dependent on and closely linked to a range of industries in the economy. Therefore any analysis of the contribution of the wine industry to the New Zealand economy needs to explicitly account for these industry inter-linkages. With this in mind, we use input-output (or multiplier) analysis to examine the aggregate economic impact of the New Zealand wine industry. 1 In this section, we present only a brief overview of the approach taken to collecting wine industry data and calculating the relevant multipliers. A more detailed exposition can be found in Appendix A. The concept of multipliers is relatively simple. If there is an increase in demand for wine, then wineries will demand more inputs from the industries that supply them. In turn, the increased activity in those input-supply industries will cause those industries to demand more inputs from their own input-supply industries, and so on. The employees in these sectors use any additional income to demand more of the goods and services they wish to consume. These three effects are summarised in Table 3. Due to these three effects, an increase in demand in the wine industry (for example additional export sales) will have a ripple effect throughout the economy. The sum of this increased activity relative to the size of the initial increase in demand is known as a multiplier. The size of these multiplier effects as they relate to the New Zealand wine industry are outlined in the following two sections at a national and regional level respectively. 1 Multiplier analysis is a commonly-used and accepted form of analysis. However, caution should be employed when interpreting the results of this work. As with any form of economic analysis, a number of assumptions and limitations apply to multiplier analysis. These are presented in Appendix B. 12

13 Image courtesy of Pernod Ricard NZ Table 3 Direct, indirect and induced effects Direct effects are those associated with final demand for wine: direct employment and expenditure of growers, wineries and wine tourism operators. Indirect effects are those generated by job creation in industries that supply goods and services to the wine sector (e.g. shipping, fertilizer, petrol, bottles). Induced effects are those due to the spending of workers who have new jobs due to the wine industry s economic activity (e.g. on clothes, food, entertainment, etc). Source: Statistics New Zealand, NZIER 13

14 New Zealand Winegrowers National impact analysis: results Multipliers The relevant national-level multipliers for the wine industry are shown in Table 4. These multipliers should be interpreted as follows: 1 Let demand for New Zealand wine increase by $1 million. This is the direct effect. Output in the input-supply industries increases by $0.83 million (from a multiplier of 1.83). This is the indirect effect. Increased household consumption (which is the difference between Type I and Type II multipliers) driven by increased incomes induces a further increase in output across all industries of $0.93 million. Thus an increase in wine output of $1 million leads to a further increase in gross output of $1.76 million elsewhere in the economy. Extra wine demand that increases the wine industry value-added by $1 million is likely to contribute an additional $2.34 million, over and above the wine industry increase, to national GDP. Extra wine demand that raises wine industry employment by one fulltime equivalent is likely to increase employment by a further 1.79 full time equivalent jobs. 1 The value-added multipliers are high; however the wine industry s proportion of valueadded to gross output is relatively low. This means an increase in demand for wine (and an increase in wine output) results in a relatively low direct increase in value-add. 14

15 Table 4 National multipliers Type I Type II Output Value-Added Employment Source: NZIER Table 5 Economic impact of the wine industry 2008 Type I Type II Output Value-Added Employment Source: NZIER Economic impacts In 2008, the wine industry contributed $3.53 billion in gross output to the New Zealand economy. This includes $2.25 billion of output elsewhere in the economy, over and above the direct output from the wine industry ($1.28 billion). Value-added is the most commonly accepted measure of economic activity. The sum of value added across all businesses is termed Gross Domestic Product (GDP). The wine industry contributes a total of $1.52 billion in value-added to the New Zealand economy, of which $1.06 billion is from indirect and induced impacts. The employment effects of the wine industry are also significant. The wine industry directly employs around 5,900 full time equivalent workers. 2 Approximately 10,600 full time equivalents are employed elsewhere in the economy due to the activity within the wine industry. The total employment impact of the wine sector is estimated at 16,568 full time equivalent workers. 2 Note that the actual count of employees in the wine industry is higher than 5,940 due to part time and casual workers, but our analysis requires us to focus on FTEs. 15

16 Regional impact analysis The New Zealand wine industry is unevenly distributed across New Zealand. Marlborough contains almost half of the country s grape growers, the largest share of wineries (almost 20%), and produces around threequarters of New Zealand wine exports. Hawke s Bay contains 16% of grape growers and 12% of wineries, and produces almost 12% of wine exports. The Auckland region, which contains 4% of total grape growers and 18% of wineries, contributes less than 1% to New Zealand wine exports. Regional analysis is not simply a pro-rata of the national results the intention is to quantify how a regional concentration of the wine industry impacts on the specific region rather than the nation as a whole. Regional multipliers depend on where the industry draws inputs from and where it sells outputs to. A high amount of local sourcing will result in a high regional multiplier (although we highlight that the total impact is a function of not just the multiplier but the level of regional wine industry activity). As the two most dominant wine regions, we focus the regional analysis on the Marlborough and Hawke s Bay region. Figure 6 Wine industry by region Percent of total for New Zealand Marlborough Hawke's Bay Gisborne Otago Canterbury Nelson Wellington Auckland Waikato/BoP Northland Other Grape growers Wineries 0% 10% 20% 30% 40% 50% Source: NZ Winegrowers

17 Methodology The steps for regional analysis are as per the national impact analysis. We use separate regional input-output tables for each of the Marlborough and Hawke s Bay regions (which are devised by using industry by region employment shares to regionalise the national input-output table). As per the national analysis, we split out the three wine sub-industries (grape growing, winemaking, and cellar door sales and hospitality) based on the information from NZ winegrowers (proportion of wineries and grape growers within each specific region). We use these modified regional inputoutput tables to calculate the regional multipliers. Regional analysis results Multipliers These multipliers should be interpreted as per the national multipliers: Let demand for Marlborough wine increase by $1 million. This is the direct effect. Output in the Marlborough input-supply industries increases by $0.33 million (from a multiplier of 1.33). This is the indirect effect. Increased household consumption driven by increased incomes induces a further increase in output across all Marlborough industries of $0.38 million. Thus an increase in Marlborough wine output of $1 million leads to a further increase in regional gross output from non-wine industries of $0.71 million. It is usual for regional multipliers to be smaller than national multipliers, as goods and services used as intermediate inputs for the Marlborough wine industry are sourced from outside the region. Table 6 Marlborough regional multipliers Type I Type II Output Value-Added Employment Source: NZIER 17

18 Regional impact Marlborough The Marlborough wine industry contributes almost $1.3 billion to the region s gross output, largely through export sales. This includes more than $500 million over and above the wine industry s direct contribution of $747 million. With total value-added impact of $395 million, the Marlborough wine industry contributes almost 20% to the region s GDP. 1 The Marlborough wine sector accounts for around 4,000 full time equivalent jobs: it directly contributes around 2,500 full time equivalent jobs, as well as supporting an additional 1,500 jobs due to indirect and induced effects. Regional impact Hawke s Bay The Hawke s Bay regional multipliers are similar to the Marlborough results. Applying them to the level of output, value added and employment in the wine industry in the Hawke s Bay region gives the results shown in Table 8. The Hawke s Bay wine industry contributes almost $275 million to the region s gross output. This includes almost $125 million over and above the wine industry s direct contribution of $150 million. With total value-added impact of $106 million, the Hawke s Bay wine industry contributes almost 2% to the region s GDP. 2 The Hawke s Bay wine sector accounts for around 1,600 full time equivalent jobs: it directly contributes around 840 full time equivalent jobs, as well as supporting an additional 760 jobs due to indirect and induced effects. 1 Marlborough regional GDP sourced from NZIER Quarterly Predictions. 2 Hawkes Bay regional GDP sourced from NZIER Quarterly Predictions. Table 7 Regional economic impact of the Marlborough wine industry 2008 Direct Indirect Induced Total Output ($m) ,279 Value-Add ($m) Employment (FTE) 2, ,992 Source: NZIER Table 8 Regional economic impact of the Hawke s Bay wine industry 2008 Direct Indirect Induced Total Output ($m) Value-Add ($m) Employment (FTE) ,596 Source: NZIER 18

19 Image courtesy of Carrick Summary of regional impacts Marlborough is home to the largest proportion of the New Zealand wine industry. The wine industry is becoming increasingly important within the region: the number of wineries has doubled in the last 10 years, while the number of grape growers has more than doubled in the last 5 years (NZ Winegrowers 2008). This is reflected in the high percentage contribution (around 20%) of the industry to the region s total GDP and employment levels. Hawke s Bay is home to the second largest proportion of the national wine industry. The region is over 3 times larger (in GDP terms) than Marlborough, and so the wine industry s share of the region s GDP and employment is relatively lower (around 2%), however the number of wineries and grape growers continues to grow strongly within the region. Table 9 Summary of regional economic impact 2008 Marlborough Hawke s Bay Number of wineries Number of grape growers Estimated total Value-Add contribution ($m) Share of regional GDP (%) 20 2 Estimated total employment contribution (FTE) 3,992 1,596 Share of regional employment (%) 18 2 Source: NZIER 19

20 Wine industry R&D expenditure and promotional activities The analysis above has estimated the obvious economic impacts of the New Zealand wine industry. However, there are other important contributions that the industry makes to the New Zealand economy. These are harder to quantify, but should be recognised nonetheless. Promotional activities One area that deserves more in-depth research is the degree to which the positive brand awareness that New Zealand s wine industry projects into key overseas markets benefits the rest of the New Zealand economy. Each time an overseas customer looks at, purchases and hopefully savours a bottle of New Zealand wine, it is reasonable to expect that their awareness of New Zealand as a country would lift, particularly for those consumers who have not drunk a lot of wine before, or who have not travelled to this part of the world. Each of these individual effects is hard to measure and is likely to be very small. However, in aggregate they are unlikely to be trivial. Determining the value of this promotion could only be achieved through carefully designed surveys. This may be an option for investment by New Zealand Winegrowers in the future. The New Zealand wine industry also generates numerous column inches in a wide variety of media outlets around the world. Each of these articles showcases both the sector itself and New Zealand more broadly. By way of example, we looked at the UK media coverage recorded by New Zealand Winegrowers over the past year (March 2008-March 2009). Around 70 articles were written in major newspapers, lifestyle magazines and specialist industry publications. Using data on advertising costs, which range from 46,000 per page for a major national newspaper to around 1,400 per page for a specialist publication, it can be estimated that the value of these UK media articles was around 650,

21 Image courtesy of Pernod Ricard NZ There is very little literature on the subject of the impacts of generic wine promotional activities offshore. Zhao et al (2002) find that the benefits from Australian generic offshore promotion of premium wine (via a collective industry effort, for example) are shared very unequally between stakeholders. Grape growers, premium wineries and overseas consumers benefit. Domestic consumers suffer losses because more of the premium wine supply is exported rather than made available within the Australian market, resulting in price increases. Non-premium wine producers also suffer losses, as the relative price of their outputs falls and relatively more premium grapes are demanded by wineries. Exports of experts It is important to note that these technological advances and the stock of existing knowledge are also applicable outside of the New Zealand economy. A recent trend that has developed as the wine industry has globalised is the exports of experts. This refers to in-demand winemakers travelling around the world, usually on a contract basis, to act as consultants or technical advisers for particular producers or groups of producers (Aylward and Zanko, 2006, p6). This revenue would be captured by Statistics New Zealand as exports of services, 1 and so would be additional to the $900 million of export revenue recorded from selling physical goods. Many regard such activities as making a significant contribution to technology transfer and productivity/quality improvements in the global wine industry. As Smith (2007, p133) notes, this presents significant opportunities for both the recipients of such technology (such as China) and also the providers (such as Australian and New Zealand experts) 1 Unfortunately New Zealand s services export data is very patchy, so we are unable to quantify the size of this additional revenue. 21

22 Research and development Research and development (R&D) and technical improvements have long been a feature of the wine industry around the world (Smith, 2007). New Zealand has been a leader in this development. As noted in Appendix A, the impact analysis above captures the direct and ripple effects of all forms of expenditure by the wine industry. This includes any R&D expenditure. However, it is very difficult to identify the spillover effects attributable solely to wine-related R&D. The international literature in this field is nascent. The potential size of the domestic spillover benefits rests largely on whether the technological developments generated by wine industry R&D activities are readily applicable to other sectors within the New Zealand economy. Zhao et al (2002) note that it is only the very largest wine producers in Australia who are able to invest substantial amounts in privately-funded R&D. The other smaller producers rely on public good type R&D that aims to generate benefits for all firms, again funded using a levy/grant. They find that a 1% productivity improvement in premium grape growing (resulting from increased R&D) delivers benefits to four main groups: Premium grape growers (44% of the benefit) Premium wine producers (36%) Domestic consumers (7%); and Overseas consumers (8%) Domestic and overseas consumers benefit from lower prices due to the increased supply generated by the R&D-related productivity improvement. Aylward and Zanko (2006, p11) also discuss the Australian approach to R&D and conclude that the complex nature of ownership and industry dynamics needs to be understood more fully by policy makers if domestic industries are to reap the benefits of public sector initiatives and targeted schemes. We would contend that a similar conclusion holds true for the New Zealand wine industry. This suggests that further research is required before the economic impacts of the New Zealand wine industry s R&D expenditure can be fully quantified. Sustainability The role of the New Zealand wine industry in promoting the sustainability credentials of the New Zealand economy can also be considered, although is difficult to quantify in terms of overall economic impact. It is generally agreed that overseas consumers are becoming more interested in the source of the food and beverage products they purchase, and how these items have been produced (Ballingall and Winchester, 2009; NZTE/MFAT, 2009). The debate over food miles, carbon footprints and buying locally is a well-known and high profile manifestation of this concern. 22

23 The precise nature and timing of changes in consumer buying behaviour related to food miles and buying locally is difficult to predict. However, economic modeling suggests that New Zealand exporters (and the economy as a whole) would suffer losses in terms of reduced revenue if buyers in key European markets such as the UK, France and Germany started to actively substitute locally-produced food and beverage products for imported items (Ballingall and Winchester, 2009). This suggests that New Zealand winegrowers will need to continue investing in demonstrating and communicating its sustainability credentials. If it is posited that the New Zealand wine industry is regarded as being a sustainable sector, due to initiatives such as the Sustainable Winegrowing New Zealand standards, and that overseas consumers see the New Zealand wine industry as being representative of the sustainability of the New Zealand economy as a whole, then one could suggest that the broader New Zealand economy could benefit from additional efforts in the wine sector to promote its sustainability credentials. However, it is likely that most of the benefits of such efforts are returned to wine producers themselves through higher prices or sales volumes. Summary of additional benefits In short, there are a wide range of additional benefits that can be attributed, at least in some part, to the New Zealand wine industry. These include the promotion of New Zealand as a wine tourism destination and additional services exports and technology transfer related to the wine consultancy work of New Zealand experts in international markets. The sustainability efforts of the sector are also linked to general perceptions of New Zealand as a clean, green country. The magnitude of these impacts is very difficult to quantify, but they may be non-trivial and should be considered as additional to the economic impacts identified in previous two sections. 23

24 Note on the economic crisis This report is being produced at a time of great economic uncertainty. The global economy is likely to experience difficulties not witnessed since the Great Depression. It is therefore useful to briefly consider the impacts of the global economic slowdown on the New Zealand wine industry. In general, we can think about two main effects that might drive changes in the demand for New Zealand wine: Income effect Lower (or negative) economic growth in key wine markets is likely to reduce consumers demand for almost all goods and services in their basket of purchases. That is, consumers have less money to spend when they go shopping, and will make cutbacks across the board in terms of the food they buy, the services they demand, the clothes they purchase, etc. In this respect, we would expect wine (in aggregate) to be little different. However, high-end New Zealand wine is targeted at those with higher incomes who might be less concerned about losing their jobs or seeing the value of their housing and other assets fall. If this group is less pricesensitive it might be expected that this income effect could be somewhat muted. Substitution effect Falls in consumers disposable income may also generate substitution between products. They may demand mince instead of steak, for example. This substitution is likely to have some conflicting effects on the demand for New Zealand wine. Those on lower budgets may decide to forego New Zealand wine altogether, preferring to buy cheaper, low quality plonk from other markets or other beverages such as beer and cider. However, this may be partially (or even completely) offset by those who have higher incomes, but are still conscious of their expenditure, switching away from expensive (say) French champagne and buying good quality méthode champenoise from New Zealand. There may also be changes to the composition of wine purchases as consumers choose to eat at home rather than going out to restaurants, although again the net impact of this change is difficult to predict. Estimating the net impact of these effects is not within the scope of this research project. However, the wine industry multipliers provided in this report do allow a ready high-level assessment of the impact of a fall in export demand for wine on the wine industry directly and the indirect effects on the wider New Zealand economy. 24

25 Conclusion Our research has quantified the direct and flow-on effects on the New Zealand wine industry. The key results from this analysis are as follows. The New Zealand wine industry: Supports 16,500 full time equivalent jobs across New Zealand, including around 6,000 in direct employment within the industry, a further 6,000 people in supporting industries, and another 4,500 due to induced effects. Contributes $3.53 billion to the value of gross output for New Zealand. Adds $1.52 billion in value (GDP) to the New Zealand economy. The marginal effects of a contraction or expansion within the wine industry suggest: The wider economy would gain an extra 1.8 jobs for every job gained in the wine industry. The economy would gain an extra $1.8 million for every additional $1 million of gross output generated by the wine industry. The economy would gain an extra $2.3 million in contribution to GDP for every additional $1 million of value-added generated by the wine industry. For the Marlborough region, the wine industry is particularly important, contributing almost 20% of the region s GDP, and almost 4,000 local full time equivalent jobs. In addition to these readily quantifiable impacts, the New Zealand wine industry also contributes positively to the wider New Zealand economy through its efforts in innovative R&D, its promotion of New Zealand as a tourism destination and its reputation as a sustainable, clean, green industry. 25

26 References Aylward, D. (2007). Fault lines: emerging domains of inertia within the Australian wine industry. University of Wollongong Faculty of Commerce Papers, Aylward, D., and M. Zanko. (2006). Emerging inter-organisational structures in the Australian wine industry: implications for SMEs. University of Wollongong Faculty of Commerce Papers, Ballingall, J., and N. Winchester. (2009). Distance isn t dead: an empirical evaluation of food miles-based preference shifts. NZIER Public Discussion paper 09/01. Gergaud, O., and V. Ginsburgh. (2008). Natural endowments, production technologies and the quality of wines in Bordeaux: does terroir matter?. In Economic Journal, Vol. 118, no. 529, June Gilkinson, B. (2008). Perfect timing for world s first carbon neutral winery. In Chartered Accountants Journal, May Mahony, B, J. Hall, L. Lockshin, L. Jago, and G. Brown. (2006). Understanding the impact of wine tourism on post-tour purchasing behaviour. In Carslen and Charters (eds), Global Wine Tourism: Research, Management and Marketing. Oxford: Oxford University Press. Ministry of Agriculture and Forestry. (2008). Horticulture and Arable Monitoring Report Ministry of Tourism. (2007). Tourist activity: wine tourism. MKF. (2007). The impact of wine, grapes and grape products on the American economy 2007: Family businesses building value. Report to various clients. NZTE/MFAT. (2009). Sustainability intelligence for offshore food and beverage markets. Online at New Zealand Winegrowers (2008). New Zealand Winegrowers Statistical Annual New Zealand Winegrowers and Deloitte. (2008). New Zealand wine industry benchmarking survey: vintage Smith, K. (2007). Technological and economic dynamics of the world wine industry: an introduction. In International Journal of Technology and Globalisation, vol. 3, nos. 2/3, Zhao, X., K. Anderson and G. Wittwer. (2002). Who gains from Australian generic wine R&D and promotion? Adelaide University CIES Discussion Paper

27 Appendix A Methodology and data sources Type I and II multipliers There are two basic types of multipliers. Type I multipliers include the direct effect of the wine industry, and the indirect effects on its inputsupply industries. Type II multipliers further include the household sector in the calculations. In this case, the increased economic activity in the input supply industries provides greater wages to employees, which in turn adds to demand in other industries. In this manner, Type II multipliers are greater than Type I multipliers. See Table 3 on page 5 for definitions of each effect. The multiplier analysis we compute here considers only the upstream (or backward) effects that is, the impact of the wine industry on its inputsupply industries. 1 While we have identified that the wine industry is a cluster of subindustries, a primary grape production industry, a wine manufacturing industry and a hospitality/tourism industry, we specifically design the analysis so as to not double count multiplier effects. Economic indicators examined To assess the impact of the wine industry, we focus on output, value added and employment, as standard measures for economic growth. Each are described in more detail below. Output is the value of production. At the firm level, this closely corresponds to sales revenue earned for the supply of goods or services. Sectoral output is simply the aggregation of the output of all firms within a particular sector; similarly, economy-wide output is the aggregate output of all firms in the economy. 1 Input-output tables can also be used to analyse the impact on the downstream (or forward) industries and sectors arising from activity within the wine industry. Downstream effects are not usually included in impact analyses because of the issue of causality. While we can reasonably claim that the demand for inputs from the wine industry generates activity in the upstream (input-supply) industries, we could not claim that activity within the industry causes activity in the downstream industries. Using specific examples, an increase in wine production will require increased purchases of barrels and packaging, labour, electricity, transport etc. This shows causality and strong linkages. However, an increase in wine production will not, ipso facto, generate increased consumption. Therefore, forward linkages are much more tenuous, and thus not used in the main analysis. 27

28 Value added represents the difference between the value of production (i.e. output) and the total value of any intermediate input goods or services used. Intermediate inputs are those goods and services that are purchased from other firms and which are required as part of the production process. Firms can be thought of as purchasing a selection of goods and services which they combine and transform into another good (or goods) for onselling. This transformation process adds value to the input goods and services hence the label value added. The two major elements of this transformation process are labour and profit margins 2 ; value added thus also has the important distinction of representing the incomes that are generated from the production process and earned by employees and business owners. GDP is simply the sum of the values added for all firms in an economy. Employment is measured in full-time equivalent terms. One full-time equivalent employee is equal to one full-time employee or 2 part-time employees. Input-output tables Input-output tables form the basis for multiplier economic impact analysis. In simple terms, they present the flow of goods and services between the sectors that make up an economy. This analysis is based on the most recent full set of tables computed by Motu and Stroombergen using the Statistics New Zealand 2003 supply and use tables. This is the latest New Zealand input-output table available. Unfortunately the wine industry is not included as a separate industry in the input-output tables. Therefore in this study, we modify the New Zealand input-output table using actual data for the wine industry. We do this to provide an accurate representation of how the industry interacts with the rest of the economy, rather than using simple agriculture sector averages (which is the aggregate sector under which wine falls in the standard tables). By using the actual input cost structure data of the wine industry, we can assess how an increase in wine production will flow through to its suppliers. Breakdown of the wine industry The New Zealand wine industry can be thought of as three sub-industries that interact with the rest of the economy in distinct and disparate ways: Grape growing an agricultural industry: uses water, fertilizers, and high amounts of labour as inputs; output is grapes; customers are wine processers Winemaking a manufacturing industry: uses higher amounts of capital for input plus intermediates such as packaging and cooperage; output is wine; customers are wholesalers 2 Value added also includes indirect taxes, fixed capital consumption and any subsidies to industry 28

29 Cellar-door sales and hospitality a service industry: uses labour as input; output is the hospitality service e.g. on-vineyard wine tastings and associated restaurants; customers are final consumers. Because of the disparities between the input cost structures of the subindustries, it is important we assess these individually within the inputoutput model. We used a variety of data sources to disaggregate the industry to these three sub-industries (see below for details). Our analysis of the cost structures captures the spending habits of each of the sub-industries. This means we get a holistic picture of how various types of expenditure in the wine industry affect economic outcomes in other parts of the New Zealand economy. Importantly, we capture not just primary inputs into winemaking, such as grapes, oak chips and packaging, but all industry expenditure, including: Flights, and other travel expenditure R&D expenditure Advertising Administration expenditure including accounting and legal services Sales and marketing salaries. These expenditure categories all have indirect flow-on effects through to specific sectors within the economy, and our analysis includes these in the estimation of the total impact of the wine industry. This annex outlines the sources of data used to separate out the three wine sub-sectors in the 2003 input-output tables, as explained under Input-output tables. Data sources and assumptions Grape growing The NZ Winegrowers Statistical Annual 2008 documents the amount of grape growing hectares in New Zealand, the average yield (tonnes/ha) and the average grape price ($/tonne). This provides an estimate for the annual gross output of grape growing. The MAF Horticulture and Arable Monitoring Report 2008 provides a detailed breakdown of the cost structures of two disparate grape-growing vineyard models: Hawkes Bay and Marlborough. We determine the appropriate weighting between these two models so that resultant gross output matches our estimates. We use this weighting to determine the overall the grape-growing sub-industry breakdown. The New Zealand Census of Population and Dwellings provides grapegrowing employment data. 29

30 Winemaking We sourced the total sales data from the NZ Winegrowers Statistical Annual We then needed to determine the average industry costs and revenue breakdown. To do this we sourced data from NZ Winegrowers and Deloitte (2008) New Zealand wine industry benchmarking survey vintage In particular, we used the income statement which disaggregated costs and revenue by line item. The data was provided as an average percentage of total winery sales disaggregated for wineries within each of the five listed revenue groups ($0-1m, $1-5m, $5-10m, $10-20m and $20+). The actual values of the costs and revenue was not provided instead we used the total sales data to weight the costs and revenue percentages, using some assumptions about the number of wineries in each group and the average revenue of each group (based on information from the Statistics Annual which splits wineries within NZ into three categories by annual sales). The New Zealand Census of Population and Dwellings provides wine manufacturing employment data. Cellar door While the benchmarking survey did not contain information about the grape-growing sub-industry, the winemaking and cellar door sections were included. In some cases these were explicitly disaggregated, but in others, we had to make some basic assumptions about the split. We used the standard hospitality industry averages as a basis for this. Statistics New Zealand does not provide employment data for the cellar door, and only limited data was available directly from the wineries. We expect the distribution of cellar door employment to be disparate across wineries: small wineries may not offer cellar door sales; large wineries may employ a number of staff specifically for the cellar door. We therefore estimate 0.4, 2 and 4 cellar door FTE per small, medium and large winery respectively. We note the limitations of this, and highlight that better employment data estimates would help capture the cellar door contribution more accurately. 30

31 Appendix B Multiplier analysis caveats For a host of reasons, multipliers must be interpreted with caution. In particular, four key points should be noted: Multipliers assume that sectors combine inputs, and produce outputs, in fixed proportions. They are based on a snapshot in time of the structure of the economy, and as such don t take into account any technological developments that have occurred since that snapshot. Multipliers take no account of induced changes in relative prices. Multipliers assume that labour and capital are available in unlimited quantities. Type II multipliers assume household consumption rises linearly with income. These assumptions are, to some degree, abstractions from reality. Businesses will, to an extent, be able to substitute between purchased goods, and thus alter their input mix. Changes in the supply and demand of goods and services will affect the price of those products. Factors of production, particularly labour in the New Zealand context, are only available in limited quantities, certainly in the short run. Finally, household savings generally increase with income levels. Care should therefore be used in interpreting multiplier results, particularly for examining effects of substantial changes in the economy. While the context of this study is an economic impact of the current wine industry, operating with certain input cost structures, levels of employment and capital, the continued exponential growth of the wine industry limits the applicability of these results to future trends. The impact of assumption (iv) also means that the total impacts we report, using the Type II multiplier, should be regarded as upper-limit results. 31

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