Why are French wines able to command a price premium in export markets?

Wine is one of mankind’s oldest and most important industries. Archaeological evidence of wine production dates back to 6000 B.C.E. Hieroglyphics from 3000 B.C.E. depict Egyptians enjoying celebratory cups of wine. The Bible records Jesus’ first miracle, turning water into wine at the wedding feast at Cana.
Today, some 18.6 million acres of land are devoted to vineyards, which yield 26 billion liters of wine annually. The EU produces about 55 percent of this output, with France, Italy, and Spain accounting for the bulk of the EU’s production. The United States, Australia, China, South Africa, Chile, and Argentina are the largest non-European producers.
Until the 1980s, French vineyards were the dominant force in the global wine trade, with Italy, Spain, and Germany trailing behind them. These Old World producers benefitted from centuries of tradition and their reputations for quality and sophistication. The mystique of French wine was in part attributable to the belief by oenophiles (a fancy word for wine experts) that terroir and the character of the grape itself contributed to the creation of unique characteristics for each vineyard’s wine. (Terroir means “a sense of place” and includes numerous factors that convey character to the wine, including soil chemistry, topography, and the microclimate of an individual plot of land.) So critical is terroir to the French wine industry that in the nineteenth century, French officials assessed the quality of the wine produced in each French vineyard and established an elaborate schema for categorizing the wines according to their location and quality—Grand cru, Premier cru, etc. Known today as the Appellation d’origine contrôlée (AOC) (controlled designation of origin) system, effectively the French government provided a quality assurance and consumer protection program for lovers of French wine.
Under the AOC system, for example, the only wines that can bear the label “Champagne” must be fermented from grapes grown in the Champagne region of northeastern France. Grand cru champagne must originate from lands specifically designated as such by the AOC system.
The Italian and the German governments established similar programs.
The Old World producers, although dominant, were not invulnerable to global competition, particularly after the so-called “Judgment of Paris” in 1976, when a British wine merchant living in Paris organized a blind taste-testing competition between French and Californian wines. To the surprise of nearly everyone, the judges rated California wines as superior to those of French wines in the two contested categories. (Bottle Shock, a 2008 movie starring Alan Rickman, dramatizes the events surrounding the Judgment of Paris.) Nonetheless, French wines command a price premium in the export market, averaging more than \($6.00\) a liter compared to only \($3.00\) for wines from Australia, Argentina, Chile, or the United States.
The AOC system, although conferring some marketing advantages, does have some disadvantages. It requires that consumers have a fair degree of knowledge to make wise wine purchases. Moreover, individual vineyards are vulnerable to the vagaries of the weather. If Mother Nature fails to cooperate, a vineyard might receive too much or too little rainfall or sunshine in a growing season; thus, the quality of its grapes could vary from year to year. This may raise the snob appeal of the Old World wines —you can impress your friends with your expertise by recommending one vintage over another. However, many consumers, particularly first-time buyers, found that downright confusing. Because the AOC system tied the wine label to the land on which the grape was grown, Old World vintners were also limited in their ability to benefit from technological changes and economies of scale. If someone invented a machine to facilitate grape harvesting, you could not necessarily buy out your neighbor to capture economies of scale—his land might have a different terroir, and perhaps a different government cru classification. As a result, the average size vineyard in France is only 7.4 acres and 1.3 acres in Italy, compared to 167 acres in Australia and 213 acres in the United States.
Driven by the Judgment of Paris and changes in consumption patterns, wine production grew steadily during the 1970s, 1980s, 1990s, and into the new century in New World countries such as the United States, Chile, Argentina, Australia, and South Africa. The New World wine makers differentiated their wines primarily by grape variety—pinot noir, cabernet sauvignon, etc.—rather than by the specific vineyard or chateau where the grapes were grown. Moreover, the New World wine makers relied on branding, rather than vineyard names, to market their products. This had several advantages. First, it simplified the purchase decision for unsophisticated buyers—-remembering a brand name like Columbia Crest or Yellowtail was often easier than recalling that of an obscure, small French vineyard. Second, New World vintners were able to blend grapes from various vineyards to create a wine with consistent taste from year to year, regardless of random changes in the weather. Third, they were able to market large volumes of wine under that brand name, allowing them to distribute their products more easily through mass market retailers like Tesco, Marks & Spencer, Kroger, and Walmart. As a result, New World vintners are much larger than their Old World rivals and are more able to capture economies of scale from use of the latest technological breakthroughs and labor-saving mechanization. The four largest firms in the United States, for example, control 56 percent of U.S.
sales; for Australia, 62 percent; and Chile, 82 percent. In France, the four largest firms are responsible for only 16 percent of sales; Spain, 21 percent; and Italy, 10 percent.