The gemara[1] has a rule that states that any type of wine which is valid b’di’eved (after the fact) for nesachim (libations on the altar) is valid l’chatchila (as a proper choice) for Kiddush. One of the examples given is yayin migito (“wine” that has just been pressed), which has not had the opportunity to ferment and is valid for Kiddush. This is also the ruling of the Shulchan Aruch.[2] This is what we commonly call grape juice, and, therefore, it appears clear that grape juice is totally fit for Kiddush.
That is basically the bottom line, but there are a few reservations that justify the claim you heard that wine is preferable. The Magen Avraham[3] points out that even though one may choose grape juice for Kiddush, it is more proper to use “older wine,” which is at least forty days old.[4] (Be aware that before the advent of preservatives, refrigeration and vacuum packing, grape juice could not last that long without spoiling.) It follows from the way the Magen Avraham presents the halachic preference that the issue is not a need for alcoholic content. Rather, wine that has been stored for at least forty days is considered to be of higher quality, and the Shulchan Aruch[5] says that it is proper to choose good wine for Kiddush. Thus, high quality grape juice could be preferable to low quality wine, and the matter might depend on personal preference.[6]
There is some room to claim that our grape juice is halachically inferior to that which the classical sources refer to as yayin migito. In the process of making grape juice, something is done to the juice (usually including heating it to a level that is considered cooking) to prevent fermentation from taking place. This raises two issues. Firstly, there are several, important classical opinions that hold that cooked wine (mevushal) is unfit for use for Kiddush.[7] However, on this issue, which may also apply to pasteurized wines, the accepted ruling is to be lenient.[8]
Secondly, the Rashbam[9] implies that yayin migito is valid only because it will become alcoholic if left alone; this is not the case with our grape juice, which cannot turn into wine. However, there are several ways to deal with this issue. One is that since the grape juice is considered fit for Kiddush before pasteurization, it does not lose that status later on, since the process is not a destructive one for the juice.[10] Most poskim rule leniently on all of these issues and say that our standard types of grape juice require the beracha of Borei Pri HaGefen and are fit for Kiddush.[11]
What remains a problem is reconstituted grape juice. Here, most of its water is removed, and new water is added to it later on. Rav S.Z. Orbach[12] felt that the minority of concentrated grape juice cannot turn the majority of added water into grape juice. While we have heard that this type of grape juice is uncommon in Israel, we cannot speak for other parts of the world. (Most “organized” countries probably require producers to inform the public that the grape juice has undergone this process.) Since wine and grape juice require rabbinical supervision for reasons of kashrut, it is appropriate that many of the hashgachot have begun indicating whether they are fit for Kiddush and deserve the beracha of HaGefen. The primary importance of such a certification is to ensure that the wine is not overly diluted, which is a halachic concern, especially for Sephardim.
In short, grape juice is acceptable for Kiddush. Unless one has personal preferences (taste, health, or educational), wine is more festive and preferable, especially at night, when we are more strict.