Breaking In

July 2, 2008 – 1:02 pm

I’ve written before about the British wine market, the most important marketplace in the world of wine.  Everyone wants a place on Britain’s Wine Wall, but breaking in isn’t easy to do, as a recent Decanter article and a conversation with one of my former students makes clear.

Decanter Discovers Washington Wine.

Many Washington winemakers are keen to try to get their feet in the door of European markets.  They figure that the time is right: the dollar is cheap and their wines are excellent. They cannot help but be pleased, therefore, with the July 2008 issue of Decanter magazine, which features an article about Washington wine by regional wine critic Paul Gregutt.  Three pages of text, maps, photos and wine reviews - it’s a nice package.  Several of the wineries mentioned even backed up the effort with two pages of advertising.  A really good display for Washington wines in the world’s most influential wine magazine.

But there’s a problem. British buyers know about these great wines now (more than ten wineries are mentioned including Columbia Crest, Seven Hills, L’Ecole 41 and Reininger), but only one (Columbia Crest) has current British distribution.  Want one of the other nine?  Call the winery in Washington State, the Decanter listing says. You’ve got to wonder how many buyers will do this and how many will just turn the page to the next New World wine - one that is actually available in Britain. You need publicity to get distribution, I know, but publicity without distribution doesn’t make the cash register ring.

On a different note, I have to wonder about the quoted price for the Columbia Crest Horse Heaven Hills Chardonnay.  Wine Spectator gives it 91 points and lists the price at $15.  The British price is apparently £19.53 or about two and a half times as much in dollar terms.!  It’s not going to be easy to break into European markets under these circumstances,

When Gallo Went to Europe

Gallo today is a classic American integrated wine multinational.  Although it is based in Modesto, in the heart of California’s Central Valley, and the bulk of its business is U.S. market, Gallo has complex international linkages.  Gallo sources wine from Italy, France, Australia and New Zealand and sells wine in Europe, Japan, and Latin America.  But it wasn’t always that way.  Gallo’s was drawn into the global marketplace in the 1980s, attracted by the markets in Britain and Germany.

I asked my former student Steve Emery to tell me what happened when these American wines (and American wine ideas) invaded Europe.  Steve is CEO of Earth2O, an Oregon company that bottles and distributes water from pristine Opal Springs near scenic Bend, but in the late 1980s he was Director of Sales for Gallo’s program to establish its varietal wines in England, Ireland and Germany.  His experiences say a lot about the nature of global wine then and now and the problems of breaking into new markets.

Getting Gallo into Europe was difficult, Steve told me, although ultimately successful.  Even though Gallo is a huge presence at home, it was an unknown quantity abroad.  I remember seeing Gallo wines on the shelf of my local wine shop when I taught in England in 1989 and I was surprised at the price point.  Gallo wines seemed expensive to me, about the same price as the most popular French and Italian wines on the shelves.  I expected Gallo to be a cheaper brand like it was at home.  But the advantage of lower price wasn’t really possible in the British market, given such obvious barriers as transportation costs and not-so-obvious hurdles such as the British wine tariff.

Many countries tax wine imports, whether to collect revenue, protect domestic winemakers, or try to shift consumption to other commodities such as local beers and spirits.  Britain is not unusual in this regard.  What makes Britain different is that the tax is relatively high and levied on a per-bottle basis (and only on non-EU wines, of course).  Britain collects more than $2 on each bottle of imported. (£1.29 according to a recent Rabobank report).  The flat per-bottle tax has a way of shifting the demand for wine towards more expensive products.  A $2 tax on a $2 wine represents a 100 percent tax. For a $4 wine, a $2 tax increases the price to $6, a 50 percent rise.  For a $10 wine, the tax raises the price to $12, only a 20% increase.  So the tariff falls heaviest on lower price goods and shifts the market upscale towards better or at least more expensive bottles and wines produced in the EU, not the New World. The cost advantage that Gallo enjoyed  in the United States was partially offset by the British tariff regime.

But that wasn’t the main problem, Steve told me.  The British supermarkets were savvy retailers - some of the wine buyers were highly trained Masters of Wine - the highest designation in wine education.  But they were organized to purchase and market wines based on geographic region rather than brand or type of wine.  As Steve says, they didn’t think in terms of brands (apart from the obvious fact of their own store brands).  This is true even today.  If you go into a Marks and Spencer store in Britain, you will find a world of wine available, but the wine is mainly organized and labeled according its place of origin rather than a US-style brand.  The wine’s “pedigree” (Friuli D.O.C. Grave Merlot, for example, or Macon Rouge, appellation Macon Rouge contrôlée) is listed in big letters, but the maker’s name and the brand - custom bottled for Marks and Spencer - are tiny by comparison.  The wines that Gallo sent to Europe were California wines, a useful geographic designation, but Gallo was the brand that defined the wine, not California.

British wine marketing was also different in other ways.  Steve told me that the British weren’t applying the basic Wine 101 lessons he learned with Gallo in the U.S. - lessons about where to put the most profitable wine (right at eye level on the shelf), where to position your target products in a wine cooler (on the right, where most people will look and reach first) and the many strategies of point-of-sale merchandising. They also introduced print advertising to the wine market successfully.

Gallo had to adapt, Steve said, to be successful in the foreign environment, even replacing the practical screw caps on its least expensive wines with more traditional cork closures (creating a shortage of corks in the process).

The German Problem

Germany was even more difficult, Steve said.  That’s easy to understand given the focus on bargain basement wines.  It doesn’t seem like most German buyers are interested in paying for a brand.  Low price seems to be the main factor and cheaper wines were readily available, Steve said, from Germany, Italy and France.  The supermarket wine buyers didn’t want to talk to him, Steve said, so Gallo resorted to guerrilla  marketing.  They got into the stores through the meat department, using a technique called cross-merchandising.  They sold the wine as the perfect accompaniment to beef, chicken and fish rather than wine alone.  Every meat purchase was therefore a potential wine sale as well.  You are probably familiar with cross-merchandising yourself, even if you’ve never heard the work before.  It is the process that has placed small displays of wine all over your supermarket, so that you never miss an opportunity to pair up wine with whatever you actually came to buy.  The Germans seem to understand cross-marketing very well now.  I visited my local Trader Joe’s this morning and found wine everywhere. I think there was probably more wine spread throughout the store than in the wine section itself.

The wine business is very competitive and Gallo found that the “rules of the game” were much different in Europe.  Wine is regulated as an alcoholic beverage in the U.S., so every aspect of its sales is subject to federal or state regulation.  In Europe, however, Steve said, wine is just another product and the competition is much freer.  That’s why he was able to bargain with the meat department managers in Germany rather than go through the wine buyer department.

Gallo was very successful in Britain and in Europe and many other American wine companies have followed them, but that hasn’t eliminated the challenge of breaking into new markets.  I wish our Washington winemakers good luck in their well-timed assault on the Old World markets. It’s not going to be easy.

By Mike Veseth | Posted in British wine market, Gallo, Paul Gregutt, decanter | Comments (0)

Attack of the Super-Cuvées

June 28, 2008 – 9:43 am

I’ve been thinking a lot recently about the different strategies winemakers use to sell their products and I find myself coming back again and again to a particularly good column by Andrew Jefford in the June 2008 issue of Decanter magazine.  Jefford demonstrates how important economic factors are in shaping what gets poured into your glass.

Bordeaux, Burgundy and Super-Cuvée

Winemakers generally find themselves working with variable quantities and qualities of fruit and the individual wines made from that fruit.  What should be done if some of the raw materials are much better than others as is typically the case?  Blend them all together?  That’s what happens sometimes, especially in the less sophisticated cooperatives in Southern Europe.  The result is often a whole that does not exceed the sum of its parts.  Historically, Jefford explains, there are two dominant approaches to the problem of wine quality to take into account variable wine quality.

The first is the Bordeaux strategy.  The best lots are blended into the grand vin — the one that sells for a high price (in good years at least).  Good wines that just don’t make the cut for the grand vin go into a second label.  Lesser wines are sold off on the bulk market or even a third label.  The system is transparent, relatively consumer friendly and the wines are as good as the vintage allows.  In The Wine Advocate’s report on 2005 Bordeaux, for example, the grand vin Latour (96+ points, 12,000 cases) costs $1125 while the second wine Les Forts de Latour (92 points, 10,000 cases) is less than $200.  A third wine, designated simply Paulliac (89 points) sells for about $60.  Something for everyone, I guess, and a pretty clear hierarchy of wines, although not every Bordeaux producer listed in Parker’s guide displays such a clear link between price and apparent quality.

Burgundy provides a second model, according to Jefford.  The top wines are released as individual vineyard-designated wines and the remaining wines are blended together in to an appellation-designated wine.  I am not an expert on Burgundies, but I have seen this in Oregon, where some wineries release a one Willamette Valley Pinot Noir along with several vineyard designated wines.  This makes the wines very interesting if you are able to taste them side-by-side, but it can otherwise be confusing.  I think it shifts a bit of power to the wine critics and specialists.  But that’s fine if the terroir really comes through and the wines are significantly different.

The third strategy, which Jefford links to the Rhône, is to create a tiny amount of a sort of super-wine that is made, more or less, to gain high scores from wine critics.  I know that wine makers always say that they don’t make wines to get high scores, but a few have privately told me that big Parker numbers are so valuable that they don’t hesitate to make some wines to try to impress wine critics like RP.  Most customers won’t have a chance to buy the Parker wine, it is true, because the production is so small, but the benefits to the winery’s reputation may extend down the line and boost prices and sales of the other wines.

Money, Taste and Power

“Let’s set aside the question of income,” Jefford writes, because he is concerned with the effect of the three systems on the quality of the wine.  The Burgundy system, with its stress on terroir, makes sense when there really is terroir, but otherwise he argues in favor of the Bordeaux plan because it produces more complete wines, wines of good “disposition,” as he puts it. Wines that are good to drink.

The Super-Cuvée strategy, he fears, makes wines that are good to taste (and rate), but not to drink because they are wines of “accumulation,” monster wines, where winemakers seek high scores by adding more and more layers of identifiable attributes to the super-wine at the expense of the quality, complexity and completeness of the wines that make up the bulk of production.

On the face of it, Jefford’s critique of super-wines and the rising power of critics associated with them is based upon taste, but as the column continues it is quickly apparent that he cannot leave the wine economics out of it, because it is at the heart of the problem. The Bordeaux model doesn’t just make better wines, he suggests, but also better incomes in the long run for all producers.  The simplicity of the single Grand vin strategy makes wines more understandable and a “perfect building block,” as he says for a reputation.  He credits Bordeaux’s use of this system in part for their consistently strong reputation and ability to attract investment and maintain strong prices.  He contrasts this with the “chaos and frenzy” of the Super-Cuvées and the “false intellectual challenge” of the many single-vineyard offerings.  Pretty strong words, I would say.

The Burgundy and super-wine strategies depend in different ways on the power of wine critics (like some of those who write for Decanter).  Wine critics validate the legitimacy of single-vineyard offerings and create super-markets for the Super-Cuvées.    It would be interesting to study what factors lead winemakers, especially New World producers, to choose one approach over another.  Perhaps it is terroir.  Perhaps it is scale, training or philosophy.  Or perhaps it is access to wine critics and the power they can have in the marketplace.  Watch this space for more research on this interesting question.

By Mike Veseth | Posted in critics, decanter, wine critics, wine markets, wine price, wine ratings | Comments (0)

Dollar Daze on the Wine Wall

June 21, 2008 – 9:01 am

You know that wine economics has become mainstream when you find yourself listening to it on the car radio.

The Dollar and the Wine Wall

Marketplace, a program of American Public Media that is broadcast by many National Public Radio stations, recently featured a story called U.S. Winemakers Toast a Strong Euro. Go ahead and click on the link to listen to the story or read the transcript.

The basic idea, which my International Economics students will recognize immediately, is that exchange rate changes create many direct and indirect winners and losers. This is particularly true in the increasingly integrated global wine market. The Euro has appreciated from about USD 1.35 per Euro to about USD 1.55 in the last year, which means that a wholesale €10 bottle of French or Italian wine’s dollar cost has increased from $13.50 to $15.50. This pushes the retail price from about $20 to $23 or $24, assuming a full cost pass-through, which puts it at a different price point on the supermarket shelf. Higher shipping costs will nudge the dollar price a bit higher still. Basically, you’re looking at a $20 wine selling for as much as $25. U.S. wines are corresponding cheaper in Eurozone countries.

U.S. winemakers hope that the falling dollar will be their ticket to higher sales abroad. I wrote about this in January when a group of Washington and Oregon wineries organized an export event in London. It is difficult to get traction in foreign markets, but the dollar’s weakness should help.

In the meantime, rising import prices here give domestic wines an advantage. Wine buyers tend to make most of their purchases around particular “comfort zone” price points and rising import prices should create some advantageous substitution effects. This comes out in the Marketplace interview. One wine professional puts it this way

Say if they used to enjoy a Sancerre for $20 and now their favorite producer is $25, they’re going to look for a comparable producer in that same price range that they originally purchased.

And the idea is that the “comparable producer” might be from the U.S., although this isn’t always the case.

Now Things Get Complicated

A falling dollar encourages exports and discourages imports — so far we are following the textbook pretty closely. But real world economics, and wine economics in particular, is seldom so simple. Foreign wine producers and distributors obviously have an incentive to keep from losing their market and there are many strategies to soften the exchange rate effects. The New Zealand producers, for example, seem to have been pretty successful in finding new markets for their wine and strengthening their reputation in response to the rising New Zealand Dollar. So far NZ wine seem to be defying gravity — higher quantities and higher prices too. But not everyone can pull of this bit of magic (or necessarily do it forever in New Zealand’s case).

One way to retain market share is for European exporters, distributors and retailers to absorb some of the exchange rate effects themselves, limiting what economists call the “pass through effect.” Canadian wine columnist Anthony Grismondi wrote about this in April in the Vancouver Sun.

I think European winemakers will be under a lot of pressure this year as container shipping costs continue to rise and the Euro’s strength persist. Not all of these higher costs can or will be passed along immediately in the form of higher dollar prices. The biggest effects will probably be felt on low cost wine, where the shipping cost effect is proportionately greater and price sensitivity is higher, too. Look for foreign wineries to go upmarket if they can and to absorb costs or adjust in other ways if they can’t.

But high end wines are not immune from exchange rate problems. Decanter reported in March that the strong Euro was expected to depress prices for Bordeaux en primeur sales.

Winners & Losers

The dollar hasn’t fallen uniformly relative to all currencies. A dollar buys 3.1 Argentine pesos today, for example, which is about the same as a year ago (Argentina’s compounding economic problems have caused a run on the currency in recent days). The Chilean Peso has not appreciated as much as the Euro and the South African rand is actually cheaper in dollar terms than a year ago.

One well known Australian brand, Lindemans, has been sourcing wine from Chile and South Africa to keep costs down as the Australian dollar has risen — a controversial but not uncommon practice in today’s small world of wine. Look for the Lindemans “Country of Origin” wine series.

This suggests that the Dollar Daze on the Wine Wall might feature some interesting shifts, from France and Italy (and Australia and New Zealand) to Argentina, Chile and South Africa. Is it my imagination or are the wine critics and magazines already riding this wave by featuring these New World regions more prominently in their publications?

By Mike Veseth | Posted in New Zealand, Supply and Demand, exchange rates, wine markets | Comments (1)

Australian Winequake

June 12, 2008 – 8:34 am

Market tremors seem to be felt everywhere — food, fuel, money, natural resources. And now in the wine world.

Wine Tremors

It has been hard to ignore the feeling of instability in the wine world for the last few months. There has been a lot of shifting around of brands and alliances, as if the big wine producers are feeling off balance and need to get recentered. In January, for example, Constellation Brands, the world’s largest wine company, sold off their high volume Almeden and Inglenook brands along with the Paul Masson winery to The Wine Group. The reported logic was that Constellation wanted to focus more on premium and superpremium wines. The Wine Group is a privately held San Francisco-based company that has its roots in Coca Cola’s old wine division. (See Note below.)  It makes and markets a variety of high volume brands, including Franzia, Concannon, Corbett Canyon, Glen Ellen, Mogen David and several international brands.. It is the third largest wine company in the United States, behind on Gallo and Constellation, with 44 million case sales in 2007.

I felt another tremor on Tuesday, when a Decanter.com story reported that Constellation had sold more of its wine brands, this time to a new Healdsburg, California-based group called Ascentia Wine Estates. The wineries are Geyser Peak Winery in Alexander Valley, Atlas Peak in Napa, Sonoma Valley’s Buena Vista Carneros, Gary Farrell Winery, Washington’s Columbia Winery and Covey Run, and Idaho’s Ste Chapelle. They produce about a million cases of wine a year between them. Vineyards in Napa and Sonoma county were included in the $209 million deal. The logic, the article said, was to allow Constellation to continue to sharpen its focus on key upmarket brands.

There are several interesting things about this sale. From the Constellation standpoint brands like Geyser Peak, Buena Vista Carneros and Columbia are a good deal more upscale than high-volume Almaden and Inglenook brands that were sold in January. Constellation sold 59 million cases of wine in the U.S. alone in 2007, so the loss of a million case capacity is less important, I think, than the sign that the company is very serious about reshaping itself to adapt to changing market conditions. Constellation says that they are going to focus on fewer brands at the top of the pyramid and I guess they really mean it.

Ascentia is clearly making a different bet. Ascentia is a private group that includes major investors GESD Capital Partners, a San Francisco-based private equity fund, wine distributor WJ Deutsch & Sons and Jim DeBonis, former chief operating officer of Beam Wine Estates (several of the brands included in this deal were part of the Beam Wine Estates portfolio when Constellation acquired that operation last year).

The involvement of the Deutsch family is significant. Deutsch is the masters of marketing and distribution of value-priced wines. They partnered with Australia’s Casella family to create [Yellow Tail], the best selling import wine in the U.S. (I have written about this in my [Yellow Tail] Tales article. They also import and distribute George DeBoeuf, J. Vidal Fluery and other important wine brands. They clearly see opportunity where Constellation does not. It will be interesting to see how this group adapts to the shifting wine landscape. I cannot believe that they are through assembling their new portfolio because I think there may be more wine brands on the market soon (see below).

Winequake

The news from California on Tuesday regarding the Constellation-Ascentia deal was interesting. But the news from Australia in yesterday’s Financial Times as stunning and represents the first of what might prove to be a series of significant winequakes.

Foster’s, the big Australian drinks group, announced major write-downs of its wine assets and the resignation of its CEO, Trevor O’Hoy. The FT’s Lex column summarized the situation like this:

We all know the feeling: a night of bacchanalian excess followed by regrets and a light wallet the next morning. Foster’s, after a 12-year bender in which it spent A$8bn in the wineries of Australia and the US, has a severe hangover. Australia’s biggest beer and winemaker on Tuesday announced A$1.2bn of write-offs, lowered profit forecasts and parted company with its chief executive.

Foster’s last big splurge, the A$3.7bn purchase of Southcorp, is partly responsible. Foster’s bought the Australian winemaker in 2005 for a generous 14 times enterprise value to forward earnings before interest, tax, depreciation and amortisation, among the highest multiples for deals in the wine sector at the time. It even mocked Southcorp, as it attempted to defend itself against the hostile takeover, for being unduly conservative with respect to its own earnings forecasts.

Fast-forward three years and the hubris has been punished. Integration was botched, partly due to the ill-judged decision to blend sales forces into a single unit in Australia. In the US, distribution was poorly managed. External factors packed the final punch. Australia’s vineyards produced a glut of wine and prices plummeted. The Aussie dollar surged, from about 76 US cents at the time of the acquisition to 95 cents today. Foster’s reckons that every cent move lops A$3.2m off the wine business’ earnings before interest and tax - forecast to total A$1.2bn this year.

Fosters owns 22 wineries in five countries and 60 wine brands, including Beringer, Lindemans, Wolf Blass, Penfolds, Rosemont and Matua Valley. Among other things it is writing off A$ 70 million of bulk wine inventory. It will try to trim its US inventory by 1.4 million cases. (Fosters was the fifth largest wine seller in the U.S. in 2007 with 20 million cases, about the same as Bronco wines and its Two Buck Chuck brand). This is more than a tremor. What does it mean? It is a Foster’s problem, or does it have larger significance?

The assumption for the last few years has been that bigger is better in the global wine market and that big global firms like Constellation and Foster’s had an unbeatable advantage. Is this just a shakeout, or are these recent events a signal that the world of wine is experiencing a fundamental change? Watch this space for updates.

Note: Coke purchased Franzia some years ago and built its wine division from that foundation. The Franzia family now owns Bronco Wines, the Two Buck Chuck company.

By Mike Veseth | Posted in Ascentia, Australian wine, Constellation Brands, Foster's, The Wine Group, Yellow Tail, brands, wine brands | Comments (0)

New World Meets the Old in Argentina

June 3, 2008 – 6:11 pm

The latest news from Argentina is good — exports are up 40%, according to a report on Decanter.com. A New World wine success story! Or is it?

Old World versus New World

Everyone who writes about wine ends up talking about Old World versus New World wines at some point. It is convenient shorthand, I guess. The OId World usually refers to the European heartlands of wine, France, Italy, Spain. The New World is pretty much everyplace else, but especially the US, South Africa, Australian and New Zealand, Argentina and Chile.

Simple dichotomies are often problematic and I think Old World versus New World raises some issues. Old World is often code for tradition, terroir and sophisticated taste while simple industrial wines are associated with New World producers. But it is easy to find counterexamples on each side of the divide. It’s hard to think of Beaujolais Nouveau as embodying the three Ts of Old World orthodoxy — Nouveau seems like the classic Chateau Cash Flow McWine. There are many New World producers, on the other hand, who seem to take the traditions of wine very seriously. John Williams at Frog’s Leap comes to mind. So sometimes it is difficult to know where Old World ends and the New one begins

This is particularly true of Argentina. Winegrapes came to Argentina in 1541, a couple of hundred years before vines showed up in Australia and New Zealand. We tend to think of Argentina as a New World producer because it seems like its wines have only appeared on world markets in the last ten years or so. In fact, however, if you look back a few years you find a much different narrative– a classic Old World wine story.

Old World Argentina

Argentina was settled by migrants from the Old World wine countries, especially Spain and Italy, so it is not unexpected that wine has long been part of its culture. But it might surprise you to know how much Argentina reveals its Old World roots. Argentine wine consumption has until quite recently been very high — Old World high. Looking back to the early 1960s, for example, the heaviest wine consumers in the world were the French (122 liters per person per year), Italy (107), Portugal (100) and then Argentina (83). Spain (61 liters per capita) and Chile came next. No other country came even close.

Argentine wine production was necessarily quite high, too. While France and Italy dominated global wine output in the 1960s, producing almost half of all wine between them, Spain (10%) and Argentina (7.5%) came next (followed by the North African countries that exported mainly to France). Argentina was the Australia of the 1960s.

But with one big difference. Australia (and to a lesser extent Chile) are significant wine nations today because of their high export volumes. Argentina, however, has always produced mainly for domestic consumers (it was actually a net importer of wine in the 1960s as near as I can tell). So it is Old World in terms of wine production and consumption, and has only recently become New World in terms of its global export market presence.

Argentina shares two other important wine attributes with its European relations, both of which are related to wine crises. Argentina’s first crisis, from which it is still emerging, was caused by protectionism. Starting in the 1930s, Argentine winemakers sought and received protection from foreign competition and then subsidies to support domestic production. Arthur Morris of the University of Glasgow wrote a good article on this a few years ago in the Journal of Wine Research. Winegrowing in the subsidized, protected market focused on quantity rather than quality and bad but very cheap wine was the result. There was no incentive to favor quality in the vineyard because good grapes and bad grapes were all mixed together in the cheap bulk wines that urban workers gulped down. Argentina made a lot of wine, but didn’t export any. Who would buy it? This produced, predictably, a crisis of over production.

Don’t Cry: Market Reforms

The big change occurred, according to Professor Morris, when Argentina’s economic policies changed course in the 1990s. The subsidies dried up and decent wines began to trickle in from abroad, establishing a higher standard. An aggressive grubbing up program reduced vineyard area by a third.

The game was up for inferior domestic brands. Competition changed the wine market dynamic, shifting it from quantity to quality. It took only a few years for higher quality Argentine wines to reach the world market, where you see them today. That’s when Argentina became a “New World” producer.

The market reforms that the Argentine industry implemented in the 1990s remind me of the EU agricultural market reforms that Old World wine producers will experience in the next few years. The Argentine reforms seem to have worked, which may be a good omen for the Old World producers, but the industry had to live through a deep crisis first.

It is a good thing that Argentina has made the shift to a wine exporter because of the second crisis it shares with the Old World: collapsing domestic demand. Wine consumption has fallen by about half in France since the 1960s, for example, as consumers have shifted from wine to beer, spirits, sodas and now water. Wine demand declined proportionately more in Argentina, from 83 liters per capita in the 1960s to only less than 30 liters today. The Decanter.com article reports that this trend continues. Argentina has dodged this bad news bullet to a certain extent, however, because of its new focus on quality-driven export markets.

The map of world wine consumption is changing fast. You could define the Old World as the part of the map where high consumption rates have collapsed– France, Italy and Argentina are all there. The New World is where wine cultures are actually growing. Wine market reforms, like those that Argentina has taken and the EU now plans, seem necessary to rebalance the map and align global demand and supply.

Older, Newer: The Wine Lexicon Evolves

Pretty soon we are going to have to invent new terms to describe planet wine– Old World and New World have just about run their course. China and India are obviously not Old World wine countries (although China has made wine for nearly 2000 years) and not exactly New World, either. Perhaps, taking a cue from financial markets, which talk about emerging market economies, we will call them Emerging Wine countries.

And then there are countries like Georgia, Romania and Moldova that produce huge amounts of wine, some of which is now finding its way onto global markets. Old World or New? Old World, if you go by history. Georgia is where wine was first made, according to some historians. But the wine industries in these countries are still recovering (emerging) from the dark Soviet years, when quantity ruled and quality pretty much disappeared. Now, as their industries modernize, they are beginning to enter the market, too. So are they the Oldest World — or maybe the Newest one — and confronting the biggest challenges?

By Mike Veseth | Posted in Argentina, EU wine reforms, Supply and Demand, emerging wine regions, globalization | Comments (0)

Sideways meets Bridget Jones

May 29, 2008 – 6:56 am

It is easy for wine enthusiasts to get carried away sometimes and to over-think the whole idea of wine. Sure cure for thinking too much: go to a movie.

The Sideways Effect

Most readers will already be familiar with the Sideways effect, named for the 2004 motion picture of the same name. In this film one of the protagonists, Miles, expresses a deep love for Pinot Noir and a complete disdain for Merlot. He loves Pinot because it is so fragile …

“It’s a hard grape to grow. As you know. Right? It’s, uh, it’s thin-skinned, temperamental, ripens early. It’s, you know, it’s not a survivor like cabernet, which can just grow anywhere and thrive even when it’s neglected. No, pinot needs constant care and attention. You know? And, in fact, it can only grow in these really specific, little tucked-away corners of the world. And only the most patient and nurturing of growers can do it, really. Only somebody who really takes the time to understand pinot’s potential can then coax it into its fullest expression.”

Merlot, by contrast, must be simple, sturdy, unsophisticated, easy. Anyone can make Merlot. Who wants to drink that — loser wine. (Wine geeks will remember that Miles’s most treasured wine — the one that he desperately drinks out of a styrofoam cup in a moment of self-pity — is ironically a mainly Merlot Cheval Blanc from Bordeaux.)

You may love the film or hate it, but its effect on the wine market is well known: it took an emerging Pinot Noir trend and magnified it, making Pinot the hottest grape in the vineyard. And it contributed to the decline in Merlot sales, too. It’s interesting that a movie could so shape the image of these wines as to produce significant market effects.

But that’s here in America. This could never happen in Britain, where wine consumers are more sophisticated.

The Bridget Jones Effect

But wait. It has, according to an article in The Telegraph. Chardonnay sales are slumping in Great Britain and British wine critic Oz Clarke blames it on Bridget Jones, the movie character who drowns her troubles in glass after golden glass of cheap Australian Chard. “Until Bridget Jones, Chardonnay was really sexy. After, people said, ‘God, not in my bar.” according to Clarke. Now, I guess, it’s loser wine like Merlot.

“Bridget Jones goes out on the pull [WineEconomist translation: singles bar scene], fails, goes back to her miserable bedsit, sits down, pours herself an enormous glass of Chardonnay, sits there with mascara running down her cheeks saying, ‘Dear diary, I’ve failed again, I’ve poured an enormous glass of Chardonnay and I’m going to put my head in the oven.’” Clarke writes, “Great marketing aid.”

A retail market analyst estimates that 7.5 million fewer shoppers picked Chardonnary this year in Great Britain. Sales of other white wines such as Sauvignon Blanc and Pinot Grigio have risen.

The biggest direct effect is in Australia, the source of much of Britain’s popularly priced Chardonnary. Foster’s has reportedly announced that it will not pay more than about $300 per ton for bulk-wine Chardonnay grapes next year, a low price and bad news for growers there. That will put the squeeze on them and they must wonder at the strange logic of the wine world where they suffer because Bridget Jones can’t seem to meet the right guy.

Wine and Identity

I haven’t seen the Bridget Jones films but I’ve watched Sideways and it is pretty clear to me that wine is a powerful image in the film because it is so obviously a metaphor for the main characters. Miles is just like the Pinot Noir that he describes — fragile, tragic and perhaps (and only perhaps) worth the effort that it takes to reach him. Jack, his gregarious, promiscuous buddy, really is Merlot. Easy, simple, stupid at times, and very very popular.

The larger lesson to be learned from all this is the power of identity in consumer behavior. Affluent consumers don’t purchase products so much as they construct personal identities. Goods and services are not ends but means. This is true in many product areas (homes, fashion, autos), so why shouldn’t it be true for wine, too.

Although we may like to think that it is the wine that is the focus of our passion, the Sideways and Brenda Jones effects suggest that identity — how wine makes us think and feel about ourselves — may sometimes be more important than the wine itself in shaping the decisions that wine drinkers make.

By Mike Veseth | Posted in British wine market, Oz Clarke, Sideways | Comments (0)

Tyranny of the 100 Point Wine Scale

May 27, 2008 – 1:17 pm

Wine rating systems are like the weather — everyone complains about them but no one does anything. Paul Gregutt thinks he knows why.

Wine by the Numbers

There are many ways to rate or rank different wines and consumers are very interested in trying to understand what they mean and how to use them. That’s why my column on wine rating systems, Wine by the Numbers, is one of the most popular posts in this blog’s brief history.

Twenty-point rating systems are popular in Europe in part, I understand, because that is how papers are graded in French high schools. Here in the United States the 100 point system that Robert Parker popularized and many others use dominates in part, I suppose, because that’s how our papers were graded in school. Any simple wine scoring system is problematic, however, since a good deal of information is necessarily lost when the attributes of a multidimensional product like wine are reduced to a single number. Wine isn’t like gasoline, where the critical components can be captured, like octane, in a single number.

But there are other problems, too. Paul Gregutt (PG), wine critic for the Seattle Times and Wine Enthusiast magazine, explained the limitations of the 100 point scale and the tendency toward “grade inflation” in his recent book, Washington Wines & Wineries:

This practice of promoting wine, a multi-faceted, subjective sensory experience, simply by broadcasting numbers has gradually devalued the numbers while shrinking the original 100-point scale. At first blush, such a rating system sounds generous, allowing room for a lot of subtlety in the grading curve. But in actual practice it’s not a hundred point scale at all, nor even close.

It has become a ten point scale. Wines rated under 85 are ignored completely. Wines rated 85 to 89 must be marketed as value wines - those numbers only work for wines priced at the low end of the scale. If your wine is going to sell for $15 or more, it must hit 90 points at least. One prominent retailer even makes a point of selling (at discount) wines that have scored the “dreaded” 89. Once a wine moves up the ladder from there, it becomes increasingly rare and expensive. As a result, wines scoring 95 or above are virtually unobtainable for the average consumer.

Although the ratings are “devalued” in terms of their utility, they are also “inflated” in terms of their commercial importance. It would seem that consumers might be better served if someone would re-center the scale so that it uses more of the 100 point range and is therefore potentially (and only potentially) a more accurate guide to quality. This would obviously lower the average score, however. Who is going to be the first to break the pattern and give merely good wines average scores, 70 or 75 instead of 85 so that 85 (B+) means something?

Revising the 100-Point Scale

PG decided to try in his book on Washignton wine. Instead of rating individual wines, he rated the wineries themselves in terms of a modified 100-point scale that gives marks for style (30 points), consistency (30 points), value (30 points) and the winery’s contribution to the development and improvement of the Washington wine industry (10 points).

How did the wineries rate? Quilceda Creek, with its perfect 100 Robert Parker point Cabernet Sauvignon, also got a perfect PG score (30/30/30/10). Leonetti ranked second with 98 points (30/28/30/10). So far so good. The trouble comes further down the list where some prominent wineries get scores in the 70s, 60s, and 50s. The scores make sense when you break them down into the four factors that PG evaluates, but the raw numbers are sort of shocking when you see them for the first time or out of context. (My university students know this feeling, I suspect. It happens when they get their first college papers back after several years of high school grade inflation.)

PG writes about the reaction to his winery rating on his website in a column titled “Time to Dump my 100 Point System?“

Comments from readers and reviewers have been largely positive. Some have embraced my scoring; others have simply accepted it and moved on to the book’s other assets. But within the ranks of the industry itself - wineries and distributors in particular - there has been an awkward silence.

There is little doubt that this book’s sales have been seriously impacted by 1) the decision not to include 3/4 of this state’s wineries and 2) the scoring system itself. One winery veteran, after some prompting, took the trouble to explain why his winery wouldn’t sell or promote the book, even though I had given them one my highest scores.

“Our problem with promoting your book,” the winemaker said, “is that, in spite of the wonderful written praise, we’d spend all out time explaining our B+ grade.” PG is trying to decide if he should scrap his ratings for the next edition of his book (if you have an opinion you can contact Paul through his website PaulGregutt.com).

The First Mover Disadvantage

It is hard to know what to say about this. On one hand I admit that my first reaction to PG’s winery rating scale was neutral to negative, but then with some encouragement from Karen Wade I looked at it more closely and decided that it was actually pretty useful to me as a consumer — so I guess I am the source of some of the positive feedback PG received. On the other hand, I understand that no winemaker is going to take out an ad that boasts “Rated 72 by Critics!” — even if that’s a very good and appropriate rating by the scale being used.

I think we have to admit that re-centering the 100 point scale is a hopeless task and move on. The first mover in point reform will suffer the sort of criticism that PG reports. The only way to do it would be for everyone to switch scales at once. I don’t see that happening.

So what should we do about the ratings? For my part I’m going to try to get my students, who are very much into wine ratings by the time they come to me, to use the UC Davis 20-point scale. I think it might work because (1) they aren’t used to thinking in terms of 20 points and so they will have more open minds about what scores mean and (2) I like the way it breaks down elements of sensory perception: 4 points for appearance, 6 points for smell, 8 points for taste and 2 for overall harmony, according to my copy of The Taste of Wine by Emile Peynaud. Using the Davis scale will encourage them to make up their own minds about what they see, smell and taste. That’s a good thing.

In the meantime I think Paul Gregutt’s experience suggests both why the 100 point system should die and why it probably never will. My advice to Paul: keep the analysis in your book, which is terrific, but kiss the 100-point ratings goodbye.

By Mike Veseth | Posted in Paul Gregutt, Washington wine, book reviews, critics, wine critics, wine ratings | Comments (0)

The Future of Wine?

May 25, 2008 – 3:22 pm

What will the world of wine look like in 50 years? A look in the crystal ball.

What if the Chinese were French?

A journalist with a Brazilian newsweekly called me on Thursday to ask for help with a story on China. The magazine is doing a sort of “worst case scenario” report on the potential impact of China’s economic growth on world markets. What would happen to oil prices, for example, if the Chinese used as much fuel per capita as Americans do? Yikes, that would be a lot of drivers using a lot of gas and it would send oil prices through the roof. What would happen if Chinese consumers generated as much waste and pollution per person as people in the West? Once again, the global effects would be dramatic.

What would happen, the journalist asked me, if Chinese tastes changed and they drank as much wine per capita as the current world champtions, the French? Well, that is a very interesting question, even if it isn’t a very realistic one. Annual Chinese consumption of wine is about a half-liter per capita and rising, according to my copy of The Global Wine Statistical Compendium (and a lot of that wine isn’t grape wine, as I wrote in The China Wine Syndrome). Wine consumption in France, on the other hand, is 55 liters per person and falling (it was more than 120 liters per capita in the early 1960s). The figure is about 8.5 liters per capita for the U.S. and 20 liters per capita for Great Britain.

It is hard to imagine how Chinese wine consumption could rise to the current French level. Heck, it is unlikely that the French will sustain their current level for long. But isn’t entirely out of the question that Chinese consumpion could rise to the world average, which is about 3.5 liters per capita per year. That’s a lot smaller increase than the Brazillian reporter was concerned with, but it would still have a huge impact on global wine markets. Much of the increase would probably be met by higher Chinese production; China is already a major wine producer — smaller than Chile but larger than Portugal in total production. But the global effects would be substantial and prices would surely rise.

We can already see some indication of the potential “China Effect” in the market for fine wine. Everyone seems to think that at least some of the rise in Bordeaux prices in recent years is due to Asian and especially Chinese purchases. This trend seems likely to accelerate now that Hong Kong has eliminated its high tax on wine transactions so that it can become the auction hub of the Asian wine market. The latest Wine Advocate reports prices of 2005 Bordeaux that reach stratospheric levels — $500, $1500, $2500 per bottle! This is what happens when a global market focuses on an object of speculation — huge rents (excess returns) are created. As China (and India, too) become more completely integrated into global markets for products like fine wine, these rents will likely rise higher still.

The View from London

The Brazilians are not the only ones interested in the future of wine. Berry Bros. & Rudd (BBR), the London fine wine house, recently celebrated its 310th anniversary with the release of the Future of Wine Report written by four of their top wine buyers (Alun Griffiths MW, Jasper Morris MW, Simon Field MW and David Berry Green). It makes pretty interesting reading if you are interested in what wine markets might look like in 2058.

I say wine markets (plural) because BBR correctly recognizes that there is not one wine market but many interrelated ones. The fine wine market, BBR predicts, will see the rise of China and India as important factors in terms of both demand and supply. “I absolutely think China will be a fine wine player rivalling the best wines from France,” writes Jasper Morris. Britain will become an important producer of fine wines, too, perhaps especially Champagne-like sparkers.

Wine prices will soar even higher, according to the report. “If values increase by 15% per annumn, as they have been doing recently, a case of 2005 Ch. Lafite-Rothschild, currently available for £9,200. could be worth just shy of £10 mllion by 2050,” according to Simon Staples.

The forecast changes are more dramatic in the volume wine market. China will be the world’s largest wine producer. Global warming will shift wine production from France to Eastern Europe and from Napa Valley to Canada. Australia, the report speculates, could see a collapse of its volume wine industry if recent droughts persist. Goodbye Yellow Tail. Hello boutique producers in cooler, wetter areas like Tasmania.

Brands will become even more important in the volume business, BBR suggest. “In 50 years, consumers will ask for wine by the brand name or flavour and won’t know, or care, where it has come from. Grapes will be genetically modified to change a wine’s taste,” according to Jasper Morris, “and producers will add artificial flavourings to create a style wanted by consumers.” Wait — OMG I think I drank those wines back in the 1970s when I was in grad school!

Bottles and corks? They’re history. Corks will disappear because they are inefficient — the contamination rate is too high. Bottles are heavy and environmentally problematic. Tetra pak containers (like the ones used in today’s French Rabbit wines) and other sustainable packaging systems will prevail for volume wine.

The Future of Wine?

So what should we think of these visions of the future of wine? Economists like to say that prediction is difficult, especially about the future, so long range forecasts need to be taken for the educated guesses that they are.

Some forecasts, will be wrong because they are more or less simple straight line extrapolations (How much wine would the Chinese drink if they were French? How much will fine wine costs if its price compounds at the current rate?). It seems to me that simple projections are usually wrong because they are sensitive to initial conditions. Who is to say if long term trends will match those of the recent past?

Some predictions, like the £10 million case of wine, are extreme, but others are probably too conservative. The wine world has a way of surprising us — who in 1958 would have predicted the importance of Chile and Argentina today or the decline of consumption and production in France? People matter, too. People and their ideas are powerful forces that do not always respect historical trends, as refelction on the recent death of Robert Mondavi remind us.

Kenneth Boulding, the great 20th Century social scientist, once wrote a history of the future. He looked back to see what people in the past had said about the world just ahead. What he learned, he told me, was that when the future eventually rolled around, it never matched the predictions, it was always unexpected. The best way to prepare for the future, he concluded, was to prepare to be surprised. I expect this rather general advice applies as well to wine.

By Mike Veseth | Posted in Australian wine, Berry Bros. & Rudd, China wine, Economic impact, New Zealand, Supply and Demand, wine price, wine taxes | Comments (2)

The Sub-Prime Wine Crisis

May 20, 2008 – 6:26 pm

What does the sub-prime mortgage crisis have to in common with the market for wine today? More than you might think! Read on …

Liquidity Problems

Here’s a simplified version of the sub-prime mortgage crisis narrative. A housing bubble masked the inherent risk of the mortgaged-backed securities that financed the bubble itself. Investors were unable to fully assess risk because the complicated financial vehicles were not very “transparent” and the rating agencies did not prove to be trustworthy guides.

When the crisis came, liquidity dried up and the market deflated (crashing in some cases). The solution to the problem, many think, is to increase transparency — to make it easier to figure what is in a mortgage-backed security and how to assess its risk and return.

Some wine buyers will find it easy to relate to elements of this story, according to the Project Genome study recently released by Constellation Brands (I have written about Project Genome in my post “What are wine enthusiasts looking for?”).

According to this study, the largest single group of wine consumers are”overwhelmed” by the choices confronting them and cannot adequately assess the risk they face when staring down a crowded supermarket wine aisle or endless restaurant wine list. Their “liquidity crisis” is a real one — they are afraid to invest in complicated wine products due to a lack of confidence in their knowledge and lack of transparency regarding what’s really in the bottle. Intimidated, they buy a lot less wine than other groups. They lose and winemakers lose, too.

Project Genome estimates that overwhelmed consumers represent 23% of wine buyers, but make just 13% of all wine purchases. They are the “bottom of the pyramid” of wine and many industry people figure that a fortune awaits anyone who taps this market.

Making Wine More Transparent

So what’s the best way to make the wine buying process more transparent and end the overwhelmed consumer’s liquidity crisis? Better information is one approach. Wine critics are the bond rating agencies of the wine market. Their scores give many wine buyers the confidence they need to make what really is a risky purchase. At their best, wine critics serve a useful function of reducing uncertainty about what’s in that bottle and whether it is worth the price.

But there are dozens of wine critics and their ratings, using different scales and ranking protocols, do not always agree and are not always a clear guide. How many disappointing wines have you bought because of the “89-point” rating on the shelf tag? It only takes a few highly-rated losers to discourage an overwhelmed buyer from taking a chance.

Wine critics are part of the answer, but they are also part of the problem. What other options are available? The May 15, 2008 Wall Street Journal included an interesting article by Charles Passy (the “Cranky Consumer” columnist) that examined how some wine retailers are trying to demystify wine. “For Novice Shoppers, a Little Wine 101” describes four retailers, WineStyles, Total Wine & More, The Grape and Costco, and their different marketing strategies (I wrote about Costco’s system in an earlier post, “Costco and Global Wine“).

I’ve been to a WineStyles store so I can give a personal report. The store is arranged according to wine style profiles (crisp, silky, rich, etc.) rather than varietal type, production region or retail price. So if you know you like a crisp wine, you go to that wine rack and you find wines such as Washington Riesling, Chilean Sauvignon Blanc and South African Chenin Blanc. You are directed to the style you like and hopefully encouraged to try unfamiliar types of wine. If consumers can actually figure out what they like about wine and if they develop confidence in the style categories, this system helps them make better and more self-assured choices.

Food and wine writer Cynthia Nims reports on another strategy on her blog, Mon Appétit. Cynthia discovered a line of branded wines called “Wine that Loves” that are intended to simplify the wine-food pairing choice. Are you looking for something to serve with roast chicken? Pick up “Wine that Loves Roast Chicken.” Fish tonight? Look for “Wine that Loves Grilled Salmon.”

The chicken wine is “Predominantly Garnacha” according to the label — not a wine that an overwhelmed consumer would probably risk as a varietal choice, but might try and like in this format. The salmon wine is a Pinot Grigio/Garganega/Chardonnay blend. I like this concept because it links wine to food, which is very important, and encourages experimentation. It will be interesting to see if buyers embrace it or if it is just a novelty that soon fades.

The British System of House Brands

Great Britian is the most important wine market in the world in part because British retailers have developed a number of successful strategies to increase wine buyer confidence. Supermarkets are the big players in the U.K, and house brands are key to their wine strategies. Tesco, Waitrose, Sainsbury’s and Marks & Spencer all have their own brands of wine (sourced from around the world). Buyers are willing to try an unfamiliar wine because their confidence in the supermarket chain transfers over the the wine.

(It doesn’t hurt that at least some of the house brand wines are very good, of course. A M&S house brand wine is one of the highest-rated New World Sauvignon Blancs in the current Decanter ratings, for example.)

Trader Joe’s uses this strategy here in the U.S. (I have written about this in 300 Million Bottles of Two Buck Chuck). Trader Joe’s sells vast quantities of Charles Shaw (a.k.a. Two Buck Chuck) wine each year and the key is reputation. Not the wine’s reputation — the store’s. Trader Joe’s has a reputation for value and quality, which lends credibility to their house brand wine. As I have said before, the miracle of Two Buck Chuck isn’t that you can sell a wine for $1.99, it is that you can get anyone to buy it. The $1.99 price point just screams “rotgut.” But people happily buy wine at Trader Joe’s  at price points they would never think of considering at Safeway or Kroger because they have confidence in the TJ brand.

My local upscale grocer, Metropolitan Market, is trying the house brand route, apparently with success. For the last year or so they have occasionally stocked limited-release house brand wine specials such as the 2007 Columbia Valley “White Selection #1″ shown here. The wines go for $8 per bottle or $88 per case and they are stacked in big displays that remind me of, well, Trader Joe’s.

These house brand wines are kind of interesting. The first release of the year was a Rosé — hardly an easy sale given upmarket consumer resistance to pink wines (too close to White Zin!) and the chilly spring we have had — and now a white that turns out on close inspection to be an oak-free Semillon blend. I like Semillon quite a bit, but I don’t think you could sell it by the case at a neighborhood grocery store with a traditional brand name and varietal label. But “Met Market White #1″ and the Rosé are products that buyers seem to embrace as safe bets and good values because of the store’s reputation for quality.

They fly out the door, according to the satisfied customers in line with me last week. You might have trouble selling them as ordinary branded varietals, but they go down easy as trusted house brand wines. The British know the wine game really well. We are smart to learn from them.

Confidence Game

Everyone is trying to solve the overwhelmed consumers’ liquidity problem. Here in the Pacific Northwest we have consumer friendly labels like House Wine (produced by the Magnificent Wine Company) and Wine By Joe, an Oregon brand. Like the Met Market generics, these are good quality upmarket answers to the question, what should I buy to drink tonight? The reputations these brands have developed for value and quality makes buying their wines a comfortable experience for many consumers. (My Costco sells the House Wines brands by the case.)

Take a close look at your supermarket wine aisle and I think you will see a lot of products designed to make wine easier to understand and buy. With so much creative energy at work here, I am confident that the needs of overwhelmed wine buyer market are being well served. Maybe they’ll stop being overwhelmed and their liquidity crisis will end. I wish I had the same confidence about the financial markets!

By Mike Veseth | Posted in British wine market, Charles Shaw, Constellation Brands, Supply and Demand, Tesco, Trader Joe's, Two Buck Chuck, brands, critics, wine brands, wine critics, wine markets | Comments (2)

Senior Research Assistant

May 18, 2008 – 9:47 am

In honor of his birthday on May 19 I am appointing Michael H. Morrell, physician, navigator and cheap wine specialist, as my Senior Research Assistant for that day.

Here is a photo of Michael hard at work during our visit to Domaine Drouhin Oregon in August 2007.

You can read about Michael, his wife Nancy and his wine fieldwork experiences in “Old World meets New World in Oregon.”

Congratulations and Happy Birthday, Michael. Keep up the good work.

By Mike Veseth | Posted in wine research | Comments (0)