Celebrating Malbec World Day 2015


April 17, 2015 is Malbec World Day — a great opportunity to pull the cork on a bottle of Malbec wine and to appreciate how quickly this grape variety has come to be an important part of the U.S. and global wine scene.

I have a warm spot in my heart for Malbec because it reminds me of all the nice people and great wines Sue and I encountered during our visit to Argentina a few years ago.  So many interesting experiences learning about old vine Malbec from Roberto De La Mota at Mendel winery, about Malbec -Cabernet blends at Catena and that Argentina is much more than Malbec at a special tasting arranged by Andrés Rosberg.

My appreciation of Malbec deepened when I was asked to take part in the award-winning 2011 documentary Boom Varietal: The Rise of Argentine Malbec produced by Kirk Ermish and directed by Sky Pinnick.  The economics of the Malbec story came to play a surprisingly large part in the film and so I had more screen time than I would ever have expected.

Malbec’s story is inevitably associated with Argentina, but it has become a world-wide phenomenon, breathing life into the Malbec industry back home in its native France (where it is often called Côt) and opening doors to wine-growers around the world (perhaps especially here in the Pacific Northwest).

I’ll be toasting the rise of Malbec with a glass of … what else? … Argentinean Malbec on April 17. Please join me. Cheers!

Premiumization: Is This the Wine Market’s New “New Normal?”

Is the current U.S. wine market the new “new normal” — can the recent upmarket shift in wine sales be sustained into the future? Two recent Wine Economist columns have detailed the surprising bifurcation of the U.S. wine market and tried to understand what forces are behind it. Wine sales below about $9 are stagnant or falling while upmarket sales revenues are increasing, with the largest percentage rise in the $20+ segment.

This is a surprising state of things, I argued two weeks ago, because the conventional wisdom once held that the Great Recession had created a “new normal” that centered on trading down behavior and discounting strategies. Not many people argued that we’d be “trading up” in the post-recession world.

And, as I noted in last week’s column, it is not clear that it is a simple return to previous behavior. I analyzed several theories for the change and concluded that none of them told the entire story, but together they explain the situation fairly well. So now we have to ask if those trends will continue — if the new market structure is the new “new normal” — or if the upmarket movement is unsustainable.

My answer — typical of an economist — is that it depends. It is really too soon to tell what will happen in the long run because there are so many unpredictable factors to consider. But since I asked this question I feel I ought to give more of an answer, so here’s my attempt at crystal ball gazing.

It’s too soon to tell about the U.S. market in the long run, but the current pattern is likely to be sustained for the medium term, although not necessarily due to the same factors that created it in the first place. Here’s my reasoning.

Decline and Fall of Down-market Wine

Inexpensive wines are not going away, but it seems unlikely that they will soon return to solid growth. This might be because of the alleged “bad wine” effect that I talked about last week, but it is more likely due to supply-side effects.

With water issues rising to the surface almost everywhere and higher irrigation costs in many places, the economic sustainability of low-cost wine grapes is in serious doubt at current prices. Jeff Bitter’s presentation at this year’s Unified Symposium in Sacramento included photos of acres of healthy Central Valley grapes left to rot on the vine because they were not worth the cost of harvest this year and probably not worth irrigation costs next year.

What is the future of these vines? Thousands of acres of vines have been grubbed up in California in recent years to make way for other crops with higher potential value — almonds and pistachios are the most frequently cited crop alternatives, but I’m sure there are others.  Imported bulk wines can easily fill in the gap left by falling California production in the short run, but sustainability issues (both economic and environmental) are a global phenomenon.

Low-cost wine grapes (and the wines they produce) are not going away, but there is limited incentive to invest here and so the focus is upmarket, where margins are better and business sustainability is more feasible.

Up the Down Staircase?

The upmarket movement in wine sales is likely to be sustained at least for some time because it is driven by factors affecting both demand and supply that are not specific to the U.S. but part of strong global trends. The supply-side element is easy to understand. Intense competition has cut margins on basic wines to the bone (and even deeper than that in some markets). Follow the money, Deep Throat said, and wine producers are listening to that advice now more than ever.

Once again, that doesn’t mean that basic wines and the bulk wine trade that has evolved around them are going away. It is simply that this is not the market segment that will get investment in future. Producers are likely to focus even more on the premium, super-premium and ultra-premium segments in the future. Every wine producer I have talked with around the world is focusing on moving up the up staircase and plotting effective distribution and marketing strategies.

On the demand  side I would point to the increasing importance of retailers like Trader Joe’s and Whole Foods and their many upscale local market competitors that attract customers by providing them with a sense of authenticity and affordable luxury in the quotidian consumption experience.

Products of origin and artisan creations with sustainability credentials — these are the hallmarks of the new retail environment and upscale supermarkets and a growing number of their customers seek out wines that fit that profile. Even hard-discount Aldi is playing along on the wine aisle, providing unexpectedly premium wines in their U.K. stores.

Bronco Busting

Don’t believe that the shift is important? Well, it wouldn’t be the first time that I’ve been wrong, but I think you will find evidence all around you if you look for it. Let me give you just one data point to get you thinking.

Consider the Bronco Wine Company, the famous maker of Two Buck Chuck and many other inexpensive wines. Bronco chief Fred Franzia once said that no wine should cost more than $10 and he built the 4th largest wine company in the U.S. by making those wines both for his own labels and, under contract, for other firms.

Where is Bronco headed today? Well, Two Buck Chuck is still in the picture and I think it is probably still selling about 5 million cases a year as it was the last time I wrote about it. But Bronco is busting out of that market segment via a variety of new products that, while they don’t aim for Screaming Eagle or DRC cult status still fit the profiles I’ve outline here. Several of Bronco’s wines illustrate the upmarket trends that I see for the future, including Garnet and Green Truck.

Garnet Vineyards are maybe not what you’d expect from the maker of Two Buck Chuck. They are all about cool climate Chardonnay and Pinot Noir from Monterey and more cool climate Pinot Noir from the Sonoma Coast. The highly-regarded Alison Crowe (author of the popular blog The Girl and the Grape)  makes the wines . The Garnet Rogers Creek Vineyard Sonoma Coast Pinot Noir ticks the boxes key to buyers seeking authenticity and sells for $29.99 on Amazon.com, about ten times the price of a bottle of Two Buck Chuck.

The long list of wines that Bronco produces and/or distributes includes six different organic wine brands plus a number that are vegan-friendly. Green Truck wine from Mendocino County is a good example. The wines are made from organic grapes and when I searched to see the nearest retailer to me there was Whole Foods near the top of the list.

Buckle Up!

Wine is looking up! The new normal will focus on wines that tell as good a story as other contemporary market products, such as craft beers and spirits and locally-sourced food products. It’s a great opportunity for wine producers, but the market is very competitive and will only get more so.

Buckle up!  It’s going to be a wild ride.

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I thought you might enjoy this 2007  video of  wine critic Oz Clarke and “Top Gear” presenter James May meeting Bronco’s Fred Franzia. Their reaction to Two Buck Chuck may surprise you. Cheers!

Business Summit Talk: How to Make a $mall Fortune in the Wine Business

Wine Economist readers in the Pacific Northwest are encouraged to come to the Walla Walla Business Summit at the Marcus Whitman Hotel in Walla Walla this Friday, April 10, 2015. I’ll be joining a solid line-up of business speakers in this day-long event (which concludes with a wine reception, of course).

My topic? “How to make a $mall fortune in the wine business (and other lessons for people in and out of the wine game).” I’ll be drawing upon some ideas found in my forthcoming book, Money, Taste and Wine: It’s Complicated!  I hope to make my comments relevant to both wine industry people and the general business community. Interested? I look forward to seeing you in Walla Walla.

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Trading Up? The New Conventional Wisdom About the U.S. Wine Market

Last week I wrote about the unexpected state of the U.S. wine market today, where sales of wines above about $9 are strong and growing while the below $9 segments are stagnant or in decline. Thinking back to the dismal state of the wine market a few years ago, with trading down and heavy discounting, the current situation comes as a big surprise.

What accounts for the transformation of the U.S. wine market? And is this the “new normal” that we should expect for future years? Let’s look at the emerging conventional wisdom on these questions.

Trading Up?

I don’t know many people who think that the shift toward more expensive wines is a simple reversal of the recession years’ trading down, although that doesn’t mean that it doesn’t happen. Consumers seem as price sensitive as ever, which is why store shelves are still papered with “shelf talkers” like the one shown here that beckon buyers with discounted prices.

Yes, discounting is still going on, although perhaps not quite at the same level as during the Great Recession. The best argument for trading up is that consumers who had an opportunity to sample better wines during the deep discount days and  liked them now are feeling more economically secure and are continuing to buy them at higher prices. I’m sure that this is happening to a certain extent, but I don’t think it is the whole story.  Consumers are simply too focused on price to have suddenly changed.

Price resistance means that most consumers aren’t willing to pay more for the same or similar wine, but they are willing to spend more for something different. Who is doing this?

The Millennial Theory

One theory holds that the changing shape of the wine market is driven by younger wine drinkers — we often call them the millennials here in the U.S. but I have also seen the term “echo boomers” used and Constellation’s latest Project Genome study calls them “engaged newcomers.” As a group they tend to buy wine less frequently than some other groups (they also drink spirits, craft beers and so on) but spend more per bottle. This is the opposite of my behavior as a young wine drinker and probably a good thing.

If what we think we know about millennials is true, then they can account for some of the trend towards higher price wine sales, but they are certainly  not the whole story.  They don’t explain the shift away from lower-priced wines because they were never the driving force there. And they cannot account for all of the upmarket shift because at this point they don’t buy enough wine to move the whole market this way. Millennials are part of the story, but not the whole answer. What else?

The Bad Wine Theory

One very interesting theory is that the relative quality of wine below about $9 has fallen, driving customers away in search of something better to drink. They have found it, too, in craft beers, ciders and spirits.

W. Blake Gray recently made this point in a column titled “Wine under $10 sucks. Should we care?”  Tim Atkin made a similar point about wine in the UK market.  It’s very difficult to find decent wine below £5, he says, which is a change from the past.

A recent article on Bibendum’s website tells the sad UK story, which this graphic illustrates. If you want to get value in wine in the UK, it seems you have to move upmarket. The actual cost of the wine is more than a third of the total cost of a £20 bottle, but less than 10% of the cost of a £5 wine. Shocking!

This deteriorating value of inexpensive wines, if true, is a surprising situation. Only a few years ago we experienced something of a revolution when the character of commercial quality wine improved  quite dramatically (I called it the Miracle of Two Buck Chuck in my book Wine Wars). A structural surplus of decent wine and grapes on the U.S. and world markets made it possible for winemakers to assemble products at low price points that rivaled some brands in higher price segments. The unexpected value they provided drew millions of consumers into the wine markets Is poor quality and value pushing them away?

Well, poor value is certainly part of the answer in the U.K., where high wine duties have distorted the market and undone much of the miracle of the past. And I have some friends in California who complain that cheaper and lower quality bulk wine imports are now filling bottles of California-brand wine. The brand is associated with California (like Barefoot, for example) but the wines themselves come from many places (and are so-designated on the packaging).

Have quality and value suffered? I’m an economist not a wine critic, so I will leave it up to you to decide, but some of my California friends think that’s what’s happened. If this is true, then where is the better California wine going? Some of it is sitting in tanks, which are pretty full after a couple of generous vintages in a row. The rest? Some of it, I think, fills the bottles of wine brands specially created for the new market environment.

The Branded Age

This supply-side theory holds that smart wine executives have noticed that many consumers are willing to pay more for something different (and are put off by the commodity wines) and they have responded by creating new brands to fill specific upscale market niches. This helps explain the great proliferation of wine brands and even virtual wineries on the scene.

Each year I enjoy Jon Fredriksen’s talk about the state of the U.S. wine market at the Unified Wine and Grape Symposium, but recently I have noticed that his list of the hottest wine brands is full of unfamiliar (to me) names. These aren’t new wineries, simply new brands created by innovative existing large- and medium-sized wine firms.

Jon’s data suggest to me that these are some of the wines that are attracting buyer interest and pulling the market along. An example? Take The Wine Group, which is the second largest wine producer in the U.S. with 57.5 million case sales according to Wine Business Monthly. A few years ago I thought of them in terms of brands like Almaden and Franzia wines, which are  in that lower market tier that is stagnating today.

Now when I think of The Wine Group I think of Cupcake Vineyards, which at 3 million cases is small compared to Franzia’s 26 million, but perfectly fits that upmarket profile and is often priced right at or just above key $9-$10 threshold along with Apothic, 14 Hands and other hot brands.

Which Theory? The New New Normal?

No single theory explains what has happened and the market is full of special cases. Take Argentinian wines, for example. Customers are buying more expensive products from Argentina now in part because the cheaper labels have disappeared. With inflation still soaring and the exchange rate stuck, many Argentinean firms cannot afford to export cheaper Malbecs to the U.S., which shifts the center of gravity upmarket.

All these ideas (and others, too) are part of the explanation of today’s transformed market. It’s a perfect story of effects (or a train wreck, depending which end of the market you are in). Is this the new “new normal” and, if so, how long will it last? That’s a question for next week.

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Thanks to everyone who commented on last week’s columns — great ideas! Keep them coming.

The Surprising Rebound & Unexpected Bifurcation of the U.S. Wine Market

Let’s climb in my time machine and go back a few years to 2008-2009, when the impact of the global financial crisis was beginning to be felt in the wine markets. It was a pretty gloomy time and there was a lot of talk about the need to reset our expectations to the “new normal.”

Gone were the days of great expectations as everyone scrambled to cope with the changing economic and consumer environment. What did we imagine the future would hold? Well, opinions varied, of course, but the “conventional wisdom” generally revolved around a few dire trends.

Trading Down and Trading Over

One of the most-cited trends was trading down. It sure looked like wine consumers were pulling away from wines at higher price points and shifting to less expensive products — or even moving away from wine altogether. Here’s a video that captures the moment fairly well (it was the first time I was ever interviewed by an animated character)

Trading down seemed like an unstoppable force at the time, although I suggested that it was more complicated. I noticed the strength of the Barefoot wine brand and proposed that it wasn’t just the price of the wine that made it so appealing to recession-battered wine drinkers, it was also the casual image that it offered with its surfer dude footprint in the sand style.

No one wants to admit to themselves that they are trading down, I wrote. Not good for self-esteem. But we can all embrace the idea of trading over — over to a more relaxed, less serious (and incidentally also maybe less expensive) idea of wine. Relax (there is even a brand of Riesling called “Relax”) and just enjoy wine. That’s what I thought I saw in the marketplace.

The $20+ Dead Zone

Whether it was trading down or trading over, the result was the same: the $20 and up segment of the wine market was declared a “dead zone” where nothing moved.  People still drank more expensive wines, then just didn’t buy them. They “drank up” from their cellars rather than “trading down” at the wine shop.

Wineries found that many wine club members were pulling back from scheduled shipments. Restaurant wine sales took a very big hit, too, as consumers dined out less frequently and economized on wine purchases when they did. Restaurants coped by trading down themselves, putting more pressure on wineries.

Dumping, Discounting and Flash Sales

Some wineries held their prices and absorbed inventory accumulations rather than discount or dumped excess wine on the bulk market (where Cameron Hughes and others found some outstanding bargains for their customers). They saw price cuts as a one-way street. You can lower prices, but can you raise them back up again when good times return?  Some wineries split the difference by bringing out second labels to sell for less — chateau cash flow wines — while holding the price line on prestige brands.  Lots of mistakes were made along the way and some wineries fell out of the market.

Many discounting strategies were rolled out. Safeway stores began running promotions where $20+ wines could be purchased for 30% off the regular price (or 40% off with a 6-bottle purchase) — a clear attempt to reduce inventories in the “dead zone” category. A number of “flash sale” wine websites appeared that allowed wineries to sell off surplus stock quickly and outside of the usual sales vectors.

Sometimes wineries found themselves caught in competition with their own wines as buyers (wine club members, restaurants, a few distributors) dumped their stock back on the market, under-cutting carefully calculated producer pricing strategies.

There were some great bargains for buyers who recognized them (and had the credit card headroom to take advantage), but there were not very many true winners among wine producers, especially those in the higher price ranges. The frankly defensive strategy of generating cash flow while protecting key price points was the best that many wineries could hope for.divide

Up the Down Staircase

Would consumers shift back when the recession was over? Not many people held out hope for a reset of the reset. So the current state of the U.S. wine market, which Jon Fredrikson has called “A Tale of Two Markets” comes as something of a surprise.

The U.S. wine market has split in two as the table above shows. (The table shows recent data for off-premises wine sales as measured through the particular retail channels monitored by the Nielsen Company. These data are indicative of what’s going on in the broad market.)

While the market is expanding at a moderate +3.4% pace (at least it is growing, unlike wine markets in some Old World regions), there is a clear division between wines selling at prices below $9 and those that sell for more. Although the cheaper wines make up the majority of the market by volume, they are shrinking in dollar sales value, especially the $6.00 to $8.99 segment.

The New Conventional Wisdom?

More expensive wines, on the other hand, represent a rising market segment. All price segments over $9 are growing as per these data, with the fastest growth at the highest price point — $20 and above!

This is truly a dramatic turnaround for U.S. wine. What is behind this unexpected change?  I’ll survey the new conventional wisdom in my next column.

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BTW that’s a really old picture of me in the video — I hope that  I’ve improved with age since 2008. The Costco reference is a bit off in that interview, too. Costco sells wine at a low mark-up, but they don’t try to compete at the very bottom of the market as the video images suggest. I don’t think I’ve ever seen boxes of Franzia at a Costco, for example.

Exchange Rate Lessons from Australia’s Wine Boom and Bust

Kym Anderson (with the assistance of Nanda Aryal), Growth and Cycles in Australia’s Wine Industry: A Statistical Compendium 1843-2013). University of Adelaide Press, 2015. (Available as a free pdf download — follow the link above.)

ozKym Anderson’s new book on the five major boom-bust cycles of the Australian wine industry is a landmark wine economics study. Like all of Anderson’s work, it is data-driven and provides both the casual reader and focused student with a wealth of information.  A detailed Executive Summary is followed by 73 pages of analysis (and ten more of references), 86 revealing charts and more than 450 pages of tables.

Answers and Questions

I’m not sure I have ever seen such a detailed account of what happened to a wine industry, when, where and how. The data span the decades, regions, grape varieties, international regimes and economic cycles.  Such a wealth of information is valuable both for its ability to answer questions and for the way that it provokes them.

I won’t attempt to summarize Anderson’s big volume here (Andrew Jefford did a great job of this in his Decanter column) but I thought I might illustrate the sort of focused analysis that the book makes not just possible but convenient.  We are always looking for lessons from history and I think Australia’s wine business cycles are useful in this regard, especially the fifth cycle, which began in 1986 and continues today.

Exchange Rate Effects?

Anderson describes the recent collapse of the Australian wine industry as the result of a “perfect storm of shocks” including drought and rising irrigation water prices, the global financial crisis, the rise of the Australian dollar (driven by mineral exports to China), increased competition from other wine-exporting countries, and China’s austerity policies (which have reduced demand for luxury wine products). He could have added vineyard  heat spikes, wildfires and the gradual but significant effects of global climate change to the list of challenges. Perfect storm, indeed!aud

Since we are currently experiencing a period of major exchange rate realignment, with the U.S. dollar on the rise and the Euro seemingly in free fall, I thought it would be useful to tease out the many ways that the Aussie dollar impacted its wine industry in recent years.  According to news reports currency instability was the hot topic at the ProWein wine fair this year, so analysis of the possible effects is timely. Here are some brief points taken from the Executive Summary.

  • The 1986 boom began, Anderson tells us, as a response to the historically low value of the Australian dollar (hereafter abbreviated AUD), which encouraged exports by reducing their price to foreign buyers. The AUD’s low value was due to falling prices for mineral exports.
  • Wine exports boomed, rising to 2.3% of all Australian exports by 2004.
  • Wine prices increased, stimulating vine plantings, higher production and more exports but higher prices also  limited domestic wine market growth making Australian producers more dependent on export markets.
  • Rising exports increased the incentive for investment in developing overseas markets for Australian wine, both through generic marketing and private brand promotion. Meanwhile, other countries also began to expand wine exports, too, contesting key market spaces.
  • The AUD began to rise in 2001 (driven by Chinese mineral demand). Competition in export markets made it difficult to pass through rising foreign exchange costs to export customers, so much of the burden was passed back in the form of lower AUD export receipts and, in due course, lower wine grape prices.
  • Meanwhile, the strength of the AUD made imports cheaper, including wine imports, which increased dramatically. Especially affected were Sauvignon Blanc imports from New Zealand and Champagne imports from France.
  • New Zealand Sauvignon Blanc became the best-selling white wine in Australia. Not the best-selling imported white wine. The best selling-white wine, period!
  • Wine grape prices collapsed and the value of vineyard land fell, in some cases to the same low value as unimproved farm land. This is the bust that the Australian industry is still recovering from.

Lessons for the U.S. Today?

The exchange rate isn’t the whole story of Australia’s fifth wine cycle by any means, but you can see that it had important effects. The long term instability in the exchange rate translated into booms and busts in wine exports, imports, wine prices, grape prices, land prices and so on.

Anyone who thinks the current rise of the U.S. dollar won’t impact the U.S. wine industry or have global repercussions should take a look at Anderson’s study of Australia. The U.S.story will be different, and the impacts less just because our domestic market is so much larger, but there will be significant impacts.

This is just one of the analytical threads in Kym Anderson’s important new book. I invite you to dig and see what questions his work raises and what lessons you can learn.

Unintended Consequences: How the U.S. & Canada Accidentally Destroyed Wine

At one point in Kym Anderson’s new book about the Australian wine industry he reflects on what can be done to shorten that country’s current wine slump and to get things sailing again on an even keel. One of his suggestions caught my eye:

“Governments need to keep out of grape and wine markets and confine their activities to generating public goods and overcoming market failures such as the free rider problem of collecting levies for generic promotion and R&D.”

This is more than the simple Adam Smith “laissez-faire” idea. Anderson’s book clearly demonstrates the law of unintended consequences — how well-meaning government policies sometimes have had unexpectedly negative side-effects. No wonder he recommends a cautious approach to wine and grape policy.

I was reminded of this when I was researching the history of the Canadian wine industry for a recent speaking engagement in Ontario. I was struck by Canada’s experience with Prohibition in the 20th century, how it differed from the U.S. experiment, and how both ended up crippling their wine industries but in very different ways. Here’s what I learned.

How U.S. Prohibition Crippled the Wine Industry

The great experiment in Prohibition in the United States started in 1920 and lasted until 1933. The 18th Amendment outlawed the manufacture, sale or transport of intoxicating beverages, including wine. Most people assume that the wine industry collapsed as legal wine sales and consumption fell and this is partly true but not the complete story. Commercial wine production almost disappeared, but wine consumption actually boomed.

How is this possible? There were three loopholes in the wine regulations outlined in the Volstead Act. Wine could still be produced and sold for medical purposes (prescription wine?) and also for use in religious services (sacramental wine). This kept a few wineries in business but does not account for the consumption boom, which is due to the third loophole: households were allowed to make up to 200 gallons of wine per year for “non-intoxicating” family consumption.

Demand for wine grapes exploded as home winemaking increased (but not always for strictly non-intoxicating purposes). Total U.S. vineyard area just about doubled between 1919 and 1926! But the new plantings were not delicate varieties that commercial producers might have chosen but rather grapes chosen for their high yields,  strong alcohol potential and ability to survive shipping to eastern markets.

Thus did Prohibition increase wine consumption in the U.S. but it also corrupted the product by turning over wine-making from trained professionals to enthusiastic  amateurs working in often unsanitary conditions. The home-produced wine sometimes had little in common with pre-Prohibition commercial products except its alcoholic content.

Americans drank more wine during Prohibition, but it was an inferior product. No wonder they dropped wine like a hot stone when Prohibition ended. That’s when the real wine bust occurred and it took decades to fully recover. Do you see the unintended consequence in this story? But wait, there’s more …

How Canadian Prohibition Crippled Its Wine Industry

Prohibition started earlier (1916) and ended earlier (1927) in Canada and took a different fundamental form. With support from temperance groups, consumption of beer and spirits (Canada’s first choice alcoholic drinks) was banned as part of war policy with the stated intent of preserving grain supplies for vital military uses. Consumption was forbidden, but production of beer and spirits was still allowed for export, which accounts for the boom in bootleg Canadian whiskey in the U.S. in the 1920s.

Neither production nor consumption of wine was included in Canada’s ban on alcohol, although wine sales were limited to the cellar door. What made wine different? Maybe grapes were not as vital to the war effort as grains, although John Schreiner cites the political influence of the United Farmer’s Party in his account of this period in The Wines of Canada. Wine became the legal alcoholic beverage of choice for Canadian consumers and production boomed. By the end of Canadian Prohibition there were 57 licensed wineries in Ontario (up from just 12) to serve the big Toronto market.

Wine sales increased 100-fold, according to Schreiner, but “It would be charitable to describe the quality of the wines being made in Ontario during this period as variable,” he writes. The market wanted alcohol and set a low standard of quality, which many producers pragmatically stooped to satisfy. No wonder wine production collapsed at the end of Prohibition as consumers went back to spirits and beer.

Unintended Consequences

Thus did government policy in both Canada and the United States create wine booms during their respective Prohibition eras, but the worst kind of booms: bad wine booms. Quality suffered as quantity surged. It is no surprise that consumers turned away from wine once other beverages were available. It took decades for these industries to recover.

Both the Canadian and U.S. wine industries are vibrant and growing today, having recovered from the crippling effects of poor quality wine. But they both are still hampered by other policies — especially regarding distribution and sales — that date back to the end of Prohibition. Economic policies can obviously have unintended effects and the shadows they cast can be long indeed.

No wonder Kym Anderson is skeptical about government interference in the Australian industry. Prohibition is an extreme case, to be sure, but such cases clearly show the unintended consequence potential that exists even with other seemingly harmless proposals. A cautious approach makes sense.

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You can read more about both the Australian booms and busts and also Prohibition in the United States in chapter 6 of my 2013 book  Extreme Wine. Look for a review of Kym Anderson’s book in an upcoming Wine Economist column.

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