Family Wineries in Transition

April 29, 2008 By Mike Veseth in Uncategorized Leave a comment

Family. It is one of the distinguishing characteristics of the wine business, at least according to some scholars. But today’s news from Vinum Capital LLC makes we wonder about the future of the family winery business model.

Family businesses are supposed to be disadvantaged in the big time business world. Their family-ownership structure is supposed to limit access to capital and make expansion and effective management difficult. And yet some of the most famous names in the wine industry are family-owned firms. Some, like the Gallos of California, have kept ownership closely held for years. Others, like the Antinori of Italy, have experimented with outside capital only to return, at considerable expense, to the family model. Still others, like the Mondavi, illustrate just about everything — the problems of family businesses (the family feud that caused Robert Mondavi to strike out on his own), the benefits of family business (the rise of the Robert Mondavi brand) and problems of taking a family business public (the eventually takeover by Constellation brands).

All in the Family

Why does family ownership seem to be an advantage in wine where it is seen as a disadvantage almost everywhere else? One theory is that it is all about trust. Family firms are forward-looking high-trust environments where long term relationships can grow. The wine industry, people say, uniquely benefits from the long term commitment and close trusting relationships (with correspondingly low transactions costs) that family relations can provide.

It is said that the success of [Yellow Tail] wine is due to the fact that the Casella family (Australian winegrowers) and the Deutsch family (American distributors) were able to work together effectively to promote the brand because both sides of the deal were high-trust family firms. I am not sure how much faith to put in this idea (economists are trained to be suspicious of “cultural” explanations of economic outcomes), but I recall that Steve Smith, the celebrated New Zealand winemaker I interviewed a few years ago, felt it was very important for his family-owned business (Craggy Range — owned by the Peabody family) to work mainly with family-owned distributors in export markets. Smith is smart, so maybe there is something to this family business thing.

But the family-owned wine business may be an endangered species according to a recent study by Silicon Valley Bank, a major wine industry financial institution. They report that as many as 51% of these family wineries (in the western U.S.) will likely be up for sale in the next decade as the founding generation retires and is not replace by younger blood. One limitation of the family business model is that it only works if generations of family members want to run the business. Wine is glamorous but hard work, so it is perhaps not surprising that heirs might prefer cash.

A New Business Model

Vinum Capital has established a $250-million private equity fund (Vinum Capital Partners I LP) to acquire certain family wineries as they come on the market, invest in them so that they grow to be large enough to be of interest to larger firms (Constellation Brands?) and then sell them at a profit. The basic business model is shown in the image above.

“Our objective is to help provide liquidity for family-owned businesses,” according to Vinum’s press release, “Many of them have been in business for 20 to 40 years and there may not be a second generation willing or able to take on the business.” Large wine companies are interested in operations that produce at least 300,000 cases per year, according to Vinum, which sees itself as being able to muster the resources to get some family-owned firms to that level.

The fund’s managers certainly have a lot of experience, both with family businesses and at the corporate wine level, so maybe this is a good business plan. I know that a number of high-profile family wineries have recently “transitioned” to corporate control including Erath in Oregon, purchase by Ste Michelle Wine Estates and Stag’s Leap in Napa Valley, sold to a Ste Michelle – Antinori partnership.

A Natural Experiment

I’m pretty interested to see what happens because I view this as a natural experiment. Vinum’s plan will work best if people are wrong about family wineries — if the particular advantages of the family form of business organization are not really important factors in winery success after all (or if they lose their effectiveness above a certain scale). If the plan works it might mean that wine is doing more than passing from one generation to the next — perhaps it is transitioning from a special type of business where long run relationships and trust are key to one where traditional business factors such as economies of scale, distributional effcieincy and brand strength matter more. Stay tuned for the results!

They Always Buy the Ten Cent Wine

April 22, 2008 By Mike Veseth in wine markets, wine ratings Leave a comment

Ernest and Julio Gallo built their business in the years after the repeal of Prohibition according to a strict division of labor: Julio made the wines and Ernest sold them. I don’t know if Ernest Gallo really appreciated the spiritual element of wine, but he did know that selling wine is not just about selling what is in the bottle. Selling wine, like selling anything else, is also about selling image, mystique or terroir.

The story is told of a sales call that Ernest Gallo made to a New York customer in the dark days of the depression. He offered sample glasses of two red wines – one costing five cents per bottle and the other ten cents. The buyer tasted both and pronounced, “I’ll take the ten-cent one.” The wine in the two glasses was exactly the same. Clearly, the customer wanted to buy an identity – the image of someone who wouldn’t drink that five-cent rotgut- even if he couldn’t actually taste the difference.

They always buy the ten cent wine, Ernest Gallo said.

I wonder how much things have changed since the days when Ernest Gallo made his calls? Two recent studies provoke this question.

Price and Taste

The first, which has been widely reported, is a study that was published in the Proceedings of the National Academy of Sciences that showed that test subjects displayed the Ernest Gallo effect. Their ratings of wines changed when they were given price information — even bogus price information. Identical wines received different ratings depending upon price information provided. “Expensive” wines, naturally, were rated higher than their inexpensive twins.

A second study, just released by the American Association of Wine Economists, answers the question Do more expensive wines taste better? The answer, based on a large sample of blind tastings, is that there is no correlation between price and wine evaluation (or perhaps a modestly negative one). This will be no surprise to readers of wine publications like Wine Spectator. Sure, the top wines are usually expensive, but there are also a lot of costly wines that get low ratings.

These findings will give bring great satisfaction to my friend and part-time research assistant Michael Morrell, who prides himself on drinking cheap wines, trusting his own tastes not ratings or price “signals” of quality. Michael would buy the five cent bottle every time.

But ask any wine distributor or retailer and you will find that price is the critical factor in retail wine sales. Although wine enthusiasts like to think of themselves in complicated ways — favoring red versus white, old world versus new world, merlot versus pinot noir, fruit bomb versus barrique reserve — the dirty little secret of wine retailing is that price is the key to most wine buying decisions. When push comes to shove, buyers are really looking for an $8 wine or a $10 wine and and make their purchases within a relatively narrow price range, regardless of other factors.

Evidence from the Wine Aisle

The wine aisle in your grocery store is probably organized this way. Yes, I know there is a California section and an Import section and even a jug/box wine spot, but look within each wine display and you’ll see the clear price stratification effect. The wines you have come to buy are probably on the shelf just below your natural eye level, so that you cannot help but see those special occasion wines just above them (and the higher priced wines above them on the top shelf). Cheaper wines are down below, near the floor, so that you have to stoop down to choose them.

The physical act of taking the wine from the shelf mirrors the psychological choice you make — reach up for better (more expensive) wines, stoop down for the cheaper products. The principle will be the same in upscale supermarkets and discount stores but the choices (what price wine will be at the bottom, middle and top) will differ as you might expect.

Studies suggest that people establish a wine price comfort zone (and corresponding wine shelf) and stay there, moving up a rank for special occasions and down a shelf for parties and other higher-volume purchases. A lot of factors drive this behavior, including fear. I have some $8 wine friends who are afraid to start drinking $12 wines for fear that they will be able to taste the difference — and have to upgrade their wine budgets.

One local supermarket has taken this principle to its logical extreme. It is a discount store that counts a lot of immigrants and retired people among its customers. The wine aisle is not organized as you might expect — by country of origin or wine varietal. It’s logic is simple and clear. This rack has wines that cost $3 and less. The next rack has $3 – $5 wines. And so on up to the $15+ wine rack. Large signs efficiently guide buyers directly to their target zone. Do they sell a lot of wine? You bet they do!

The relationship between the price of wine and our evaluation of it is complex. These recent studies indicate that we shouldn’t let price information influence our decisions, but marketing experience shows that most of us do.

Wine, Rice and Drought in Australia

April 18, 2008 By Mike Veseth in Australian wine, climate change, globalization, Supply and Demand, wine markets 1 Comment

The effects of Australia’s continuing drought on the wine industry are well known; I wrote about drought and other problems that Australian winemakers now confront last September in a post titled Big Trouble Down Under. An article on the front page of yesterday’s New York Times explains how the crisis is deepening and evolving in frightening ways.

The Global Food Crisis

The article is part of a series on the global food crisis. If you haven’t been paying attention, food supplies around the world are drying up (both literally and figuratively), causing chaos in many places. Food riots are reported in the press almost every day. The crisis has many causes. Drought and climate change have reduced supplies in some areas, for example. Increasing demand is part of the problem, too, especially in China where, rising incomes have encouraged greater consumption of pork, which in turn increases the demand for grain. Rich countries like the U.S. are not helping the situation. Our biofuel policies divert food to the gas pump. All these factors push up food prices and the poorest people are the most affected.

As prices rise and surplus supplies shrink, food-exporting countries have begun to impose export taxes or even export bans in an attempt to keep domestic supplies plentiful and relatively cheap. The effect, of course, is to drive international prices even higher and “beggar they neighbor.” The price of rice rose by 40 percent in a single day last week as these export controls kicked in.

The Rice-Wine Connection

What part does wine play in this problem? Australia was until recently a major exporter of rice, but rice is an especially water-intensive crop and the continuing drought in Oz has dramatically limited production there. The Australian drought is a key part of the global rice shortage story. Wine production, however, makes the problem worse.

As the New York Times explains, winegrape production uses much less water than rice and so, as irrigation costs have soared, farmers have shifted production from rice to grapes. The graphic above shows the economic reality of the situation. Even at today’s crisis price of $1000 per ton for rice, higher water costs make winegrapes the more profitable crop. So while drought has reduced production of both grapes and rice, the substitution effect has reduced the impact on grapes and made the crisis in rice even worse.

Many authors suggest that what we are seeing here is part of an important transformation in the global economy. Globalization linked up producers and consumers at the far ends of the earth in the 1990s and produced a world of abundance and falling prices. The growth this helped produced (plus the associated environmental effects, according to some) are now combining to turn surplus into shortage. It is easy to see this in rice, but it is true in wine as well, as I argued in my post on The End of Cheap Wine. Protectionist policies conspire to raise the problem to crisis level for those who are least able to deal with it.

The [New] Emperor of Wine

April 15, 2008 By Mike Veseth in critics, robert parker, wine critics 3 Comments

I met the guy everyone thinks is the New Emperor of Wine last week at the Taste Washington event. He’s a thirty-ish fellow from Belarus via New Jersey. He was walking around in a white and green New York Jets jersey and people treated him like a god. Wine is changing and the New Emperor is part of the story. Here is my report.

The Old Emperor

The Old Emperor of Wine is Robert Parker, of course. That’s the title that Elin McCoy gave him on the cover of her book, The Emperor of Wine: The Rise of Robert Parker and the Reign of American Taste. Parker is often cited as the most influential wine critic in the world. His writing on Bordeaux wines helped make these products objects of global interest. Jacques Chirac awarded him the Legion of Honor for his service to France and her wine industry. Parker is controversial because of the perceived power of his palate. Parker has particular tastes, it is argued, and winemakers who cater to those tastes receive big Parker numbers and are rewarded handsomely in the marketplace. Those who go their own way suffer.

And yet the French hate him. Parker is one of several villains we meet in the film Mondovino. Here’s what he looks like according to an illustration I found in Slate. He looks more like a devil here than an Emperor, shoving his idea of wine down the public’s throat (or over their heads, actually).

Robert Parker is more than a wine critic, he is a business model. Parker scrupulously avoids conflicts of interest, accepting no payment from anyone with a financial stake in wine, so he must sell his knowledge and opinions to pay the bills. He does this successfully in a variety of ways including subscriptions to his magazine Wine Advocate ($75 per year in the U.S.), his frequently updated internet wine site, eRobertParker.com ($99 per year) and sales of his many books and buyers guides ($30 to $75). People will clearly pay a lot to learn Parker’s opinions. They will pay even more to meet him in person. Dinner with Robert Parker appears frequently on charity wine auction lists. I don’t think I have ever seen it go for less than $10,000 although I admit I don’t follow these things closely.

Parker’s reign is coming to an end, however, according to an article by Michael Steinberger in the current issue of The World of Fine Wine ($300 per year in the U.S. – wow!). Parker is getting older and slowing down, Steinberger writes, overwhelmed by the global expansion of the wine industry. He’s slowly turning over the chores to a stable of hired tasters with regional specialization and in the process losing his hegemony over global wine.

The X-Emperor

The New Emperor, the one I met in Seattle, represents a different business model and a different idea of wine. His name is Gary Vaynerchuk and he is director of operations at the Wine Library, a wine store in Springfield, New Jersey that is owned by his family, immigrants from Belarus. This is what he looks like, based on an image that appeared in another Slate story.

You don’t have to settle for the illustration, however, because you can see him in action on the web at his website, Wine Library TV. His daily 10-20 minute wine tasting webcasts draw a growing audience — I have seen estimates that range from 60,000 to 90,000 viewers a day. They come for a completely different experience of wine.

Click on the link above and watch one of Vaynerchuk’s wine reviews right now. Yes, do it now. His real-time reviews may change the way that you think about wine. The narrative is zany and over the top. The “tasting notes” are instant, personal, confident and detailed. I admit they make me wish that I could taste as much in a glass of wine as he does. But it’s his business and he does it with gusto. The surround sound experience (complete with the splurt as he spits into a NY Jets bucket) will either delight you or appall you, but it probably will not leave you unmoved.

Gary Vaynerchuk is to traditional wine criticism as the X-games are to the Olympics. It’s the same game, more or less, but intentionally taken to a new level. Like the X-games, I’m not sure it is to my taste, but it fascinates me. Like the X-games, I suspect it is an experience that will appeal instantly to young people who are drawn by the combination of extreme bungy-jumping pure adrenalin rush and geeky technical detail. Like the X-games, I think it is probably here to stay.

Wine Empire 2.0

The New Emperor embodies a new business model, too. Parker studiously avoids conflict of interest. Vaynerchuk accepts such conflicts as inevitable and moves on. Wine Library TV is given away free on the internet, not sold on a subscription basis (another appealing factor for young people, who often resent being asked to pay for web content). The webcasts generate business for the store, however, and for other enterprises, including a forthcoming book (101 wines guaranteed to “bring thunder” to your world).

One particularly interesting part of the New Emperor’s empire is Cork’d, a wine social networking website (Facebook for wine geeks, I guess). Cork’d aims, like Cellar Tracker, to turn the tables on wine critics by collecting reviews from wine drinkers themselves, many of whom are very knowledgeable, so that the ratings are free, interactive, and reflect the tastes of an (hopefully) informed consensus. Is it working? It is too soon for me to tell — I’ve only been experimenting with Cork’d for a few days.

Cork’d is classed Web 2.0 — shifting power from a small number of content providers to a huge user base. Lead by Emperor Vaynerchuk, the Cork’d army could seize control of the idea of wine from Parker and the others. Imagine what Parker’s staid critics would say about that! I’ll have to watch Gary Vaynerchuk to see how his empire unfolds.

Taste the Washington Wine Market

April 8, 2008 By Mike Veseth in alcohol, Chateau Ste. Michelle, Fielding Hills, Supply and Demand, Washington wine, wine markets Leave a comment

Demand meets Supply in Seattle

Mike and Karen Wade of Fielding Hills Winery in East Wenatchee, Washington asked me if I’d like to pour their wines at the big Taste Washington event in Seattle on Sunday. I jumped at the chance, of course, because you hardly ever get to see supply and demand in the wine market at work in such a personal way. I will admit that I enjoyed this opportunity and I might have been a little too enthusiastic at times. I think my boss, Robin Wade, had to restrain me at times from talking up the wines and the winery more than I should. (Robin is my student at Puget Sound during the week, but she was my supervisor on Sunday at her family winery’s tasting table).

Taste Washington is a big event: more than 220 wineries, 70 restaurants and a long list of what I would call “lifestyle product” vendors ranging from Viking, the maker of high end kitchen appliances, to Maserati, the Italian sports car. Click here to download a pdf of the program. People paid $125 to attend the VIP tasting from 2-4pm. Then the doors opened to the “masses,” who paid $85 for unlimited tastings from 4-8pm. Many of the VIPs were industry people – winemakers, distributors, restaurants, wine shops, and so forth. The “masses” were a very mixed group that I’ll discuss below. I guess about 3500 people came in all.

The event is all about giving things away. Wine is sampled, but cannot be sold. Restaurants give samples of food. No cash changes hands once you are inside the room, but I suppose that exchanges can be arranged for future delivery. Apparently someone bought a Maserati ($135,000) off the show floor. There was a moment of silence (while everyone drew a breath) when that was announced.

The Supply Side of the Pour

The list of wineries was long and diverse. Columbia Crest makes at least 200,000 cases each of some of their Two Vine wines, for example, while Benke Cellars, located near us in the exhibition hall, has a total output of just 200 cases. Some of the most prestigious wines in Washington were represented (DeLille Cellars was across the aisle from us and Quilceda Creek was across the room) alongside humble family start ups. Fielding Hills was one of several wineries in a sort of intermediate position: a small family operation, but one with an impressive record of ratings and reviews and hence a built-in audience among wine enthusiasts.

What do wineries gain from giving away wine at tasting events like this? There needs to be a benefit, especially for the smaller wineries who may pour away a couple of percent of their annual production. Some of the large volume wineries seemed to use the event to show that they were about more than just fruit forward popular premium supermarket wines. Chateau Ste Michelle, for example, poured these wines

2005 Boreal, Columbia Valley $30
2005 Ethos Cabernet Sauvignon, Columbia Valley $38
2006 Chardonnay, Horse Heaven Hills $22
2007 Eroica, Columbia Valley $22

and Columbia Crest offered these

2005 Grand Estate Merlot, Columbia Valley $11
2004 Reserve Red Walter Clore, Columbia Valley $44
2005 H3 Chardonnay, Horse Heaven Hills $15

These are very good wines – on average several steps above what you would probably taste for free at the winery. I like the Eroica quite a lot and I wish I’d found an opportunity to taste the Walter Clore. The Grand Estates Merlot is a great value in my opinion.

I spoke with a famous winemaker – he was treated a bit like a rock star – who spent most of his time in close conversation with customers, distributors, and fellow winemakers. He said he thought it was important to be at the tasting and to make personal contact, but he wasn’t sure if it had much effect on sales. He was “preaching to the choir,” he said, talking with current customers and business clients more than making new ones. I wonder if he’s right. I like to say that wine is good but wine and a story is better. A story about talking with a rock star winemaker adds a lot of value to a bottle of wine. Maybe he was just being modest.

Mike and Karen Wade are certain that this event benefits them by connecting them with the trade network and giving wine drinkers who read about their wines in magazines (but often cannot find them on local shop shelves) an opportunity to see what all the fuss is about. I certainly think the wines made a good impression and even created a bit of a buz in the room as word spread. It will be interesting to see how this is reflected in the market.

Spit, Don’t Swallow!

Spit! We were told to encourage people to spit the wine rather than swallow it so that they would not get tipsy so soon. The trade visitors often did spit, as you have to do if you are really going to taste a lot of different wines, but most people didn’t. They did dump out extra wine into the spit buckets, however, which was a good thing. The woman who came around to empty the spit buckets every 15 minutes estimated that she had collected 20 gallons by 6pm.

Like the organizers, I was worried about the alcohol problem. Faced with 200+ wineries pouring maybe 700 different wines – and you with a bottomless glass until 8pm – it is easy to see how things could get carried away. I only talked with a few tasters who had clearly had too much to drink, however. Most people seemed to understand the problem and, even if they didn’t spit, they tried to limit consumption so that they could continue tasting.

The people on the other side of the table were an interesting collection of wine people. The $125 VIP tasters were mostly trade people, as you might imagine, many with well-defined agendas of people to meet and wines to taste. It was fun to talk with them to get an insider view of the event and the business. The $85 general admission tasters were perhaps younger than I expected (many in their 20s) and more diverse in their apparent knowledge of wine. Many were wine enthusiasts, of course, armed with detailed notes and Parker numbers, looking to taste specific wines, interested in every detail from vineyard to barrel.

Others were “image seekers” (to use Constellation Brands’ Project Genome taxonomy – see next post). They didn’t know as much about wine but they wanted to learn. It was fun to meet them because we were pouring a 2005 Cabernet Franc – a varietal many of them had never tasted before – and I enjoyed watching them make up their minds about what was in the glass. Finally I would say that I met some “traditionalists” and even some “overwhelmed” consumers (it was easy to be overwhelmed at this event, to be honest, with so many wines and wineries present). They were spending $85 to try to figure out what was new and what they liked. That seems like an expensive education until you consider how fast you can burn through $85 on failed wine experiments.

People always ask me if interest in Washington wine is a bubble that will someday pop leaving broken wineries in its wake. It is difficult to be sure about bubbles (ask Alan Greenspan about this) and I actually worry that there might be a supply side wine bubble shaping up and a shakeout coming (Paul Thomas, a pioneer Washington winery, closed shop last year). But the demand side looked strong to me as I poured my measured tastes on Sunday. Education is the key to sustainable growth in the wine industry and I met a lot of people who seemed to be committed to broadening and deepening their knowledge of wine. The Washington wine industry can only benefit from this. That makes Taste Washington a more important program than I thought it would be.

What are wine enthusiasts looking for?

April 5, 2008 By Mike Veseth in brands, Constellation Brands, Costco, critics, decanter, Masters of Wine, wine critics, wine magazines, wine markets, wine research 8 Comments

The Search for Wine Drinker DNA

According to the data that WordPress collects about visitors to this website, the three most frequently viewed posts on The Wine Economist are

The World’s Best Wine Magazine?, an analysis of Decanter magazine, part of the ongoing series on wine critics and publications;
Costco and Global Wine , which examines Costco’s wine strategy in the context of the three most important global wine markets, the U.S., Great Britain and Germany, and
Masters of Wine (and Economics), which is about the prestigious Masters of Wine (MW) qualification and the importance of wine economics in its curriculum.

(Other popular posts include my discussions of global climate change, problems in Australia, rising wine prices, and the Hong Kong and Chinese markets.)

What can we learn from the fact that these three posts get the most hits? A closer examination of the WordPress data show that many visitors to this site are looking for information about the “Best” – the best wine, the best wine price, the best wine magazine and so forth. The search for the best and not just the good seems to be very important.

Wine enthusiasts also seem to be searching for credible authorities – people and publications that can guide them and tell them what to buy and drink.

Not unrelated to this is in the interest in Costco (and Trader Joe’s) and other retailers that seem to make the choice concerning good wine or good value wine a little simpler. Costco is now the largest wine retailer in the U.S., as the blog post explains, and it does this in an unexpected way – by giving consumers fewer choices than a typical upscale supermarket (about 120 different wines at typical Costco versus more than 1200 different wines at your supermarket), but also giving them more confidence in the choices that they make.

Project Genome

Visitors to The Wine Economist reflect many qualities that research by Constellations Brands (the largest wine company in the world) has uncovered. The study is called Project Genome, which suggests that it is an attempt to sequence wine drinker DNA. Wines and Vines reports that

The original 2005 study of 3,500 wine drinkers was one of the largest consumer research projects ever conducted by the wine industry. The new study examined the purchases of 10,000 premium-wine consumers–defined as those who purchased wine priced at $5 and higher–over an 18-month period. While the first Project Genome study asked online survey participants to recall their wine purchases during the last 30 days, the Home & Habits study tracked the actual purchases of Nielsen Co.’s Homescan® consumer purchase panel, which employs in-home bar code scanners and surveys to map consumer buying behavior across a demographically balance

Nielsen measured consumer attitudes and purchase behavior within multiple purchase channels, including warehouse clubs, supermarkets, mass merchandisers, drug stores, liquor stores and wine shops. The scan data were supplemented with online interviews to classify consumers by Project Genome consumer segments identified in Constellation’s original study: Enthusiasts, Image Seekers, Savvy Shoppers, Traditionalists, Satisfied Sippers and Overwhelmed.

The largest group of wine consumers are the Overwhelmed (23% of consumers). They are described as

Overwhelmed by sheer volume of choices on store shelves
Like to drink wine, but don’t know what kind to buy and may select by label
Looking for wine information in retail settings that’s easy to understand
Very open to advice, but frustrated when there is no one in the wine section to help
If information is confusing, they won’t buy anything at all.

The second largest group are Image Seekers (20% of consumers). They

View wine as a status symbol
Are just discovering wine and have a basic knowledge of it
Like to be the first to try a new wine, and are open to innovative packaging
Prefer Merlot as their No. 1 most-purchased variety; despite “Sideways,” Pinot Noir is not high on their list
Use the Internet as key information source, including checking restaurant wine lists before they dine out so they can research scores
Millennials and males often fall into this category.

Traditionalists (16% of consumers)

Enjoy wines from established wineries
Think wine makes an occasion more formal, and prefer entertaining friends and family at home to going out
Like to be offered a wide variety of well known national brands
Won’t often try new wine brands
Shop at retail locations that make it easy to find favorite brands.

The Savy Shoppers (16% of consumers)

Enjoy shopping for wine and discovering new varietal s on their own
Have a few favorite wines to supplement new discoveries
Shop in a variety of stores each week to find best deals, and like specials and discounts
Are heavy coupon users, and know what’s on sale before they walk into a store
Typically buy a glass of the house wine when dining out, due to the value.

Satisfied Sippers make up 14% of consumers. They

Don’t know much about wine, just know what they like to drink
Typically buy the same brand–usually domestic–and consider wine an everyday beverage
Don’t enjoy the wine-buying experience, so buy 1.5L bottles to have more wine on hand
Second-largest category of warehouse shoppers, buying 16% of their wine in club stores
Don’t worry about wine and food pairing
Don’t dine out often, but likely to order the house wine when they do.

And, finally, Wine Enthusiasts are the smallest group, accounting for just 12% of all wine buyers. They

Entertain at home with friends, and consider themselves knowledgeable about wine
Live in cosmopolitan centers, affluent suburban spreads or comfortable country settings
Like to browse the wine section, publications, and are influenced by wine ratings and reviews
47% buy wine in 1.5L size as “everyday wine” to supplement their “weekend wine”
98% buy wine over $6 per bottle, which accounts for 56% of what they buy on a volume basis.

The Fortune at the Bottom of the Pyramid

Not surprisingly, Wine Enthusiasts and Image Seekers account for nearly half of all wine sales while Overwhelmed consumers purchase disproportionately little wine. While wine magazines find a ready market at the top of the pyramid, retailers and wine companies probably view the Overwhlemed as the potential “fortune at the bottom of the pyramid.” There is a lot of money that can be made if wine can be simplified (or these consumers educated) so that they move up the wine buying ladder.

Visitors to The Wine Economists seem to fall into three of Constellation’s categories: Enthusiasts, Image Seekers and the Overwhelmed based upon the limited and superficial “most popular post” data reported here. It will be interesting to track further Project Genome results as they are released and to see how Constellation Brands uses this information in its wine market strategies.

The Father of [Wine] Economics?

April 1, 2008 By Mike Veseth in British wine market, wine markets 2 Comments

Adam Smith is generally regarded as the Father of Economics, even though many wrote on economic topics before him. Was he also the Father of Wine Economics?

The case for Smith’s paternity is made in the most obvious (and least likely) of places, The Wealth of Nation (1776), his most famous work. It is the obvious source because Smith wrote about everything in Wealth of Nations: history, theory, policy, even provided practical advice. It is the least likely place to look, however, because it is so little read (really read, if you know what I mean) and because people only remember the book for two thing: the Invisible Hand and the Pin Factory example of the division of labor. But there is a lot more to be found, including an early treatise on wine economics.

Adam Smith wrote a good deal about wine. This was partly because he traveled in France and learned about wine markets first hand. But it was also a fact that Britain was for centuries a wine-drinking country, as John Nye’s fine book explains, just as it is so today, with a practical interest in wine market concerns.

The foundation of Smith’s wine economics is laid out early in Wealth of Nations, Book One, Chapter 11: Of the Rent of Land. Here Smith tries to explain why some kinds of land earn more than other lands. Land suitable for viticulture earns higher rent, Smith said, and has long done so.

That the vineyard, when properly planted and brought to perfection, was the most valuable part of the farm, seems to have been an undoubted maxim in the ancient agriculture as it is in the modern through all the wine countries

But viticultural profits were constantly threatened, Smith argued. Not by nature, although this could cause bad crops, and not by high taxes, although he argued against them. The chief threat (or perceived threat) to viticultural earnings was expansion to new lands. Old vineyards, as he called them, were threatened by New Vineyards — and would seek protection from them or to prevent their development. This section reads very well today if you change Old Vineyards to Old World wine and New Vineyards to New World Wine. Certainly New World Wines (and their vineyard, cellar and marketing practices) are seen by many Old World producers as a threat to their livelihood. Adam Smith understood why Old would seek by any means to prevent development of the New. You don’t have to have a Ph.D. in economics to already know that he did not approve.

Smith wrote about terroir, too. I can’t really say that Adam Smith invented terroir, the idea of a special taste of place that winemakers strive for, but I can say that he understood its economic value. Smith wrote that

The vine is more affected by the difference in soils than any other fruit tree. From some it derives a flavour which no culture or management can equal, it is supposed, upon any other. This flavour, real or imaginary, is sometimes peculiar to the produce of a few vineyards; sometimes it extends through the greater part of a small district and sometimes through a considerable part of a large province.

I note with interest that Smith recognized terroir and doubted the reality of its existence in the same sentence (“real or imagined”). It isn’t terroir that really matters to a wine economist, I suppose, it is only that people think there is terroir. Smith wrote at length about the economics of these special wines and, because of their limited quantities, the premium prices they could command. Any modern winemaker, upon reading this section, would immediately try to create an A.V.A. to cash in on the possibility of terroir by limiting supply.

The whole quantity of such wines that is brought to market falls short of the effectual demand, or the demand of those who would be willing to pay … The whole quantity, therefore, can be disposed of to those who are willing to pay more, which necessarily raises the price above that of common wine.

A small part of this higher price … is sufficient to pay the wages of the extraordinary wages bestowed upon their cultivation, and the profits of the extraordinary stock which puts this labor in motion.

Smith’s treatment of wine is not complete – there is no discussion of cork versus screw-cap, for example, and no treatment of en primeur wine futures, but what he does say shows pretty clearly how well he understood the political economy of wine.

So, to answer the question that started this entry, is Adam Smith the Father of Wine Economics? Probably not, is my answer. His analysis in Wealth of Nations is certainly very good, but I am pretty sure that earlier economists did not ignore the wine market. The reason: because wine was so very important to economy and society from the earliest days.