The Sub-Prime Wine Crisis

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!

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2 responses

  1. Hi Mike,

    I love your spin on the Sub-Prime Wine Crisis but I have to take issue with a couple of things. First, but not least, it’s really difficult to feel the pain of consumers who want to buy ‘good’ wine but refuse to spend the time it takes to understand wine, or even understand how to define their own tastes.

    If I go to China and know only two words of the language am I going to feel nervous about it? Yep. But whose fault is it? Mine. Any consumer who does not want to invest the time into educating himself/herself deserves what they get within the confines of a glass bottle. If someone wins the lotto and invests all of their winnings into a lead paint surplus, who could possibly feel sorry for them for such self-inflicted stupidity? The wine world is complicated and it behooves anyone that wants the maximum benefit from it, to actually pony up and put some time in.

    Your comparison to wine critics’ being the bond rating agencies is erroneous and here’s why: bond rating agencies take a snapshot of where a business or government entity is at that moment in time, based on what current financial information they can garner (like I need to tell you this, Professor). Wine critics on the other hand have actually tasted the wine being reviewed and render an opinion about its attributes or lack thereof, its aging potential and predict the wines peak in terms of drinkability. Are they wrong sometimes? Absolutely, but let’s remember this is a very subjective evaluation – it is not simply black and white as in a balance sheet or P&L.

    So to the consumer who buys several wines based on a review and are disappointed, I can say this: find another critic whose palette is similar to yours. I have different trusted wine critics for Bordeaux, California, Australia, and Burgundy and other regions. I have poured hundreds of bottles of wine down the drain to fine tune my tastes with various critics but the payoff ultimately was very well worth it. After all, they get to taste thousands of wines per year. Me, hundreds.

    As for the house brands making inroads in the market – please Mike – listen to yourself. These are bottles selling for $2 to $10 and why wouldn’t someone take a chance on that? It’s a no loss transaction for the consumer: if it tastes good – great. If not, who cares? Most consumers buying at this level would hardly be considered serious about wine anyhow. This is not economics; it is just filling a market need for those who will likely never care about the taste of wine or to become educated about wine.

    I also must object to “dumbing down” everything in the wine world to appeal to those that can only distinguish between dry or sweet, or red or white. Honestly, are these concepts at retail actually going to benefit the wine industry or the consumer? My guess is no. Descriptors of silky, rich or crisp do not begin to define wine and only propagate the myth that making a choice amongst literally hundreds of thousands of wine can be that easy. Rather than dumb down, I strongly believe that the industry needs to step up its perception of consumer education initiatives by making it less intimidating for consumers to become more knowledgeable. There are many things that can be done, that are not being done by the industry, that I would be happy to share. This is the future of the wine market.

    Best Regards,

    David Boyer

  2. Hello Micheal,
    Hello David,

    I believe this post and it’s comment really show what is at stake when producing, selling, buying and drinking wine today.
    On one side you have typical marketing and on the other side you have the wine and it’s very rich complexity.
    In the middle you have producers who will always need to sell their wine and consumers that will look for the best buy.
    Because there is *selling* and _selling_, we will have *buying* and _uying_ ; or is it the other way round?

    Because the wine world simplified, without risc and adventure components, is not the the wine world anymore but just a mere standardised copy, we must rethink our way of applicating marketing to wine.

    The idea of marketing is actuating on the products'(services’) components to make it stick as much as possible to the detected needs/desires of a stratified group of people.

    In the wine case, the statements made by the both of you show clearly this is not possible or very limited and subjective. So why not make it the other way round?

    Translating the idea “getting wine closer to consumers” into “helping consumers access key tools for enjoying wine” actuations is what I think is right, and what I am trying to set up through a new business concept so that both producers and consumers enter a winner-winner game.

    Best Regards,

    Jessica Liabeuf

    P.S.: David, it would be great getting to know you better!

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