State of the Wine Industry: Global Perspectives

I’m back from Sacramento where I moderated two panels at the Unified Wine and Grape Symposium, North America’s largest wine industry gathering.  I chaired the morning “State of the Industry” session (estimated audience = 2200 according to one news report) and a smaller afternoon break-out on “Leveraging Global Supply.”

You can find a list of the session speakers at the end of this post and you can read a comprehensive  news report here. I thought I would use this space to outline what I said   in the morning session. My job was to try to provide a global frame for the speakers who followed.

Silver Linings and Dark Clouds

Global Perspective. Wine is a global business. When David Ricardo wrote his economics textbook almost 300 years ago the example he used to illustrate international trade was the wine trade between Britain and Portugal. It has always been important to have a global view of wine, but now more than ever as the wine world gets smaller and more tightly connected.

Silver Linings. This is a year with much good news for the wine industry, especially for winegrape growers as the shortage phase of the wine cycle unfolds and prices rise after years of structural surplus.

But as an economist, it is my responsibility to channel Alan Greenspan and to caution growers to avoid irrational exuberance. Silver linings don’t always come wrapped in dark clouds, but sometimes they do. There are dark clouds a plenty for the global economy and some of them will affect the wine industry.

A Dangerous Phase

A Dangerous Phase. The global economy has entered a “dangerous phase” according to the International Monetary Fund. It is a time of great uncertainty and risk because global growth is slowing, albeit unevenly, at a very inconvenient time.

The problem, of course, is the debt crisis. And while each country has built “mountains of debt” in its own way, there is only one route down from the summit: stop adding to the debt and then try to outgrow the debt burden.

Europe, the U.S. and Japan are all struggling to contain growing debt. Stopping the bleeding is the first priority, of course, but no one seriously expects the debt to be paid off. The only solution is for debtor countries to grow faster than their  compound interest bills and to slowly make the debt and its burden a smaller and smaller proportion of GDP.

Catch 22: Slowing growth (and the probability of recession in Europe) means that even more emphasis must be put on cutting budgets, which unfortunately makes it even more difficult to generate growth.

The Growth Squeeze. So everyone will be desperate for growth, but where will they find it? Consumer spending? Not likely with unemployment high and the housing crisis still unresolved. Business investment? Not with credit so tight and business confidence so low. Goverment spending? Please! The pressure is on to cut government outlays, not expand them.

This leaves only international trade and it seems likely that many countries will try to stimulate exports through currency depreciation to get the growth they so desperately need. This has worked for the U.S., which has had a secret “weak dollar” policy. Look for currency wars as many countries try to follow suit by depressing their exchange rates.

Wild Cards. There are many “wild cards” in the global economic scenario — factors that could change everything. The Euro is probably the biggest wild card, since a collapse of the single currency would be a financial earthquake with global repercussions. The U.S. economy is another wild card, especially in an election year.

A Tight Squeeze for Wine

A Tight Squeeze. The wine industry is connected to the global economy but not perfectly synchronized with it. The wine industry is in for a tight squeeze in the coming year. There will be increased competition on both ends of the market — for wine grapes (and bulk wine) and for wine drinking customers and retail accounts.

[The intensity of the squeeze, as detailed by the other speakers in this session, was probably the biggest news to come out of the State of the Industry panel. Vineyard plantings have been stagnant for several years, so there is not enough supply to meet rising demand in many market categories.]

The shortage of grapes and bulk wine will force wineries to search high and low for product to sell. The higher costs that result will put even more pressure on margins and this may be the biggest squeeze of all since buyers are now accustomed to discounts and, having reset once down to lower prices, will be not quickly reset back up again across the board.  The pressure on margins will increase because of rising competition for market share.

Currency Wars. Exchange rate shifts will make this situation more complex. The U.S. has enjoyed a weak dollar for several years — this stimulated wine exports and kept the price of import competition high. The dollar strengthened in 2011 and  is likely to continue to strengthen in 2012 and this will reverse some of those effects, making the U.S. wine market more attractive to foreign wine firms. These effects will loosen the big squeeze in some places and tighten it in others, creating both dark clouds and silver linings.

Wild Cards. There are lots of  wild cards, but the most interesting one for me is China. We expect China’s growth to slow in 2012  – perhaps to 8% or less — if Europe’s recession is more serious than projected and if U.S. growth stalls.

The “bicycle theory” of Chinese economic growth holds that China must grow by at least 8% in order to overcome structural weaknesses and social instability. If growth falls below 8%, the theory holds, a “tipping point” effect might cause rapid deceleration.

No one knows if the bicycle theory really holds for China, no one knows if 8% is the tipping point number. And no one wants to find out.

A Chinese slump would have some direct effect on wine sales there, but the biggest impact on global wine would be indirect, spread through trade flows and financial flows. The Chilean Peso, Australian dollar and South African rand would all likely fall in value dramatically altering the competitive structure of global wine trade.

All this could happen, but of course it might not. That’s the biggest squeeze this year — uncertainty.

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Thanks to the Unified Symposium’s organizers for inviting me to take part. Special thanks to my fellow panelists, who helped me so much, and to Jenny and Lisa for their guidance and support. Here are the details of the two sessions.

State of the Industry

The State of the Industry session will provide a comprehensive look at every aspect of the wine industry, from what’s being planted to what is selling. This 2½ hour session features highly regarded speakers and will offer incredible value for attendees who need to understand the market dynamics of the past year and are seeking insight into the market trends that will define the year ahead.

Moderator:
Mike Veseth, The Wine Economist Blog/University of Puget Sound

Speakers:
Nat DiBuduo, Allied Grape Growers, California
Steve Fredricks, Turrentine Brokerage, California
Jon Fredrikson, Gomberg, Fredrikson & Associates, California

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Leveraging the Supply Side of the Global Wine Market

This session will focus on supply to Brazil, Russia, India and China (BRIC) as well as to Chile and Argentina.

Moderator:
Mike Veseth, The Wine Economist Blog/University of Puget Sound

Speakers:
Steve Dorfman, The Ciatti Company, California
Liz Thach, Sonoma State University, California

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8 responses

  1. Excellent article, Mike. You may recall we exchanged email recently concerning a new box wine accessory we’ve introduced. As we continue tweaking our marketing strategies, your information about the future economies of wine are most helpful. So are the other sites your referenced. Thanks so much for your good work. Jerry Griffith

  2. Mike, does this mean the French wine lake will dry up? Can Australians stop worrying? I’d guess although you were talking about a global perspective, you were addressing the concerns of a largely American audience.

    • Thanks for this, Ken. You are correct that I was addressing global issues with my US audience’s interests in mind. But the news is interesting. Australia seems to be close to market balance due in part to short harvests and in part to major vineyard reduction. Supply is much closer to demand that you might think because the supply-side adjustment has been quicker and larger than I expected.

      Europe has also experienced large scale grubbing up. The reports I read indicate that the market is close to equilibrium if we look at wine that meets global market standards. There is still a (shrinking) surplus of wine unsellable wine.

  3. Hi Mike :-)

    Having just finished “Wine Wars” which I couldn’t put down, I was particularly interested to see your email pop into my inbox today!

    We operate out of Cape Town, focussing on exports of South African wine, and your article, whist being pragmatic about the huge uncertainties surrounding us all in the current global economy, gives us some green shoots to hope for this year in this fascinating world of wine! Thank you for that. I guess tightening margins will necessarily lead to the development of more efficiencies in the global supply chain.

    Curious, though, why your session on Leveraging the Supply Side of the Global Wine Market refers to supply to the BRIC countries and not the new BRICS countries? South Africa became part of the BRIC nations in 2010, turning BRIC into BRICS :-)

    Cheers from the Cape Winelands, as we start our 2012 harvest!

    Fiona

    • Thanks for this, Fiona. Rest assured that South Africa was included in our session on leveraging global supply! Why start with the BRICs? As they say on Facebook, it’s complicated. Hopefully I’ll have an opportunity to explain on the Wine Economist!

  4. Hi Mike, I’ve been following your blog for awhile, and read your new book not too long ago – which was a great read! I’m not an industry guy, but am an avid wine consumer interested in how wine markets are developing (if for no other reason than I can have a sense of what I should buy before prices shoot up).

    I’ve always been curious about the export potential of American wine. What do you think? Do they have any penetration into Europe or Asia? I have a hard time imagining restaurants in France or Italy including a lot of Napa cab on their wine lists. And when I visit my family in Hong Kong, it’s pretty rare for me to even see any California (let alone Oregon or Washington state) wine on the store shelves or in a restaurant.

    • Dear Andy,

      Thanks for your comment (and I am glad you enjoyed Wine Wars).

      U.S. exports have actually increased significantly in recent years, although as you suggest from a low base. For most wineries, the U.S. market is more profitable than foreign sales, so there is limited incentive for export.

      The wines that make it abroad have tended to be concentrated in the lower and higher price points with a large “missing middle” of the wines that you and I probably drink.

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