Economic Impact: Wine [Not Just] By the Numbers

Apple, maker of iPods, iPads and other iGadgets, recently released data that tried to establish the corporation’s economic impact on the American economy (this in response, I think, to charges that its high-outsource policies mean that its products benefit China and other countries more than its U.S. home market).

The company published the results of a study it commissioned saying that it had “created or supported” 514,000 jobs in the United States. The study is an effort to show that Apple’s benefit to the American job market goes far beyond the 47,000 people it directly employs here.

The number of indirect jobs claimed drew attention from economists.

David Autor, an economics professor at the Massachusetts Institute of Technology, said via e-mail that the “entire business of claiming ‘direct and indirect’ job creation is disreputable” because most of the workers Apple is taking credit for would have been employed elsewhere in the company’s absence.

I tend to agree with Prof. Autor’s comment mainly because I can do the math. If Apple is right, then its small labor force is responsible for an incredible fraction of all U.S. jobs. If we made similar estimates for all other U.S. industries I am confident that the total number of jobs claimed would quickly exceed the total number of jobs … period.

Suspicious Minds

But then I tend to be suspicious of economic impact studies … period … whether they are about the gadget industry or any other industry. And this is due mainly to the incentives that are present. No one ever commissions an impact study unless they have a reason to want to show a large impact (usually it is politics — to prevent a political backlash against Apple’s outsourcing policy, for example, or to encourage provision of “key industry” government benefits).

And I know from personal experience that no one ever takes on an economic impact study without realizing that higher numbers are better for the client. I’m not saying that anything shady takes place. I’m just pointing out the incentives and you know what economists think about the power of incentives!

So (and I’m sure you can see this coming) I’m also suspicious of economic impact studies of the wine industry that are occasionally published. Economic theory says that economic impact (the total value added throughout the supply chain) should be equal to the final sales price of the product. This is such a strong idea in economics that it is stated as an identity rather than an equation or theory.

And the reported economic impact always seem to exceed the final sales by a large margin just like Apple’s jobs study. Yikes. No wonder I have my doubts!

Visible Hands

It is good to be critical in assessing numbers, but I’m afraid my skepticism sometimes goes a bit too far, to the point where I don’t really appreciate how important the wine industry is and how broad its impacts really are. That’s why my travels this year to the Unified Wine & Grape Symposiium and the Washington Association of Wine Grape Growers meetings have been so useful.

It’s not [just] that the presentations have been useful, although they have. It’s really the trade shows that have taken my breath away and provided a needed perspective. I’ve been able to see and meet the people behind the numbers and it has been very helpful.

This was especially true at the Unified in Sacramento, which had two huge floors brimming with about 650 exhibitors. The trade show was so large that Wine Business Monthly created an online planning guide to help visitors navigate the room (http://www.winebusiness.com/planningguide/2012/). Wow! I heard that there was a smartphone app available to optimize your walk through the trade show based upon your business interests. A great idea.

The Ordinary Business of Wine

I’ve pasted in a directory of exhibitors from the 2011 Unified event so that you can see the wine range of businesses that come to the meetings (and the wide range of economic impacts involved, too). I really wanted to use a photo for this, but I couldn’t find an image that captured the sense of the place, so the table (more numbers) will have to do.

Many of these firms are specific to the wine industry, but a number are what I would call “ordinary businesses” (see my last post) that provide the wine industry with the sorts of goods and services that all businesses need, albeit often with a special wine slant. If wine has a large economic impact, and I think it does, these ordinary businesses — banking, accounting, marketing, legal services, flooring, hoses, tanks and even iPad-enabled electronic sommelier apps — are part of the process.

iPad apps for wine? Wow, I guess this means that we are part of the Apple empire, too. (Or is it the other way ’round?)

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Thanks to Ken (who put it better than I did here) for suggesting the “wine as an ordinary business” theme.

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3 responses

  1. Hey Mike, great article.

    Let’s see if I understand you correctly… If the value added by a company equals the total value of its sales at retail, then something like the equation below should work (roughly) to estimate job creation for a winery.

    (#bottles sold X average retail Price) / average annual income

    For the company I work for, highly simplified rounded numbers…

    (30 million bottles x $10 per bottle) / $50,000 per year US average salary = 6000 jobs

    Our actual direct employment is a little over 500, so this would be more than 10 indirect jobs for every direct job. Does this make sense to you?

    • Thanks, Paul. The tricky part comes when you attribute those indirect jobs to any specific producer because in most cases a shop that sells wine A also sells B, C, D etc. If wine A disappears all the indirect jobs associated with selling it won’t disappear, they will likely shift to selling B, C and D.

  2. To help clarify what’s an “indirect” job as distinct from a direct one wine manufacturers pay for:
    1) Lobbyists to convince the government to be nice to the industry: subsidies rather than restrictions, please. Every industry has them.
    2) Machinery companies that develop specialized equipment and others that maintain and repair it.
    3) Marketing people including:
    a) Market research people. Who is the market and what trends are developing among consumers that might affect us.
    b) People who figure out sales strategies. Mainly it’s the pitch – “Our wine will convince girls you’re debonair, impress your boss and actually cures dandruff” or more modest claims.
    c) Merchandising folks who hire people to work on product design: odd shaped bottles, strange labels, 14 bottles or 10 to a case instead of 12. It’s also in-store displays, training sessions for retail staff and little gifts consumers find attached to bottles at the retail shop. They also design the wine tour visitors get and the tasting room. (Staff accountants figure out what visitors are served for free.)
    d) Publicity people who try to get the message out without buying time or paying for space, preferably appearing o come from a more trustworthy source than an ad
    e) Advertising agencies.
    f) Ego boosters. All the junk organizations who say, “You’re more than important, you’re good.” Billy Crystal at the Academy Awards talked of millionaires handing other millionaires golden statues. Every industry and trade has organizations designed to boost the ego of egomaniacs. Mentioning this to any industry executive means you’re out of there.
    4) Consulting agronomists, wine makers, and other experts.
    5) Lawyers of three classes:
    a) Those for commercial disputes – another company’s wine label and name imitates ours—or this wholesaler hasn’t paid up.
    b) Criminal defense lawyers for when a binge drinking lout misuses he product and you end up being sued by the family of the person he killed in a car wreck and a lot of other problems that arise
    C) Lawyers to limit your liability. They’re the ones who put warnings on labels that read, “Do not consume.”
    6) Community relations consultants so people in town don’t resent you: the “We care about the community” thing. They usually also deal with the loud folk: some valid, some fruitcakes. Some will want you to ship wine in containers that don’t use any energy to produce or transport without specifying a reasonable alternative to what you’re now doing. Some want you to change how you make wine people want to buy to a method that costs more and produces rotgut. Some will have very valid concerns. Whoever you hire has to be very good. Some concerns are valid and should be addressed immediately. Others are hat “Y2K, all computers will crash” scare again.
    There are a lot of others who will be on staff. One example: transportation specialists watch prices. At times rail is cheaper than truck over a given route in North America, but the price advantage flips to trucking at irregular intervals on some routes.
    The list is far longer. Contact a major wine company where a friend works and your friend will send you a much more complete listing.
    Important warning against two self-serving lies:
    1)companies in any industry will tell you,”We’re different, we have unique problems.” They’ll also say, “We’re important. Look at all the jobs we’re creating.”
    All the tasks listed above except criminal liability lawyers are also done by Harlequin romance novels, one of Canada’s great exports. Pharmaceutical companies have everything listed above done except in-store merchandising, but they have physician contact representatives and more government entanglement than wineries ever dreamed of.
    2 )No company is out to create jobs. Since the industrial revolution began, eliminating jobs in one area—usually starting with manufacturing—has led to job creation in other areas. Employment for suppliers to a firm is just seen as unavoidable costs of doing business.
    From the view of the ad agencies, the lawyers, the merchandising people and the others listed above, if grapevines were grubbed out and replaced with another industry, they’d just change clients. Remember that FMC Corporation started out as the Food Machinery Corporation. It made insecticide sprayers, then added fruit packing plants, then got a contact for the M113 Armored Personnel Vehicle. Today it’s mainly a chemical company.

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