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Kiwi Malbec? Signature Wines & the Dutch Disease Effect

February 16, 2021 By in Argentina, emerging wine regions, globalization, New Zealand, wine, wine markets 3 Comments

Some people like to define wine regions by their signature grape varieties. New Zealand = Sauvignon Blanc. Argentina = Malbec.  You know what I am talking about. So what should you think of a Kiwi Malbec like the one shown here? Read on to find out.

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What do you think of when I say Malbec? Well, there are lots of things that could come to your mind, but I expect that Argentina or Mendoza are at or near the top of your mental list for this term. Malbec is Mendoza’s signature wine grape and it tends to dominate the region’s image.

Signature Wines & the Dutch Disease

This is convenient from a marketing standpoint — it is good to stand for something in the world’s congested wine markets. Here in my home state of Washington, for example, we make great wines from many different wine grapes and we sometimes yearn to have a defining variety like Argentina or our neighbor Oregon with its famous Pinot Noir.

But signature wines have a downside, which I have compared to an economic condition called the Dutch Disease. Sometimes when one sector of an economy becomes particularly successful the result isn’t a tide that lifts all boats, but rather a sort of whirlpool that drags the other sectors down.

Thus Argentine Malbec’s great success makes it more difficult for other interesting wines to get attention. Personally,  I always look for Argentine Cabernet, Semillion, Cab Franc, and Syrah, for example, and there are some wonderful Chardonnays and high-elevation Torrontes, too. But I imagine they are tougher to sell than good old Malbec. The signature wine rises high, but can cast a deep shadow.

New Zealand and the Dutch Disease

Now consider New Zealand wine. What comes to your mind? Chances are that Marlborough Sauvignon Blanc comes first, with Pinot Noir from Central Otago on the list for many. I’m a big fan of these wines, but the Dutch Disease dilemma applies here, too. Other wines and other regions don’t get the attention (Rodney Dangerfield would say they don’t get the respect) they deserve because of the signature wine phenomenon.

So what would you think about a Hawke’s Bay Sauvignon Blanc or a Gimblett Gravels Malbec? Well, I hope your interest would be piqued at the very least. Sue and I visited the Hawke’s Bay area (think Napier on New Zealand’s north island) several years ago, where we were fortunate to meet with Steve Smith MW of Craggy Range. He helped us understand this interesting region and introduced us to the Gimblett Gravels’ rocky dry river bed terrain that makes me think of alluvial fan terroirs such as To Kalon in Napa Valley or The Rocks District of Milton-Freewater in Oregon. Hawke’s Bay is warm enough to make great wines from Bordeaux grape varieties (of which Malbec is one), which are unexpected for those who haven’t fully explored New Zealand’s varied wine scene. The Gimblett Gravels is a special case within that special case. Fascinating.

Now Hear This!

Which brings us to some wines we’ve been for fortunate to be able to sample during this pandemic period. Daniel Brennan is an American who came to New Zealand in 2007 with the intent to focus on Pinot Noir. But somehow the people and terroir of the Hawke’s Bay region captured his attention, which is something Sue and I can appreciate. We stayed with a modest grower/winemaker family in the Esk Valley during our visit and got a deep sense of the people and place.

Brennan makes 11 different wines under the Decible and Giunta labels (including a Pinot Noir from Martinborough). We had the opportunity to sample three of them: the 2019 Decibel Crowethorpe Vineyard Hawke’s Bay Sauvignon Blanc, 2020 Giunta Malbec Nouveau, and 2017 Decibel Gimblett Gravels Malbec.

The Sauvignon Blanc broke through some of the stereotypes about Kiwi Sauv Blanc, with more savory notes than you might expect. The Malbec  Nouveau was just what you want from a young wine like this: fruity, juicy, easy to drink and enjoy. The Gimblett Gravels Malbec featured a line bright acidity that tied together fruit and tannins in ways that evolved in the glass over time. The acidity made it different from most of the Argentina Malbecs we’ve tried.

Brennan makes a number of wines that run counter to the signature wine stereotype, but his passion for Pinot Noir is undiminished. He hosts a popular podcast called Vintage Stories that spreads the word about Kiwi Pinot and the people who craft it.

I’m a Pinot fan, too — and I hope to taste Brennan’s Martinborough wine at some point — but I enjoy these Hawke’s Bay wines because they are distinctive and because they challenge the signature wine stereotype and the Dutch Disease that can go with it. The Gimblett Gravels Malbec forces you to re-think the conventional wisdom about New Zealand … and about Argentina, too, I hope.

Too Much of a Good Thing: Washington’s Wine Woes in Perspective

August 22, 2023 By in Economic impact, Washington wine, wine, wine markets 12 Comments

It has been a little more than a month since executives from Ste Michelle Wine Estates (SMWE) told their Washington winegrowers the bad news. Having already trimmed grape purchases over the past several years, they now planned to cut grape contracts by 40 percent over the next three years, starting with this fall’s harvest. SMWE is by far the largest wine producer in Washington and many of the vineyards that have come into production in the past ten years were planted with sales to “the Chateau” clearly in mind.

The announcement was big news. The wine press here in the U.S. and around the world has covered this situation very well. I am not a SMWE insider, so I don’t have breaking news to report here, but as someone who studies the U.S. and global wine markets (and as a personal consumer of Washington wine products), I want to contribute some perspective to the situation, which I hope Wine Economist readers will find useful.

Washington’s Problem By the Numbers

Washington has about 60,000 acres of producing vineyards today, a number that has grown rapidly in the last decade. SMWE is such a dominant producer in the state that their 40 percent cut in grape purchases will make about 10,000 vineyard acres redundant. Growers are advised to look at the situation strategically and to identify diseased and unproductive vineyards for vine removal. Demand and supply are out of balance. Thoughtfully reducing supply is a necessary short-term action.

This is not only sensible advice, it is also the advice that I hear nearly everywhere in the wine world these days.  Jeff Bitter, the President of Allied Grape Growers in California, has been telling our State of the Industry audience at the Unified Wine & Grape Symposium this very thing for several years. It isn’t just that Washington has too many grapes, it is a California and global problem, too. I know of a few regions around the world where grapes are in short supply, but the list isn’t very long.

So the Washington situation isn’t unique, but its impact gets attention because of SMWE’s size relative to the Washington industry. Where other regions have suffered from grape cuts by dozens or even hundreds of smaller producers, the spotlight is focused clearly on Washington’s big producer. The big cut makes the news more clearly than many smaller cuts even if the net effect may be much the same.

That said, the proportion of vineyards that will be directly affected by cuts in Washington is higher than in California. This is partly the case because Washington was planting new vineyards while many growers in California were pulling them out. That explains a lot of the problem but not all of it.

The Curse of the Signature Wine

The success of Sauvignon Blanc from New Zealand and Malbec from Argentina has made many people believers in the “Signature Wine” phenomenon. You need to have one signature wine to define a wine-growing region, the story goes. I have always seen Signature Wine as both a blessing and a curse. It is a blessing because it makes a region easier to understand and to sell. But it is a curse because, in my experience, the monolithic identity makes it harder to sell other wines from the region.  I have had some great Syrah and Riesling from New Zealand, for example, but these wines don’t get much love because everyone is thinking Sauvignon, Sauvignon, Sauvignon.

Ditto for Argentina, where the Syrah, Cabernet Franc, and Pinot Noir can be wonderful and the Semillion will surprise you. But the market chant is Malbec, Malbec, Malbec. Listen. You can hear it now! And that’s despite the fact that some winemakers think their Cabernet Sauvignon is a better wine.

Students of economics may recognize this as a sort of cockeyed variation on the foreign exchange theory of the “Dutch Disease,” where great success in one industry can backfire in terms of its negative impact on other industries.

I saw the Signature Wine blessing in person when we visited New York City a few years ago. A tour of notable wine shops found lots and lots of wines from Oregon and very few from Washington. Why? Customers who came looking for Oregon wines wanted one thing: Pinot Noir. So the shops made sure to have a large selection. But Washington wine isn’t dominated by one grape variety. There are lots of great wines, but no defining grape variety theme. And so no clear guidelines as to what consumers might expect.

Washington’s Signature Price Point

Actually, that last statement is not quite correct, and maybe this is the important point. Whereas Oregon is Pinot Noir (and Napa is Cabernet Sauvignon), Washington’s Signature Wine isn’t defined by a grape variety so much as a price point. I don’t think it was intentional. Washington has always made lots of different wines from lots of different grape varieties at lots of different price points. But SMWE, the state’s dominant producer, and some other volume producers, too, eventually discovered success by producing large quantities of wines in the $9 to $11 price range at a time when that was the sweet spot of the market. Bulls-eye!

SMWE has many wine brands from Washington state, how did it (and the state) end up being stereotyped to one spot on the wine wall? It is too big a question to be analyzed here. I admit that as a consumer, I sometimes struggled to figure out the relationship between big-volume brands like Chateau Ste. Michelle, Columbia Crest, and 14 Hands. It seems like the power of market growth in that critical price range was like the firm pull of gravity. Hard to resist. But I am sure there was more to it than that.

As premiumization has driven the market sweet spot higher, SMWE’s advantage has melted away enough to create a crisis. That signature price point is still important, but it can’t absorb all the grapes that were planted in anticipation of its continued growth.

Realignment is necessary, but it won’t be as simple as raising price or creating new brands (or designing new labels as I have seen on store shelves). That signature thing will be harder to reset because it is easy to change how you represent your brand, but hard to control how others will perceive it (a variation on a Machiavelli lesson).

Washington is now in a new era, where identity will come from the bottom up through the work of the many successful small- and medium-sized wine producers. It is a big challenge, but the quality is there and so is the determination.

A California Thought Experiment

Here is a little thought experiment that might put the Washington situation in context. What would it mean if California’s largest wine business, Gallo, were to cut grape purchases by 40 percent the way the SMWE did in Washington? I put this question to Natalie Collins, President of the California Association of Wine Grape Growers, and Jeff Bitter, President of Allied Grape Growers. Here is my analysis (all errors are mine, not theirs) based on our conversations.

Gallo buys about one-quarter of California’s wine grapes (a much smaller proportion than SMWE in Washington, although that could be where things end up). That would amount to about 1 million tons of wine grapes in a fairly typical 4 million ton year. A 40 percent cut would mean 400,000 fewer tons of grapes and so, figuring maybe 12 tons per acre, that’s more or less 35 thousand acres of surplus vineyards. If all those vineyards stayed in production, that would be a huge surplus of grapes that would drag down grape prices in some market segments.

The hypothetical Gallo cuts wouldn’t impact all parts of the wine grape market equally, of course. Given recent market trends you might expect vineyards in the interior to be disproportionately affected, although high-quality grapes might find a home in some California blends, replacing more expensive grapes from other regions as the cost squeeze continues to bite.

Bottom line for this thought experiment: a 40 percent cut by the state’s biggest wine grape buyer would have a greater absolute impact in California, as you would expect, but SMWE’s cuts are a larger relative problem in Washington

Something to Think About

Do I expect Gallo to cut grape purchases by 40 percent? No. This is just a hypothetical exercise to stimulate thought.

But Gallo’s huge portfolio is subject to the same general market forces as other producers, so some quantity adjustments are necessary. And Gallo might even become a seller of wine grapes in some market segments if they can’t find a use for all the grapes on the 20,000 acres of vineyards that they control.

Gallo selling grapes? Now that’s really something to think about.

Kiwi Wine Wars: Terroir and Its Discontents

June 30, 2015 By in New Zealand, wine law, wine markets 2 Comments

When Sue and I visited New Zealand in 2004 we found a wine industry experiencing tremendous success, but worried that the good times might not last. It seemed like New Zealand’s wine production was doubling every few years — could global markets continue to absorb so much Kiwi wine?

Eleven years later the conclusion is that global consumers still love Kiwi wine, but the concern is still there for the future.

A Kiwi Variant of the Dutch Disease? 

There were lots of worries back in 2004. One was a kind of Kiwi variant of the “Dutch Disease” — the concern that tremendous success in one part of the wine industry would put a curse on the rest of it. Would the triumph of Marlborough Sauvignon Blanc crowd out other regions and winegrape varieties and leave New Zealand uncomfortably reliant on a single type of wine?

But that wasn’t the only problem people saw then. Ironically, we met with one very successful Marlborough producer who was worried about Pinot Noir messing up Sauvignon Blanc. New Zealand’s brand is Marlborough Sauvignon Blanc, he told us. Giving more attention to Pinot Noir risks confusing consumers about the Kiwi wine identity and killing the goose that lays the golden egg.  Put all the chips on Marlborough Sauvignon Blanc and make sure that very successful and profitable wine doesn’t fade away, he advised.

Eleven years later I think the concern about reliance on Sauvignon Blanc is  still around, but I’m not hearing much talk about Pinot Noir getting too much attention for the industry’s good. And that producer who wanted to deemphasize Pinot is now proud to make some highly-regarded Marlborough Pinot Noir in addition to his Sauvignon Blanc!  So a lot has changed even if some things stay the same.

 It’s Terroir Time

One concern that is still on the agenda is terroir and its importance in marketing the wine by telling an authentic terroirist story. As I have suggested in previous columns, terroir designations have morphed from a protective tool in Europe (an attempt to control fraud, for example, and protect geographical trademarks) and a brand issue here in the U.S. (brand Napa Valley) to an indicator of authenticity in the story-telling necessary to effectively sell wine today.

It’s terroir time in wine world. Upscale consumers want to have authentic stories to go with the products they buy — this is true for wine and other products — and a specific geographic designation is one way (but not the only way) for winemakers to tell that story.

Some of the people we talked with in Marlborough back in 2004 were thinking in terms of protection and brands and they were worried by New Zealand’s lack of a stronger geographic indicator system for wine. Marlborough is a very large designation, one producer told me, and it is a powerful brand for Sauvignon Blanc. But it is such a big and diverse area, he said, and the wines are so diverse in terms of style and quality.

He was afraid that as production was ramped up the lack of consistency would undermine Marlborough’s credibility. Private efforts to stress particularly excellent sub-regions did not seem to be getting traction and official actions looked slow in coming. Would Marlborough’s success ultimately undermine its credibility? That’s the pattern that I called “the Curse of the Blue Nun” in Wine Wars.

NZ-based wine writer Rebecca Gibb recently wrote about the movement to identify key Marlborough zones for Pinot Noir, concluding that as appealing as the idea is it might be premature. Maybe Kiwi winemakers are still learning where the the best places are to grow particular varieties, Gibb says. If she’s right then it was certainly too soon back in 2004, when the zones might have been crafted with SB, not Pinot, in mind. And Jamie Goode has recently cautioned about the movement to adopt geographical indicators in general.

Gimblett Gravels: Seizing Control

We visited Hawkes Bay on the North Island in 2004 and some of the winemakers there were impatient with Kiwi geographical indicator policies. Growers in the Gimblett Gravels knew that they had special terroir and, having saved it from exploitation as a gravel quarry, wanted to both protect it and brand it. But how?

They did both in the most direct way available to them, forming an association, registering “Gimblett Gravels” as a trademark and rigorously regulating its use. In essence I guess they “privatized” their terroir designation because they were frustrated with the lack of a clear public path.

Here is an explanation from the GG association’s website.

GIMBLETT GRAVELS is the registered trademark of the Gimblett Gravels Winegrowers Association. The Association and registered brand were developed to define and then name a winegrowing district using principles that are not catered for within New Zealand’s proposed Geographic Indications Act legislation.  … The Association and designation of the area was formed at a relatively early stage in its winegrowing life to ensure that the purity and integrity of its designation was not compromised by political issues outside its control. … To the best of our knowledge this is the first viticultural appellation in the New World where its ultimate boundary is defined by a distinct soil type boundary, no compromises, no politics.

The approach taken has determined that a carefully planned and professional branding program was required to promote the Gimblett Gravels Winegrowing District as a viable sub-region within the Hawke’s Bay region. The lack of any legal Geographic Indication status for Gimblett Gravels Winegrowing District has determined this approach. The branding program has developed a strong logo and branding platform that controls the use of the name “GIMBLETT GRAVELS” and “Gimblett Gravels Winegrowing District”.

Kiwi Terroir Today

I suspect my friends here in the U.S. who are caught up in various aspects of AVA and sub-AVA politics will look at the Gimlett Gravels initiative with respect, admiration and even a bit of envy. What a bold move! And I think it has been very successful, too.

Terroir and geographical indicators have grown and changed in their significance. Where does New Zealand stand today? Come back next week for a quick look at progress on this front both in private sector branding  and in Kiwi wine policy.

Australian Wine Outlook: Modified Rapture

June 11, 2013 By in Australian wine, Economic impact Leave a comment

“Modified rapture” is a line from Gilbert and Sullivan’s comic opera The Mikado. The dialogue as originally written was “Rapture!” but the actor who played Nanki-Poo was apparently a little too enthusiastic about it during rehearsals and Gilbert kept unsuccessfully asking him to tone it down. (You will understand why the rapture was incomplete if you view the YouTube video above.)

Finally, in complete frustration, Gilbert barked, “Modified rapture!” as a stage direction. And that’s exactly what the actor said, taking it literally as a text revision. Modified rapture, indeed! And it became a permanent part of this entertaining scene.

Dutch Disease Dilemna

Modified  rapture – that’s my reaction to the good news about the Australian dollar (AUD). The Australian wine industry has suffered mightily from the “Dutch Disease,” which is what happens when a boom in one sector of the economy causes an over-valued currency that makes other sectors less competitive.

Exports to China, especially mineral exports, have been the boom sector and they have pushed the Australian dollar to incredible highs relative to the U.S. dollar.  This has created a dilemma – pass the foreign exchange costs along to foreign buyers and you risk losing sales. Absorb the foreign exchange impact and margins shrink and sometimes dip into the red.

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Rapture: the short term view

The over-valued Aussie dollar has affected all segments of the Australian wine industry, but bulk wine sales have been perhaps the most impacted because international competition is so fierce for commodity wines. Bulk wine sales account for about 45% of New World wine exports, so lots of business (and grower incomes) hang in the balance when the exchange rate shifts by even a penny or two.

Good News: A Short Sharp Shock

So the recent fall in the Australian dollar as shown above must be greeted with joy by Australian growers and producers. Although it was expected that the AUD would depreciate eventually, I’m not sure anyone would have predicted such a “short  sharp shock” (to use another Gilbert and Sullivan line).

What caused the change? Well, Australians might say that it hardly matters – good news is good news.  But good news doesn’t always last as the graph below indicates. This isn’t the first time that the AUD has tumbled and we can’t be entirely sure that it will not rebound (hence my “modified” description). And although the recent trend is welcome it must be noted that the AUD is a long way from its value back in early 2009, when it was even cheaper relative to the dollar than the 85-cent valuation that one analysis has predicted.

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Modified rapture: the longer view

The AUD Trifecta

As I see it, the sudden shift is the result of a trifecta of effects. The first and most important is the slowing of the Chinese economy, with the resultant decrease in demand for Australian minerals. That’s one. The second is the shift in Japanese monetary policy. Abenomics, as it is called, is pumping up Japan’s money supply in an attempt to jump-start the economy.

This has driven down the yen’s value, which encourages some investors to repatriate funds previously placed abroad to take advantage of the fact that each host country Australian dollar (for example) now yields a larger home country yen profit. A good time to cash in your chips and bring your money  home.

Finally, the U.S. Federal Reserve has announced that it is “tapering” its expansionary monetary policy, which has boosted U.S. interest rates and perhaps caused some “carry trade” international investment to shift to the U.S. from other countries (like Australia, for example).

So the result is good news and I think it might last, but it is important to realize that the trend could be reversed if China’s growth rate picks up (as most people hope it will) or if U.S. and Japanese monetary polices change dramatically. Fingers crossed — there is a lot on the line!

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Foreign exchange historical tables are from Oanda.com.

I couldn’t resist adding this classic Mikado video — the “short sharp shock” appears at about the two minute mark. Enjoy.

Vineyard Plague: The Dutch Disease

October 31, 2010 By in Australian wine, economic crisis, Economic impact, exchange rates, South Africa Leave a comment

As if things weren’t bad enough in Australia, now there’s this: the Dutch Disease. No, it isn’t a fungus spread when you plant tulip bulbs in the vineyard or something you saw on the television series House MD. It’s much more serious than that. And it’s hitting South Africa, too. Look out!

Australia’s Perfect Storm

I’ve written several times about Australia’s continuing wine crisis. It seems like everything that could go wrong has gone wrong. Too much heat, too little water, excess capacity, collapsing demand — even smoke-tainted grapes caused by runaway brush fires. Yikes!

Now there is more bad news and it’s the result of too much good news? Good news is bad news? Yes. Read on.

The Dutch Disease is the name economists give to the problem of too much good news in one industry and its negative impact on the rest of the economy. If one sector of the economy gets hot on global markets (think oil exports, for example) one effect can be that export sales increase the demand for the country’s currency, causing it to appreciate in real terms. The rising currency value makes all the nation’s other products more expensive on foreign markets, sending them into a tail-spin.

The Good News the Bad News

That’s how good news in one part of the economy can backfire. The Economist magazine apparently invented the term to describe the dilemma of the Netherlands after a big gas field was found there in 1959.

The good news / bad news in Australia is clearly the fact that China’s economy is growing rapidly and sucking in the natural resources that Australia has in considerable abundance. But big purchases of the Australian dollar needed to pay for these products has pushed the currency up, making Australian wines more expensive here in the U.S.

This helps explain why off-premises sales of Australian wines are still falling here even though many other segments of the wine market are recovering. Recent Nielsen retail data show the U.S. wine market growing by 4.3 percent in the period ending in August, but sales of Australian wine fell by 7.5 percent (data from the November issue of Wine Business Monthly).

As the chart above shows, the Australian dollar has continued to appreciate since these data were compiled, magnifying both the Dutch Disease problem and the sense of crisis in the Australian wine industry.

South Africa Also Hit

South Africa seems to be experiencing the Dutch Disease as well. There are many factors that have contributed to the sharp rise of the Rand against the dollar, but surely the surge in gold prices must be the most important one. As speculators and investors who have worried about inflation turn to gold, their purchases have driven up the value of South Africa’s currency as well.

This helps explain why sales of South African wine in the U.S. have been in a bad slump. Nielsen data indicate that South African wine sales fell by 8.3 percent in August and by 9.4 percent in the last year.

The U.S. dollar’s rapid recent fall will affect all countries that depend on our huge markets for exports, but inevitably some will be hit more than others.  Those like Australian and South Africa who suffer the Dutch Disease will be challenged the most.

We’ve entered an era of extremely unstable currencies, reflecting both the inherent instability of international financial flows and the increasingly cut-throat battles in the global currency wars. Inevitably many industries — including wine — will get caught in the cross-fire.

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More Bad News for Australia: Parallel Imports

December 22, 2010 By in Australian wine, economic crisis, Economic impact 2 Comments

Sometimes I feel like a broken record when I write about the Australian wine industry: bad news, bad news, bad news.

Most recently the bad news was the Dutch Disease. Australia’s mineral export success has driven up the foreign exchange value of the Australian dollar, making imports cheaper and exports (including wine exports) more expensive abroad.

That’s just what the shell-shocked Australian wine industry needs — higher prices or slimmer margins in key export markets!  But now the bad news is even worse — the strong Aussie dollar is driving down wine prices in Australia’s domestic market and slashing producer margins there, too.  How? Through “parallel import” programs that crafty retailers have put into effect. An article from the Sydney Morning Herald explains the situation.

Caution: Economics Content

Parallel imports are a consequence of a very common practice called international price discrimination. Price discrimination is the business strategy of charging different prices to different customers for similar or even identical products. Different buyers have different ability to pay and price sensitivity and it is sometimes possible to charge some customers a high price and others a low price in an attempt to extract all possible revenue from the market demand curve.

Classic examples of price discrimination include the highly complex pricing system that airlines typically employ with some seats being sold for four or five times the cheapest fare depending on when and how the ticket is purchased. Student and senior citizen discounts are relatively benign and generally accepted price discrimination examples.

International price discrimination is the practice of selling similar goods at different prices in different countries based on local demand conditions. In the case of Australian wine, for example, it appears that local wine market conditions in Brazil or Malaysia might cause winemakers to want to sell products there at lower prices than in the more mature domestic market. If the prices are set correctly, the combination of lower prices in some markets and higher prices in others can maximize the winemaker’s profit.

The Key to Price Discrimination

The key to price discrimination, according to your Econ 101 professor, is to prevent resale. The whole strategy backfires if someone finds a way to buy your products in the low price market and resell them (undercutting your sales) in the high price market. This fact limits price discrimination to situations where resale is costly, difficult or just plain impossible.

If someone finds a way to sell your discounted product back to the home market, the logic of price discrimination explodes.

Now the “parallel import” problem in Australia is that some large retailers there have discovered stocks of lower-priced Australian wines in other countries and are importing them back into Australia to sell for less. The strength of the Australian dollar (Dutch Disease again) makes this even more profitable. The Herald reports that

Parallel importing is … hurting business as supermarket chains and some of the bigger independent bottleshop chains bypass Australian brand licensees and import from third parties in countries including Brazil, Malaysia and the US.

Parallel importing hit record levels in the past year as the dollar continued to strengthen and retailers, looking for ways to drive prices down and exert control over their suppliers, became more aggressive in importing.

Some Australian producers are thus getting a double squeeze in their home market. They are exporting wine at the slimmest of margins (because of lower foreign market prices and the strong Australian dollar’s impact) only to see the wine shipped right back and sold by local retailers, undercutting their plans for higher margin home market sales.

Why do they call these “parallel imports?” I imagine it is because the imports and exports form two parallel lines, with cargo ships full of outbound and inbound wine containers crossing mid-ocean. Australian wine producers need to cross their fingers that even more bad news is not in the cards.

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Special thanks to my Australian informant “Crocodile Chuck” for tipping me off to this situation.

The Final BRIC: South African Wine

February 20, 2011 By in BRICs, South Africa 6 Comments

This series of posts has taken Goldman Sachs executive Jim O’Neil’s list of BRIC and New BRIC nations and examined them from the particular perspective of wine. All of the BRICs (Brazil, Russia, India and China) and New BRICs (South Korea, Mexico, Indonesia and Turkey) produce wine. They have glorious pasts, tempting futures, and face certain present challenges linking the two.

In a sense (but I don’t want to push this too far), the challenges and opportunities that these countries face in terms of wine reflect their overall national situation. In vino veritas? Yes, I think so, but not just in the usual sense. Read the individual posts and you will see what I mean.

The Undiscovered BRIC

So now I turn at last to the overlooked BRIC: South Africa. With a relatively modest population (less than 50 million), it was probably too small to qualify for O’Neil’s signature group in terms of market size. But South Africa punches above its weight in many fields and has great symbolic importance, too, which is one reason it was chosen to hold the 2010 soccer World Cup.

If South Africa is too small to be a BRIC in gross domestic product terms, it towers over many of the other countries with respect to wine. South Africa was listed at #8 on the world wine league table for 2007 according to OIV statistics, with 9.7 million hectoliters of wine production, just behind Germany and head of Australia and Chile. Among the BRICs only China produces more wine (12 million hl, #6 on the list), although it isn’t clear that all Chinese wine is actually wine or really made in China.

Like many of the BRICs, South Africa has a deep wine past and a sunny future — it’s the present that’s problematic. The first wine was pressed on April 6, 1652. The famous Groot Constantia wine estate was established outside of Cape Town in 1682. By the 18th century its eponymous Muscat-based sticky was one of the three most sought-after wines in the world (Tokaji from Hungary and Cotnari from Romania completed the tasty trio).

South Africa’s wine history has been filled with peaks and valleys, both the usual ones for wine producers  and some that are country-specific. Phylloxeria, persistent over-production, and difficulty breaking out of the fortified wine cycle to produce quality dry table wines are familiar stories.  Apartheid — the notorious South African exception —  damaged the industry by effectively shutting off export markets and distorting domestic demand.

South Africa’s  fast emergence in the world of wine in the last 20 years  has been exception in a good way. South Africa surpassed France (France!) in U.K. wine sales in early 2010.

Good News / Bad News

I would like to say that South Africa is poised to beat all the BRICs and assume a place at top of the wine wall, but I hesitate just a bit. Part of it is due to the exchange rate. South Africa has a reputation for good value wines and it is suffering just now from a case of the Dutch disease. The Rand’s value has increased by more than 40% in the last two years (higher gold prices are part of the story) and the higher exchange rate has cut South Africa’s competitive advantage.

But there are lots of disturbing factors.  If you search the Decanter.com website for “South Africa” you get lots of good news (booming sales, distinctive varietals, demand so high there have been grape shortages) and bad news, too (burnt rubber aromas, persistent grape surpluses, Pinotage image problems). U.S. sales of South African wines have actually fallen by about 10 percent in the past year according to Nielsen data published in the most recent issue of Wine Business Monthly.

Perhaps it would be the same with a news search for any wine region — lots of good, bad and ugly news to go around — but coming off the Apartheid era of dreadful news, South Africa needs more than a bit of sunshine just now.

So I am left a bit uncertain, honestly. Optimistic but realistic, too.

And I think this is my opinion of the BRICs and New BRICs generally. The wines and the countries that produce them will succeed, no doubt, but not without a struggle, if only  because the times we live in are so uncertain. Mother nature and human nature are both very fickle and wine cannot help  but reflect them both.

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The video up top shows how South African winemakers used the occasion of the World Cup to try to market their wines abroad. A good idea, but I think there was a better one that they missed.  These days South Africa is trying to use wine as part of their program of Black Economic Empowerment by promoting black owned wineries and vineyards. It’s still in the early stages, but I like the idea. Given this, it seems to me that Invictus is a better image for South African wine than Bend It Like Beckham.

Boom Boom! On Money and Wine

October 25, 2011 By in wine investment, wine research 2 Comments

I’m just back from the San Francisco Treasury Symposium where I gave the luncheon keynote speech on “Wine Boom and Bust — With Lessons for Finance in the 21st Century.” You might well ask what business a wine economist has speaking to a group of treasury executives (I asked that question myself!), and the answer has two parts.

First,  I actually know a little bit about global finance from my day job as a university professor. I’ve written frequently about global financial flows and especially the periodic crises that seem to plague them.

The other reason is that the conference organizers thought it would be interesting and different to hear someone talk wine, but in a way that would still be relevant to their treasury executive audience. So that was my challenge.

Money into Wine? Easy! Wine into Money … Not So Much

Money and wine are closely tied, although it is an asymmetrical relationship. It is pretty easy to convert money into wine, for example. In fact, it may be a little too easy to do this. Some of my friends report that the whole “money into wine” thing has gotten way out of hand for them. You probably know the problem from personal experience if your cellar has grown bigger than your bank account.

It is harder to convert wine into money, especially if you are in the wine business. The best way to make a small fortune in wine, people tell me, is to start with a large one.  I focused on three aspects of wine economics for my talk: globalization’s opportunities and threats, the “new rules of the game” and the need to embrace (or at least accept) volatility. All these points apply to both wine and 21st Century finance.

Globalization: Opportunity and Threat

Globalization offers a world of opportunity to winemakers and financial managers alike, but it is a complex world and a very competitive one. New markets open their doors … but your market doors are open wide, too. Optimists will see the wine glass more than half full and seize the opportunities that present themselves, hopefully taking the associated costs and risks into account.

One problem with globalization is that the risks are so difficult to fully evaluate. The Australian wine industry, for example, is currently suffering from a bad case of globalization gone bad and part of the problem has nothing directly to do with wine.

Although the Crash of 2008 slowed down the global economy, China continues to surge ahead, its demand for natural resources (one of Australia’s strong sectors) growing year after year. Australian has come down with a bad case of the “Dutch Disease” where success in one sector causes chaos elsewhere. As mineral sales have increased, the strong Australian dollar has depressed the already weakened wine industry by discouraging exports. Click on the “Dutch Disease” link to see my report on this problem.

The [New] Rules of the Game

Global finance is dominated by a number of key financial centers that set the “rules of the game” for money. Wine works the same way, but the centers have shifted and the rules of the game have changed.

Producing nations (think France and Italy) once determined the rules of the game with their AOC designations.  The center shifted to Great Britain, Germanyand the United States in the last 20 years and now the rules are written by those who sell wine (think Tesco, Costco and Aldi) more than by those who produce it. The most successful wine sectors so far are those that have best adjusted to the new rules.

The rules will change again soon, I suspect, as the BRIC and new BRIC nations make their wine market influence felt. I think finance will also experience shifting centers with new rules and have to adjust accordingly.

Volatility was my final point and wine markets have plenty of it. Boom and bust cycles seem to be “baked in the cake” in both money and wine. I talked about Australia’s five big wine booms and busts in the past 150 years and characterized them in terms of Hyman Minsky’s famous “seven stages” description of financial crises.

Beyond Boom and Bust

Booms and busts are bad enough, but wine markets also suffer from medium-term cycles of surplus and scarcity as illustrated by the Turrentine Brokerage “Wine Business Wheel of Fortune.”  High prices today sow the seeds of low prices a few years down the road, according this analysis, which is based on the well-known “cob-web” model of lagged adjustment in agricultural markets.

Anyone who has tried to guide their 401k portfolio (much less manage corporate financial affairs) knows how volatile financial markets can be – the wine world’s bubbles and cycles must seem pretty peaceful by comparison.

Wine and money may be very different, but the problems they face bear a certain resemblance, don’t you think? What can wine teach money in these uncertain times?

One lesson, I proposed, is to “think global but drink local.” This sounds pretty simplistic, but it captures trends that I see in wine today. Economic imperatives have made both global and local markets more important than in the past. Developing direct sales vectors and developing and maintaining personal relationships is high priority today. Wine (like money) is a relationship business that needs constant attention.

Boulding’s Law

But it’s useful (and often necessary) to keep a global mindset even as you cultivate local markets. The world is getting bigger and smaller at the same time and the rules of the game continue to change.

The second lesson is what I call “Boulding’s Law” after Kenneth Boulding, the famous economist. Boulding once made a study of the history of the future. He looked at what people thought about the future at various points in time and then did a “fast forward” though the history books to see if they were right.

His conclusion? When the future came around people were usually surprised. It wasn’t what they expected at all (even if it was exactly what they predicted years before!).

Hence Boulding’s Law: The best way to prepare for the future … is to prepare to be surprised. That holds for wine, I think, and for money, too.

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Thanks to the San Francisco Treasury Management Association for inviting me to speak at their symposium. Special thanks to Jim Lindsay and Larry Goldman.