Theories of the Global Wine Glut

September 12, 2023 By Mike Veseth in economic crisis, Supply and Demand, wine markets 10 Comments

The world is awash with wine, or so it seems from reading the news. Down in Australia, they are counting up the gallons of unsold wine in a new (to me) measure: number of Olympic-size swimming pools full. Rabobank estimates that the surplus would fill 859 big pools or, if you want a more conventional measure, about 2.8 billion bottles. That’s a lot of surplus wine.

In France, the government has allocated two hundred million euro for crisis distillation. Surplus wine will be bought up to support local prices, and then distilled into industrial alcohol. The next time you use alcohol-based hand sanitizer at your favorite Paris restaurant it might be based on wines from Bordeaux or the Rhone.

Rioja is swimming in wine, too, and here in the United States, there are big stocks of bulk wine for sale in California and thousands of acres of surplus vineyards in Washington state.

This Time is Different

Surplus wine is not a new thing. Wine is an agricultural product and so it is prone to the famous “cobweb” market theory that predicts periodic booms and busts. Turrentine, the California wine and grape brokerage, has cleverly adapted this idea to the wine sector with their “Wine Business Wheel of Fortune.” But this kind of surplus is relatively short term and what we see in the market today looks more permanent.

Sometimes government policies create wine gluts. This is a big part of Australia’s problem today, of course, as Chinese foreign policy has essentially cut off Australian wine from its biggest export market for several years. And the European Union’s famous “Wine Lake” was filled up by price support policies that encouraged over-production to stabilize producer incomes.

If wine surplus is not unusual, what is different about this time? Surpluses today are global not just national. And the driving force is primarily insufficient demand, not excess supply. Something’s changed to create a new global wine environment. What happened? It is a complicated situation, but I’ll try to scratch the surface in a helpful way today and in next week’s Wine Economist.

The Global Wine Glut in Perspective

The graph above (taken from the most recent OIV global wine market report) shows the volume of global wine consumption since 2000. Wine consumption rose steadily for the 20 years that ended with the global financial crisis in about 2007. This was the golden age of wine with many producers (think Argentina and New Zealand) entering global markets with great success and worldwide wine consumption on the rise.

The pause during the financial crisis was thought at the time to be a temporary phenomenon, but in retrospect, we can see that it was the start of what I have called “wine’s lost decade” with stagnant wine sales. The years of steady growth were no more.

Wine consumption fell during the COVID-19 pandemic period, but we expected it to bounce back when the health crisis passed. It hasn’t and in fact, global consumption has fallen back recently to levels not seen since the early 2000s. The picture looks different if we measure the value of sales not the volume of purchases because of the premiumization trend. But people are drinking less wine and less wine than we are growing.

Is there a general theory to explain what happened to global wine? There are lots of special theories that, in an ad hoc sort of way, try to explain individual circumstances. I’ve identified three general theories that help me think about this situation. I’ll analyze two of them briefly below, saving the third for next week’s Wine Economist.

Theory 1: The Generation Gap Hypothesis

The Generation Gap Hypothesis is much discussed here in the United States. The Baby Boom generation powered that long rise in wine consumption, the theory holds, but the following generations failed, for one reason or another, to engage with wine with the same ardor as their parents and grandparents. Total demand cannot be sustained because younger drinkers have not increased consumption to replace the falling demand by boomers as they age.

The younger audience is just different, in this telling, and the task ahead is to introduce them to wine’s appeal through marketing or perhaps cultural education programs. In many wine countries, affiliates of an organization called Wine in Moderation are active to present the positive case for wine in opposition to prohibitionist forces.

It is difficult to organize a response to the Generation Gap problem because generic marketing programs are costly and not always effective (and wine producers and regions have strong incentives to invest in private promotion as opposed to generic programs).

The assumption that generations are fundamentally different leads to the uncomfortable question: Which generation is the anomaly? Are Boomers the norm and the problem is to get Millennials and others to get in line with them? Or, in fact, are Boomers a special case? Was that long wine boom the result of special circumstances? If so, how likely are those circumstances to reappear? Tough questions.

I think generational analysis is very useful in understanding the global wine glut, but it is important to be careful in drawing conclusions. I remember a university colleague of mine who cautioned his Asian Studies student to avoid popular “Asian Values” explanations of political and economic conditions in Japan, Korea, Singapore, etc. “Asian Values” can be twisted to explain anything that might happen, he told his students, so it isn’t valid on its own. Economic events ought to have economic explanations, too, and ditto political events. That’s how I see the Generation Gap hypothesis.

Theory 2: The Life Cycle Hypothesis

The Life Cycle Hypothesis presents a very different theory of the global wine glut. The hypothesis holds that generations are more alike than different in many ways. In particular, the demand for wine remains latent until consumers reach a certain stage in their lives. Millennials are just now approaching this stage and later generations are still in the queue. Wait for it, as Radar used to say on M*A*S*H, and they will discover wine.

This sounds like good news, but it really isn’t because post-Boomer generations are smaller and so, even if and when they find wine, there won’t be enough of them to replace Baby Boomer consumption levels. No use waiting for wine consumption to surge (and not much use in generic promotion, etc.). Supply adjustments are necessary and the sooner the better.

One question that the Life Cycle Hypothesis raises is why the big boom in wine sales only happened when the Baby Boomers came of age. Why didn’t previous generations get the wine bug before them? An answer is, of course, that Boomers represent a surge in the population curve, so anything they do has had a bigger effect, and the generations that immediately preceded them might have understandably had their normal cycle patterns interrupted by the Great Depression and World War II. So maybe the cycles will repeat as this hypothesis suggests, smaller than the Boomers but otherwise much the same.

An Economic Theory?

I find both hypotheses useful in understanding the global wine glut, but my Asian Studies colleague’s voice haunts me. I would be more satisfied if there were an economic theory to explain the economic fact of wine’s over-supply.

Come back next week for my attempt to provide an economic theory of the global wine glut.

>><<<

A book that I have found useful in thinking about generational analysis is The Generation Myth: Why when you’re born matters less than you think by King’s College London professor Bobby Duffy. Generations matter in Duffy’s analysis, but only when taken in context. Food for thought.

Global Wine Glut: The Return of Crisis Distillation

September 26, 2023 By Mike Veseth in economic crisis, wine, wine history, wine markets 1 Comment

Crisis distillation is back in the news. For those unfamiliar with this wine business term, crisis distillation refers to government programs that buy surplus wine and distill it into industrial alcohol. The point isn’t to increase industrial alcohol supplies but to support prices and incomes in the wine sector by taking excess supply off the market.

Crisis distillation has a long history in the European Union. You might remember that some countries authorized crisis distillation just a few years ago during the COVID-19 pandemic. Public health restrictions hit on-trade wine very hard in some places where producers rely heavily on bar and restaurant sales (a more significant factor in Europe than here in the U.S.). The crisis was short-lived, but distillation was a significant factor while it lasted.

Distillation was a persistent feature twenty years ago, however. EU price support programs encouraged the production of low-quality wines that were poorly suited to highly competitive market conditions. Distillation programs bought the surplus wine that resulted. It was an expensive way to stabilize wine-grower income and, for a while at least, it seemed like it would go on forever, getting more and more costly each year.

It was reported at the time that Britain’s Prince (now King) Charles had his Aston Martin configured to run on a grape alcohol-rich fuel blend. Plonk power! I wonder what other uses they found for the enormous quantity of distilled wine that was produced?

The distillation policy was changing when The Wine Economist first appeared back in 2007. I have inserted a column below that was first posted on Christmas Eve of that year, which I think you might find useful to read for perspective on the current situation. The combination of supply adjustment and demand-based policy reforms did in fact address the critical issues and crisis distillation slowly disappeared from the wine business lexicon.

Distillation is back, but things are very different today. This wine glut today is caused more by stagnant and falling demand than by high supply, for example. And the quality issue is different, too. Back in the 2000s, the issue was poor quality wines that were hard to sell at any price. As you can read below, one part of the solution was an effort to eliminate these wines and raise quality and marketability. These efforts (magnified by the market premiumization trend) have been relatively successful. Now Sue and I routinely encounter excellent wines from regions that only a short while ago were better known for plonk.

What was important about the policies I discussed back in 2007 was that they addressed the causes of the problems that the EU wine industry faced. Crisis distillation today treats the impact of today’s issues in terms of surplus wine, but the causes (and therefore, I suppose, the cures) have not yet been directly addressed.

Distillation buys time. Spend it wisely. Here’s that 2007 column.

>>><<<

Draining Europe’s Wine Lake

Wine Economist / December 24, 2007

Europe is afloat in a sea of bad wine and the European Union agriculture ministers agreed last week to do something about it. But is it too little and too late?

Marian Fischer Boel, the EU Agriculture Minister, proposed a number of fairly radical reforms in 2006 and these were the basis of the discussion. She wanted an immediate end to distillation subsidies and a vast program to encourage small winegrowers to pull up their vines — one million acres — replacing them with other crops or, in some cases, with more marketable grape varieties. Perhaps predictably, the policies agreed last week are much weaker than the original proposals. Distillation subsidies will be phased out over five years and as many as 400,000 acres of vines will be “grubbed up.” Four hundred thousand acres seems like a lot, but given the size of the problem is it, as Wine Spectator reported, just “a good start?”

Current EU policies are as useless as the old wine barrels shown above. At the top end of the market, national and EU policies tend to stifle innovation and prevent effective market adjustment (the counter argument is that they preserve tradition and prevent destructive commercialization). I have read any number of stories about high end European winemakers who have expanded abroad in part to escape regulations on what they can produce, where, and how they can market it.

In the mid-market, where current attention is focused, EU and national regulations seem to prevent winemakers from achieving the transparency that an increasing global market requires. It is hard enough to know what’s in a bottle of wine without the complicated rules that government European wine labeling. French wines are typically “branded” by place of origin, not grape varietal, for example. Buyers who are not confident about their French geographical knowledge and the relationship between place, grape variety and wine style, are likely to choose New World wines with more easily understood characteristics. Australian wines sell well in France partly for this reason.

At the low end of the market, EU policies designed to support farm incomes have produced the famous “wine lake.” Each year the EU spends about $2 billion to buy up unsold wines and turn them into industrial alcohol. This vast reliable market for poor quality wine keeps thousands of small scale producers in business. The distillation subsidy insulates low-end producers from market forces with the result that the vineyards remain uneconomically small, the practices favor quantity over quality, and the wine, while it may reflect local tradition, finds few buyers in the marketplace. Cheap New World wine is preferred to bad Old World plonk.

The new EU policies are designed to drain the wine lake by making the wine sector more responsive to market forces. Label laws and regulations will be reformed so that European wines can be sold by regional and grape varietal just like New World wines. The distillation subsidy will be phased out over four years, with some of the subsidy funds returned to regional groups to be used in wine marketing and promotion efforts. And up to 400,000 acres of vineyards will be included in the new “vine-pull scheme.” New plantings will be allowed over time, but they will be market-driven not subsidy-driven.

The top end of the market is unlikely to be affected very much by these policies, since by definition they already have established brands and distribution channels. New label laws and subsidy reductions will have few direct effects on these producers, although they may be able to gain indirectly as vineyard consolidation takes place and Australian-style brands grow in importance. I predict that the most visible early effect of the new rules will be expansion of European brands both at home and in export markets.

The clear gainers are the mid-market producers — the wines that sell for about $12. There is great potential profit in this part of the market, which is expanding rapidly in the New World. Freed from the constraints of tradition, European winemakers should be able to compete in this market quite well. It is, however, a hotly contested market segment. European producers will need to use their new freedom well to succeed and those who choose not to adjust may suffer as the European market realigns itself.

The real problem is at the bottom of the market. Losing the distillation subsidies will hurt many producers and I don’t know how enough about the cost-benefit of the vine-pulling schemes to comment. Pulling 400,000 acres out of wine production should help stabilize the market by reducing the annual surplus, but I don’t know if it is enough and I don’t know if the incentives provided are strong enough.

Four hundred thousand acres — how big is that? Huge if you are thinking New World — Australia had just 388,000 acres of vineyards altogether in 2003 according to my Oxford Companion. But tiny if you think Old World — and of course this is an Old World problem. Italy and France had more than 2 million acres of vines each in 2003. (The Languedoc region in the south of France has 528,000 acres by itself.) Taking 400,000 acres out of production in Europe is like removing Moldova and Switzerland from the market. The effect on the regions where the vines are grubbed up will be large, but the impact on the global market is likely to be quite small — reducing the global surplus, but not eliminating it. I don’t know if it will be enough.

Will it work? Much of the discussion that I have read focuses on the size of the vine-pull scheme — 400,000 acres versus the million acres that Marian Fischer Boel proposed two years ago. Although I think the size of the grubbing up program is important, I believe that the market-driven reforms and the elimination of distillation subsidies are more important. The 1988 vine-pull scheme took over a million acres out of production but, as we see today, didn’t eliminate the surplus because of the difficulty of selling the good wines and the incentives to keep make bad ones.

A Tale of Two Glasses & Wine’s Triple Crisis

July 6, 2022 By Mike Veseth in Shameless Self-Promotion 2 Comments

My new book Wine Wars II has just been released — you can order it in paperback or e-book format from Rowman & Littlefield, Amazon.com, and other online and bricks-and-mortar book sellers. The audio version will be released in a few days. How exciting!

Rowman & Littlefield is offering US and UK customers a 30% discount on Wine Wars II publisher-direct purchases for a limited time. See details below.

This week’s Wine Economist offers you a taste of my new book in the form of two brief excerpts from the first chapter. Cheers!

>>><<<

It was the best of wines, it was the worst of wines (apologies to fans of Charles Dickens). The global wineglass, it seems, is both quite empty and full to the brim. We live today in the best of times for wine if we evaluate the situation objectively, as economists like me are trained to do. Never before has so much good wine been made and so many wine choices offered up to consumers. For someone who loves wine, the glass is very full, indeed; it is hard to imagine better days than these. The global markets deliver a world of wine to your door. Drink up!

And yet many enthusiasts are anxious about the future of wine. The good news we find in our wineglasses and on the supermarket shelves is often accompanied by disturbing rumors, feelings, and forecasts. It is the worst of times, too, you see—especially if you are a maker of cheap wine in France, Italy, or Spain, the largest wine-producing countries. Everything about wine is wrong for you. Consumption at home has been falling for decades and squeezing your market share, and import competition has increased. The rise in global wine drinking that you counted on to power your export business has unexpectedly stalled at exactly the wrong moment. You find yourself making the wrong wine in the wrong style from the wrong grapes at the wrong price and trying to sell it in the wrong places. You are betrayed at every turn by the markets that once treated you so well. You hold an empty glass, or so it must seem.

Times are troubling in Australia, too, where a wine boom was followed by a wine bust, when consumers around the world have seemingly turned away from the muscular Aussie wines they enjoyed so much just a few years ago. So the Aussies turned to China and, through lots of hard work, turned it into their number 1 export market, bigger that either the United States or the United Kingdom. Then the lucky country’s luck turned again. Driven by political disagreements that have nothing to do with wine, China imposed tariffs of more than 200 percent on Aussie wine, choking off this promising market.

Wine producers are optimists by nature, but they face serious challenges. Recession, pandemic, falling consumption, rising antidrinking lobbies, water shortages, global warming, and even raging brush fires all threaten the livelihoods of winegrowers and producers in many parts of the globe.

It is the worst of times for consumers, too, if they seek that special taste of a place that wine geeks like me call terroir. The wine in your half-empty glass is free of any technical flaw, but so what? Does it have a soul? Does it express any particular place or any producer’s distinct vision of what wine should be? This is the age of McWine, I have heard people say: wine that is all the same. When everything is the same, then it is all nothing! And what’s worse than that?

These are good times and bad ones, too, for the world of wine—what a contradiction! What about the future? Will wine’s tale of two glasses have a happy ending? Or will our (excuse the Dickensian pun) “grape expectations” be crushed? I’m an optimist about the future of wine, but as an economist, I am trained to pay close attention to the dismal side of any situation. I wrote this book to try to find out just how empty or full the global glass really is and how the world of wine is likely to change.

The first thing to understand about wine is that it is many things, not just one, in terms of both wine itself and the economic forces that drive the wine industry, so the story of the future of wine will necessarily be a complicated one. Although hundreds of factors will come into play as the wine world evolves, three big forces will almost certainly shape the overall pattern: globalization; brand-driven commodification; and resistance to these powerful winds, which I call the revenge of the terroirists. Globalization and commodification are economic push forces that are transforming the world of wine. The revenge of the terroirists is all about pushing back.

>>><<<

WINE’S TRIPLE CRISIS
The global wine industry is in the midst of a triple crisis, and I am not really sure how it will end. The climate change crisis comes first. It affects everything if we consider both direct and indirect effects, so it may seem odd to think of it as a wine crisis. Wine grapes generally can be made to grow under quite extreme conditions; in some colder regions, they actually bury the vines in the winter to protect them and unearth them each spring so that they can come back to life (you might call this Lazarus viticulture). But specific wine grape varieties thrive in only very narrow bands of average temperature, and wine regions defined by particular grapes or wine styles are threatened by relatively small changes in environmental conditions. Wine is, therefore, the canary in the coal mine when it comes to climate change. It will feel the impacts before many other industries, and so it is not a surprise, as I explain later, that wine businesses are among the strongest advocates for progressive environmental action.

The climate change crisis dwarfs everything else in the long run, but because the long run can seem far away and we often misjudge how fast it is approaching, climate concerns do not get the attention they deserve. Indeed, as the global reaction to the coronavirus pandemic crisis has demonstrated, climate change generally isn’t treated with the “drop everything” or “operation moonshot” urgency that real crises warrant. But even if the climate change threat were to disappear tomorrow, wine would still be in trouble.

The second crisis is economic. Wine is magical beverage, but it is a crazy business. Wine’s economic environment is characterized by cyclical, structural, and “wild card” forces that make it difficult to prepare for or successfully execute a business plan.

Global wine consumption grew steadily for the twenty years that ended in about 2008, the date we associate with the global financial crisis. Rising wine sales were important because they slowly soaked up a surplus of wine. Too much wine? Well, for many years the European Union in effect subsidized wine
production to stabilize agricultural economies, especially in France, Italy, and Spain. Wine farmers were paid to grow grapes and to make wine that could not be sold, so some of it was distilled into industrial alcohol. Yuck! Those policies are history, and European winegrowers turned from government subsidy wine to wine aimed at global markets. This is a good thing, but it happened just as wine production increased in other parts of the world, too. The result: a lot of grapes, a lot of wine, and a lot of jobs and incomes at risk.

Rising global wine sales were most welcome in this context, and when sales dropped a bit in 2008, no one was very concerned. “It’s just the economy, dummy,” they said. “Wine will spring back when the economy improves.” But it didn’t, and the next ten years were what I have called “wine’s lost decade.” Why did wine lose its mojo? There are many possible reasons (I explain them later), but the sudden loss in momentum changes the nature of the game from a positive-sum fight, where a rising tide raises all ships, to a zero-sum fight for market share. And the battle isn’t just between Old World and New World or among the growers and producers in these regions; the opponents are now more diverse and unexpected than ever before.

The reason? Wine’s identity crisis. Wine has never been just one thing. It is, after all, both that fancy French Champagne at the top of the wine wall and that big box of Franzia at the bottom. Wine is healthful (think Mediterranean diet) and dangerous (read the government required warnings on wine labels in the United States). It is culture to some and just another commodity to others.

The cartoon character Pogo famously said, “We have met the enemy, and he is us,” and this is true in a way for wine. The biggest threat to wine’s identity is something inherent to wine’s existence: alcohol. You might think that wine is just grape juice with alcohol, but wine doesn’t taste much like the grapes it is made from except for in a few specific cases. Fermentation doesn’t just add an alcoholic kick; it transforms the product in complex ways. It’s the same with the way that fermenting yeast makes bread different from flour and water. So wine as we know it is impossible without alcohol, but it may also be impossible with it if antialcohol forces have their way.

Wine’s identity crisis is significant because it seems like those who see wine as a social or health problem, not an essential element in our culture, have seized the momentum. If wine doesn’t know who it is and what it is and cannot tell its story to the world, then how can it survive?

>>><<<

Wine Wars II 30% discount offer. Many thanks to Rowman & Littlefield for making this discount available.

US Customers: Order Wine Wars II here and use code RLFANDF30 at checkout to receive your discount.

UK Customers. Use the code RLFANDF30 to order from Rowman & Littlefield International
https://www.rowmaninternational.com/shop?q=wine+wars# or IPSUK: https://store.ingrampublisherservices.co.uk/checkout/025/?isbn1=9781538163832

Flashback: Spanish Wine Challenges & Opportunities

May 31, 2022 By Mike Veseth in Spain, wine, wine markets 2 Comments

I am in virtual Madrid today to talk about the changing global wine market on a program that also includes OIV director general Pau Roca and Dorian Tang of ASC Fine Wine in China. Zoom brings the three of us together from across the global wine map to talk with our on-line audience in Spain, Portugal, and many other places.

Preparing for this talk got me thinking about the lessons I took away from a trip to Spain five years ago for an in-person wine industry meeting in Valladolid. I think the message is still relevant, so I reprint it here in a “flashback” column.

>>><<<

Wine Economist (April 25, 2017). Sketches of Spain is the title of the 1960 Miles Davis/Gil Evans album that deftly walks the line between classical and jazz genres, with Davis’s virtuosity shining throughout.

Sue and I have recently returned from a visit to Spain, where I spoke at the General Assembly of the Spanish Wine Federation (Federación Española del Vino or FEV), so Spain and Spanish wine are on my mind and I have been puzzling over how to write about our experiences and all that we learned. Such a big country! So many impressions! The Miles Davis album solved the puzzle.

Davis and Evans gave us a few powerful sketches of Spain and its music, not a detailed musical portrait, which would be impossible in the context of a ’60s-era 33-rpm vinyl recording. A perfect choice! In this and the next several weekly columns I will try to provide sketches of the Spanish wine industry, which I hope you will find useful, leaving a more detailed portrait for another time and place.

Sketch 1: The Spanish Wine Supertanker

They say that it is not easy to turn around a big ship because of all the momentum it has to continue on its path and this might be a good metaphor for Spain. Spain is certainly big when it comes to wine. Spain has the largest area of vineyards of any country in the world and is the third largest wine-producing nation (after Italy and France). Spain produces nearly 70 percent more wine by volume than the United States, which is number four in the global wine table.

The Spanish wine industry has devoted enormous effort to changing wine market direction, investing in more productive vineyards planted to grape varieties like Tempranillo that are more attractive to global wine buyers, and in new or updated production facilities.

The wineries we visited have made the transition and are now sailing in the right direction. As I said to the General Assembly audience, it seems to me that Spain has all the pieces in place to succeed in the new global wine market environment that has emerged, where value matters much more than sheer volume. I am an optimist about Spanish wine. But I am also a realist …

Sketch 2: Breaking the Glass Ceiling

Improving Spanish wine is one thing (a good thing!), but achieving greater success in the global market is another because of reputational momentum. Spain’s wine reputation has not caught up with its reality in many markets. Citing data from a Nielsen Company survey of U.S. on-premises wine drinkers (thanks to Danny Brager for his help), I noted that Spain was stuck under a “glass ceiling” in terms of consumer perception.

Italy and France — these are the countries that American diners think of first when they consider imported wines. Spain, despite its status as the third largest producer, ranks far below with perception roughly on a par with Australia, Argentina, and Chile and only a bit above tiny New Zealand, which is number 14 on the world wine production table, lodged between Romania and Hungary.

Spanish producers would love to break through the glass ceiling to achieve market status of Italy and France, but — let’s face it — everyone wants to do that.

A more interesting question for Spain, I proposed, is why it does not rank higher above Argentina, Chile, and New Zealand. Do they make more wine than Spain? Better wine? Do they have better generic market promotion programs? The answer is no in each case. What do these much smaller countries have that Spain does not that allows them to punch so far above their weight? This got my audience thinking, which is always my intent.

Sketch 3: Spain at the Crossroads

Hard thinking is necessary because Spain’s wine industry is at a cross roads of sorts. A graph of domestic vs export sales of Spanish wine shows that an important line has been crossed. Domestic wine consumption continues to fall in Spain as in other Old World producer countries. The opponent is not so much France and Italy as spirits and beer and changing consumer habits generally.

Wine exports are rising and now exceed domestic sales. This is important since the industry would be in crisis if exports did not replace lost domestic purchases, but that doesn’t mean that slowly losing your most biggest market is not a cause for concern. It was rare for us to meet a wine producer in Spain who had as much as 50 percent domestic sales.

Global markets are congested and competition for high value sales will only increase when Brexit’s full impacts are finally felt. Reversing the decline of the domestic wine market is Spain’s next big challenge.

Fortunately, I think there is an realistic opportunity for domestic wine sales growth. Spain was hit very hard by the global financial crisis and the austerity policies that followed in Europe. Only now, ten years after the crisis, is Spain’s gross domestic product approaching its pre-crisis level. A lost decade! No wonder exports have been the focus.

But growth has picked up in the Spanish economy and optimism is in the air, something Sue and I could feel on the streets of big cities and small towns alike. Beer is a tough opponent, but perhaps this is Spanish wine’s moment at home as well as abroad! More to follow in the weeks ahead.

Thank You Notes

Sue and I would like to send out big “thank you” notes to Pau, Susana, José Luis, and Eduardo and everyone else at FEV and to all the people we met at the General Assembly in Valladolid.

FEV organized a series of winery visits for us in the two weeks following the General Assembly (I will report on this fieldwork in future columns) and we would like to thank everyone who took the time to meet with us and share their stories. Here is a list of the wineries we visited:

The Road Ahead: Lessons from the Unified Symposium

February 6, 2024 By Mike Veseth in economic crisis, Unified Wine & Grape Symposium, wine, wine markets 7 Comments

What’s the state of the wine industry? Here are four observations inspired by things I learned at the Unified Wine & Grape Symposium‘s State of the Industry session and in hallway conversations. The theme, if there is one, is a spin on Robert Frost’s poem about the road not taken. The industry needs to choose a direction. Follow the well-trodden path that got us where we are or break away? Frost thought the choice was significant. What do you think?

One: The wine industry has a problem. But it isn’t just wine’s problem.

Everyone knows that the volume of wine sold has declined in recent years, which is a serious problem for many people in the wine value chain. Not every category has suffered equally and there are a few areas of growth. The picture improves a little if we look at the value of wine sold, but this mainly highlights segments where increases in average price have outpaced declining volume.

For many years the industry was built on an expectation of continued growth and it is difficult to re-gear for a declining market with high inventories from previous vintages that cloud prospects for the near future.

Some people were shocked when Jeff Bitter, President of Allied Grape Growers, called for the quick removal of 30,000 net acres of vineyards in California in order to bring supply into line with demand. Jeff has been saying this for several years and I think his message is finally starting to sink in.

What’s behind the headwinds blowing against the wine industry? We used to blame spirits and craft beer. The story was that consumers were shifting to beer and cocktails in preference to wine. But that’s not true in general today. Both beer and spirits have falling overall demand, too.

Wine’s problem is not just a wine problem, it is a beverage alcohol problem. The situation is so bad that even once-hot tequila is cooling off. The Financial Times recently reported that some agave farmers in Mexico are balking at requests to replant for another harvest cycle. Maybe demand will be there when the plants mature. But maybe not, especially if U.S. demand tumbles (markets in other countries are not large enough to absorb a big U.S. surplus).

Two: We are not alone.

OIV data show that global consumption has fallen after a decade of stagnation. The soft wine market is just about everywhere you look, but especially noteworthy in the U.S. and China. I highlight the U.S. because it is the world’s largest consumer of wine (and still, many would argue, the best market around because American wine declines are relatively small compared to some others).

China? Well, that’s my own addition to the list. Chinese wine consumption increased dramatically before the pandemic struck and many imagined that its growth would be enough to offset declining sales elsewhere.

But then came covid, which crippled critical on-premise sales in China, and then the trade wars and tensions that have followed. The Chinese market is opening up again now (Australia has its fingers crossed that Aussie wine will be granted favorable access to China soon), but the market there has changed, and lost its dynamism. China after covid is not the growth market for wine that some counted on. It’s a small world after all and wine’s share of it has shrunk.

Three: The prisoners’ dilemma.

It is one thing to say that the wine industry needs to become smaller, more efficient, and more profitable (and it does!), but how do you do that when there are thousands of growers and wineries each protecting their own interests? There is an element of the prisoners’ dilemma problem here. Collectively, the ideal strategy would be for many winegrowers to reduce vine acreage and take surplus grapes off the market. That would help everyone gain some control over margins.

But collective interests and individual incentives aren’t aligned. If everyone else is going to pull up their unprofitable vineyards, then it is in my interest to keep vines in the ground and gain from the higher prices while they suffer from smaller production. The private incentive encourages everyone to keep production high and the problem continues.

How do you overcome the prisoners’ dilemma created by this conflict of collective versus individual interests? Well, one solution is to play and replay the game over and over until the participants learn that cooperation is a better solution (even then, the “defect” strategy is always a problem). Or some sort of collective action mechanism can be employed, which is one of the things that the Spanish industry’s strategic plan hopes to achieve.

Four: A tale of two futures.

Susana Garcia Dolla, the director general of Spain’s broadest wine industry organization, framed the question in terms of two cycles, one a vicious cycle that reduces the wine industry through crisis and shake-out, and another, a virtuous cycle, that moves ahead toward sustainable profit by design.

Lots of forces will shape the wine industry’s future and it is impossible to expect any predictions to bear up over time. That said, it seems to me that the facts above suggest that we have reached a fork in the road and need to take the right path.

One road leads … well, it leads nowhere in terms of the future of wine. And it seems like the road we are on right now. This road blames consumers for the soft market and fails to confront over-supply in any coordinated way. The industry will lurch along until a critical point comes along, forcing action.

The other road leads to a smaller, more efficient, and profitable wine industry through timely and intentional actions. The process is painful but follows Machiavelli’s advice to give the bad news all at once and the good news a little at a time. Which road will be taken for wine? And what’s the road not taken?

Wine, Globalization, and the End of History

December 5, 2023 By Mike Veseth in globalization, Unified Wine & Grape Symposium, wine, wine history Leave a comment

I have been thinking a lot recently about how much things have changed since the 1990s and what the future might look like in this light. The event that has provoked this unexpected thoughtfulness is the upcoming Unified Wine & Grape Symposium, which will be the 30th edition of what has become North America’s largest wine industry gathering.

A Golden Age?

Looking back at the program for the first Unified, it is clear that the American wine industry was worried about the future. It must have seemed like obstacles and headwinds were all around. Problems in the vineyards. Rising foreign competition. And concerns about both government regulation and uncertain consumer demand. One session was titled “Who Isn’t Drinking Wine and Why.” That’s a question we are asking again today.

Looking back it is easy to appreciate these concerns (because they never really go away). What folks back then didn’t realize, however, is that they were in some ways at the start of a wine industry golden age. Baby boomers were entering peak wine-buying years. The economy was growing, fueling the rising interest in wine. The “French paradox” infused popular culture with the idea that wine (especially red wine) was actually good for you because of its role in the healthful Mediterranean diet. Wine made you feel good, it was good for you, and you could afford to drink it. What could be better?

Things have changed a lot since the 1990s and some of those changes contribute to the challenges that the industry confronts today (and that we will strive to address at Unified 2024).

The Globalization Effect

This makes me think about other ways the world (and the wine world) have changed over these 30 years. Globalization was gaining speed in the 1990s, for example. It was controversial (think NAFTA debates and the Seattle WTO meeting riots), but eventually (when China joined the WTO, for example) it was seen by many as an inevitable tide, an irresistible force.

No one thinks globalization is inevitable anymore. The Global Financial Crisis made investors aware of the risks of international market contagion. The supply-chain disruptions of the COVID era made “nearshoring” an awkward but understandable concept. And now political tensions and uncertainties have driven “friendshoring” trends.

Economic globalization hasn’t collapsed. But it is different. Globalization was a powerful force in wine in the 1990s, too, as patterns of production and consumption around the world shifted and international wine trade volumes rose. They kept rising, too, as the graph above (taken from the most recent OIV global wine report) shows, until about 15 years ago, when the volume of wine exchanged across borders reached a plateau. (Click here for a pdf of the OIV report).

The value of the international wine trade has continued to rise, as the graph below shows, due to the general premiumization trend. The pattern of global wine trade has changed, too, both in terms of shipping patterns (think the sharp Australia-China shifts) and the commodity composition of shipments (packaged goods versus bulk wine, for example).

The End of History Effect

One of the forces that powered economic globalization was the collapse of Communism, which opened up a world of trading and investment opportunities. We called it “The End of History” after the famous book by Francis Fukuyama. History was ideological conflict, Fukuyama argued, which was all over. The liberal order was the only story left to tell.

Wine had its own “End of History” in the 1990s, although it understandably got less attention. The history of wine was defined, more or less, by Old World notions of appellations and terroir. Burgundy was Burgundy and Pinot Noir made anywhere else wasn’t the same. Ditto for Bordeaux and Cabernet Sauvignon. New World producers might purloin Old World titles to market their wines (remember Gallo Hearty Burgundy?), but no one was fooled.

Jancis Robinson’s 1995 BBC television wine series was an important part of the movement to rewrite wine history. She didn’t organize her tour of world wine as you might expect — Burgundy, Bordeaux, the Rhone, the Loire. She sorted things by grape variety — Pinot Noir, Cabernet, Syrah/Shiraz, Sauvignon Blanc — and featured New World wines and producers alongside familiar Old World names.

Not everyone was convinced that the new history was valid. My favorite scene was where Robinson poured a glass of New World Pinot Noir and asked a famous Burgundy producer what she thought. The winemaker scowled at her glass and proclaimed that Oregon shouldn’t make something like this. They should find their own terroir, she said, invoking that mystical French phrase almost like a curse. Oregon on the same stage as Burgundy? It’s like the end of history. What next?

However, the curse was cast in the opposite direction. Not for the most famous names of Burgundy and Bordeaux, but for producers with less well-known names from less-recognized appellations. The fact that they were defined by their place turned out to be a disadvantage in the global wine world where grape variety was the new lingua franca. ( I am smiling at the irony of this phrase even as I type it.)

The baby boomer consumers that everyone was chasing didn’t grow up understanding appellations, but they rather quickly came to understand grape variety and to define their wine world that way. Thus the wines of emerging global powers New Zealand and Argentina became known for their signature grape varieties more than the particular regions that grew them. No one asked if France or Italy had a signature grape variety (a good thing, because they obviously don’t). But other regions asked the question themselves and decided that the lack of a grape of their own was all that was holding them back.

The End of History in terms of ideological conflict hasn’t exactly worked out. Old divisions have reemerged and new ones have arisen. There is plenty of conflict to go around and history endures.

History has returned to the wine world, too. Wine defined by grape variety was the great leveler and helped open up the world to wine. But today, with the market at a plateau, product differentiation is the name of the game, and claiming terroir is one strategy. AVAs are popping up all over in response.

Golden Age Worries

The golden age of the 1990s didn’t last for wine, but that’s how golden ages work. What’s interesting is that the golden age was already upon us before we realized it (and ended before we knew it, too).

I wonder what’s ahead for wine? My friend Kenneth Boulding used to say that history doesn’t repeat itself, but sometimes it stutters. Something to think about! Another golden age? Hard to see how the stars could align to make that happen. But I don’t think many people saw that golden age on the horizon either.

Unified Symposium XXX: Back to the Future for the Super Bowl of Wine Industry Meetings

October 31, 2023 By Mike Veseth in Unified Wine & Grape Symposium, wine, wine history, wine markets 1 Comment

As harvest 2023 draws to a close, many of us are gearing up for the 2024 edition of the Unified Wine & Grape Symposium in Sacramento on January 23-25, 2024. The Unified is sort of the Super Bowl of North American wine industry events, so I’ve decided to follow Super Bowl practice and call this Unified XXX.

A lot has changed in the economy and the wine business since the first Unified Symposium was convened. The 1990s were a very different time. This was the era of “The End of History” as the collapse of Communism was said to close the era of ideological conflict and open a world of rising liberal democracy.

Surfing the Global Wave

The economy was expanding and markets were becoming more open and more global. Although Ross Perot claimed to hear a “giant sucking sound” of jobs being pulled to Mexico by the new NAFTA agreement, economic growth was remarkably robust. I recall that interest in university economics studies declined because there didn’t seem to be any big economic problems to solve.

As the 1990s moved ahead, the budget deficit in the United States shrank and then eventually actually achieved a surplus! The budget deficit for the last fiscal year was more than $1.5 trillion. What a difference!

The wine world was changing very rapidly in the 1990s, too. Wine surfed the globalization wave much to the benefit of Southern Hemisphere producers. This was the time when Australia, New Zealand, Argentina, and Chile wines became more widely available in the U.S. market, for example.

Wine’s Golden Age?

The U.S. wine market was growing and a Wine Business Monthly article published at the end of the decade provides useful context. “Demographic and Macroeconomic Factors Fueling Increased Wine Consumption” by research analyst Kristine Koerber identified four forces driving American wine: demographic trends, moderate wine consumption’s image as heart-healthy (think “60 Minutes” and the French Paradox story), rising wealth among consumers, and a successful generic marketing campaign (think Got Milk? but for wine).

Koerber concluded her report by saying, “We expect favorable trends to persist. The aging of the baby boomer will be the key demographic trend providing robust growth for the wine industry in the coming years. This demographic group has more disposable income and is reaching its peak spending years at 46.5 years of age, which should further facilitate the consumption of premium wines. High-quality wines with strong brand recognition such as Beringer and Mondavi are positioned to benefit from the growing premium wine market.”

Changing Times

An insightful forecast! But the situation today is pretty much the mirror image of that report. Demographic trends are widely seen to work against wine and alcoholic beverages generally today. Some consumers are wealthier but don’t necessarily feel that way because of pressure from inflation, rising interest rates, higher housing costs, and other factors such as student loan obligations.

Wine was the healthful choice in the 1990s but that tide has turned, too, with anti-alcohol initiatives gaining steam. The wine industry’s response has been muted, creating what I call in my recent book Wine Wars II the wine identity crisis. Wine has a positive case, but consumers seem to have trouble hearing it.

Which brings me back to Unified XXX. The Unified Wine & Grape Symposium has become the place where the American wine industry comes together to think about, talk about, and form strategies regarding the challenges and opportunities of the day. (A lot of relationships are strengthened and business takes place on and off the trade show floor, too).

Unified I in Perspective

Now flash back to Unified I. That first event drew about 500 participants to the symposium sessions and to visit the 20 exhibitor tables (too small to call a trade show back then). Five hundred wine industry players is a lot and that attendance would be impressive for most meetings today. But Unified XXIX (the 2023 edition) was a lot bigger. About 12,000 people attended over three days, harvesting insights from the 96 speakers and doing business with the 879 exhibitors at the trade show. Unified XXX is on course to be bigger yet.

I have been involved with the Unified since 2012, mainly as moderator and/or speaker at the Wednesday morning State of the Industry session, the largest gathering of a three-day event. So I was interested to see what the equivalent program looked like at Unified I.

Jon Fredrikson was the lead-off speaker, giving a half-hour survey of market conditions. Knowing Jon, I’ll bet it was jam-packed with data and insights and that the audience hung on every word. Jon went on to be a featured speaker at almost every Unified meeting for the next 25 years until his retirement.

Jon’s lead-off presentation was followed by a teleconference that brought the voices of wine retailers into the room. This was not an easy thing to do in the landline era of the 1990s. Everyone wanted to know as much as they could about who was buying wine, who was selling it, and how the market looked for the future.

Globalization was obviously on everyone’s mind, too, as the next three sessions made clear, with a session on international trade effects, global perspectives, and how efforts to drain Europe’s wine lake might affect the American industry.

The Unified XXX State of the Industry lineup shows how the program has evolved to even more directly address the concerns of its wine industry audience. Jeff Bitter and Danny Brager take deep dives into the trends and issues on the grower and consumer sides of the wine market respectively and Steve Fredricks analyzes the markets that connect them and the global market environment in which everything takes place. Susana Garcia Dolla, Director General of the Interprofesional del Vino de España, will provide an important international perspective, helping us understand how Spain’s wine sector has weathered the wine world’s storms and what lessons can be learned from their experience.

But Wait, There’s More!

There was a lot more going on at that first Unified meeting, of course. I am particularly struck by sessions titled “Monsters in the Closet: Major Issues Impacting Growers & Vintners” and “Government Landmines & Opportunities.” Monsters and landmines? Sounds like wine was a dangerous place! John Gillespie and Mike Boyd spoke on “Who’s Not Drinking Wine and Why?” — a question we are still asking today.

Unified XXX will feature a vast array of sessions (here is the complete schedule) that examine important issues in virtually every aspect of wine growing, production, distribution, regulation, and sales. Several sessions are offered in Spanish. It is quite a multi-discipline University of Wine.

A special treat this year is the Tuesday Keynote Luncheon. Karen Ross, Secretary of the California Department of Food and Agriculture, will be the featured speaker. Secretary Ross was President of the California Association of Wine Growers before taking her current job and in that role was instrumental in expanding the Unified into the impressive event it is today.

I am looking forward to hearing what Secretary Ross has to say about how the wine industry has adapted (and must continue to adapt) to the monsters and landmines that lurk around the corner. And to see everyone and learn as much as I can at Unified XXX.

Wine 2021: The Good News is the Bad News Could Be Much Worse

January 12, 2021 By Mike Veseth in Australian wine, economic crisis, Economic impact, exchange rates, wine, wine markets 5 Comments

Australia’s export dilemma.

As the door to 2021 slowly swings open, the landscape looks both familiar and transformed at the same time. When the U.S. wine industry entered 2020, for example, the problems seemed to be stagnant demand on one side and excess wine grape supply on the other. Not a good situation for the world’s largest wine market, but not something beyond our ability manage, either.

Those problems are still with us, although they’re a bit lost in the fog. Structural wine production capacity is still too large, but this is disguised a bit by a smaller 2020 harvest in California and widespread smoke damage, which took some grapes off the market.

Overall wine demand is still under-performing, too, but that is hard to gauge exactly because of the way that wine channels have been disrupted by the covid pandemic in general and bar/restaurant restrictions in particular. Consumers are buying much more through retail channels, a good deal more direct-to-consumer and much less in the on-trade. Whatever the net impact, which seems to be negative, the effects on individual wineries in particular sales channels is significant.

The Unified Sine & Grape Symposium‘s “State of the Industry” session is about two weeks away so those of us on the panel are working to put our thoughts about 2021 in order. Here are some of my working notes. The theme here is that, while there is plenty of bad news going into 2021, if you take an international perspective on the U.S. situation, it quickly becomes clear that things could be much worse. If that sounds like a “glass half full” perspective, well it is.

Take the loss of on-premise sales. These lost sales are costly indeed, but producers in Europe had it much worse because they depend much more on bar and restaurant sales. No wonder their industries are hurting to badly and that crisis distillation is back in some E.U. countries.

Unlucky Australia

If people in the U.S. wine industry are looking for something to be thankful for, they might consider how lucky they are not to be Australia. The U.S. industry has been caught in the trade war crossfire to be sure. Importers and distributors have been hit by U.S. tariffs on many European wines, for example, and China has imposed tariffs on the relatively small amount of U.S. wine sold there.

As if matters weren’t bad enough, the U.S. recently imposed 25% tariffs on French and German still wines above 14% abv, which had been spared in earlier rounds of the trade wars. U.S. firms that import, distribute, or sell these wines are collateral damage in the bigger trade fight, which has nothing to do with wine. These are daunting challenges, to be sure, but nothing in comparison to what Australia is experiencing.

The Australian wine industry invested heavily in opening the door to the Chinese market and moving up-market once inside. And they were remarkably successful. As you can see above in data from Wine Australia, China was by far Australia’s largest export market by revenue in 2019, accounting for $1.3 billion of the $2.9 billion of wine exports. China bought almost three times as much as the #2 export market, the United States.

Australian wine is #1 in China, too, measured by value. Australia overtook France in the Chinese sales league table in 2019.

This was good news for Australian producers back with economic relations with China were happy ones, but now a variety of tensions exist and China was imposed up to 212% tariffs on Australian wine. I don’t know if sales will go to zero immediately, but that is a lot of tariff to absorb. Although anti-dumping measures are cited in this case, the real conflict is elsewhere. Economist have long held that anti-dumping tariffs, ostensibly designed to deal with damage from predatory pricing, are often subject to political abuse.

Australian producers hope to be able to divert previously China-bound production to other Asian markets and some of it may end up in the U.S. and U.K., too. But realistically there is just too much wine for these markets to absorb and margins in the pivot markets are unlikely to match those in China.

But things could be even worse. What if Australia was even more dependent on Chinese market? The turn of the political screw would be even more painful then. And that is what happened in the past to Moldova and to Georgia when their biggest wine export market, Russia, decided to use wine as political tool.

The Good News is That the Dollar is in the Dumpster

You can find another good news story by looking at the foreign exchange markets. Typically when there is any kind of crisis around the world there is a rush to the security (and liquidity) of the U.S. dollar. Uncertainty drives the dollar in turbulent times. Or at least that’s what we thought.

A strong dollar translates into cheaper imports, which would not have helped in any way restore domestic balance in the U.S. wine market. A strong dollar isn’t the worst thing for domestic producers, but the negatives outweigh the positives for many firms.

As I noted in a Wine Economist column back in August, this crisis is different and the dollar didn’t soar, it plunged as this graph (above), which shows the dollar versus the euro, indicates. And then, after bouncing around for a while, it plunged again.

Now this is bad news for consumers who want to buy imported wine because a cheap dollar buys less on international markets, so European wines, many already subject to U.S. tariffs, are even more expensive. But it is good news for U.S. wine producers who compete against euro-priced imports. The cheap dollar gives them a cost advantage in the domestic market. There is also a theoretical advantage in export markets, but honestly those markets are pretty congested right now with lots of unsold wine (some of it from Australia) looking for a home.

But foreign exchange news isn’t completely sunny for U.S. wine because the dollar isn’t falling against all currencies. As this graph shows, the Argentina peso is even weaker, so the U.S. dollar steadily increased in relative terms, making wine from Argentina a fierce competitor where price is the key factor, especially bulk wine trade.

Economics is often called the dismal science and these examples of good news have a decidedly glass-half-empty feel. Stay tuned for glass-half-full analysis in coming weeks.

Wine and the Dollar: Big Mac Index Update

August 2, 2022 By Mike Veseth in exchange rates, wine, wine markets 3 Comments

The Economist newspaper’s most recent analysis of global exchange rates was released a few days ago and the results are noteworthy, especially for those of us in the wine trade where exchange rates are an important factor in both import-export flows and in the cost of imported bottles, corks, equipment, etc.

No News is News?

Exchange rates are in constant motion — most currency values change at least a bit — and sometimes quite a lot more! — on a daily basis. It is a fact of life in international trade and finance. But sometimes there is a strong secular movement that shakes things in a big way and the recent sustained rise in the U.S. dollar’s value is a good case in point.

There are dozens of forces that can shift exchange rates — I used to joke that the worst job in the world was the person who had to write the “exchange rate” headline for the Wall Street Journal every day because he or she had to boil down dozens of factors into a few words. I remember one headline that read “Dollar Rises on No News.”

There is plenty of news right now to explain the dollar’s appreciation relative to most of the world’s currencies and the most important explanation are rising U.S. interest rates that the Federal Reserve has implemented and is expected to continue this year. Rising interest rates attract short term investment funds from abroad. The dollar strengthens as the investment funds pour in until the point (to simplify quite a lot — experts please forgive me!) where the dollar is so expensive that the risk that it will reverse course and fall exceeds the interest rate premium that it earns.

Econ 101 Impacts

That’s what is happening now and the Econ 101 impact is that the strong dollar makes imports relatively cheaper for buyers in the U.S. but makes U.S. exports more expensive for foreign buyers. Imported wine will be cheaper because the currencies used to buy them are cheaper in dollar terms. U.S. wine exports will face a headwind because the strong dollar raises their cost to foreign-currency buyers.

A strong dollar is not, therefore, particular good news for U.S. wine businesses that compete with imports or have export aspirations. It is, however, potentially good news for U.S. importers of foreign wine and the owners of U.S. brands that rely upon bulk wine imports to fill their bottles, boxes, and cans. This bit of good news has been tempered recently, however, by international trade logistics issues that make imports more costly and delivery less reliable. The dollar’s value is just one factor in the complex web of wine trade.

The interest rate effect diverts the dollar from what is called the purchasing power parity (PPP) level, which is the exchange rate where the currency’s buying power is the same inside the U.S. as it is on the international markets. A currency that is at or close to its PPP level does of itself distort trade. If you have travelled abroad and thought the prices there were a lot cheaper (or more expensive) than back home, you have encountered a PPP distortion.

Big Mac Index Update

The Economist calls its Big Mac Index a “lighthearted” attempt to estimate the PPP level of exchange rates in order to see which are over-valued and under-valued using the ubiquitous fast-food hamburger’s price in local currencies as the foundation of analysis. It seemed like a silly idea when first revealed back in 1986, but the Big Mac Index has proved to be fairly accurate overall in its assessments. More often than not, major currencies have tended to converge over time towards their Big Mac PPP exchange rate.

So take a close look at the table at the top of this page (click on the image to enlarge it). The U.S. dollar is so strong that there are only a small number of major currencies — Switzerland in particular — that are over-valued relative to it. Most other currencies, including the Australian dollar, Argentine peso, and Chilean peso — are undervalued, which means their wine exports have an exchange-rate based competitive advantage in the U.S. market.

The euro is undervalued as well, but by much less than I might have guessed given that its value has tumbled toward dollar-euro parity in recent weeks.

The Economist has also released an updated Big Mac index shown here, which is adjusted for differences in per capita GDP. The idea, in simple terms, is that many prices (especially for non-traded goods and services) will be higher in countries with higher income levels, so PPP settings need to take this into account.

Argentina and Hemingway

This adjustment is significant for some countries, as the table above shows. The Argentina peso, for example, is now calculated to be very much over-valued, not under-valued, and I think this is probably accurate. A Financial Times article published last week reports that peso’s black-market rate, which had been steady recently at about 200 pesos per dollar (compared with the official rate of about 130 pesos), has suddenly plunged toward 350 pesos. Such a shift is often a sign of a developing currency crisis. Will the peso do a “Hemingway” — first decline slowly and then suddenly collapse? Stay tuned.

The currencies of Australia and Chile along with South Africa are still under-valued after the GDP adjustment, but the euro is shown to be over-valued, suggesting that, further depreciation is possible.

The U.S. is experiencing historically high inflation just now, which by itself would argue for a PPP-driven decline in the dollar’s value. But other major currency countries are having the same problem. And, in any case, rising U.S. interest rates, for as long as they last, will likely keep the dollar strong in the medium term.

The Bottom Line?

The bottom line? These are tricky times for exchange rates, with inflation pulling one way and interest rates the other. The dollar could continue to strengthen or, as expert Barry Eichengreen argued in a recent Financial Times, column, reverse course and fall.

Wine businesses that are sensitive to exchange rate changes need to be cautious indeed. You cannot control the exchange rate, but there are ways to hedge against unfavorable shifts using either forward exchange markets (you lock an exchange rate today for a set transaction in the future) or foreign exchange options (giving you the option to make a purchase or sale at a fixed future price).

Hedging is important if a business has significant costs or revenues in a foreign currency. Recent earnings reports suggest that some large and sophisticated businesses have not fully hedged their positions, however, with the result of unexpected earnings (or costs) due solely to exchange rate adjustments on otherwise stable transaction.

>>><<<

What is a “Hemingway?” I have coined this term to characterize a particular pattern of decline. One of the characters in Hemmingway’s The Sun Also Rises is asked how he lost his fortune. Slowly and then suddenly, he replies.

Magical Mystery Box: Emerging China Wine Market Strategy

May 4, 2021 By Mike Veseth in Chilean wines, China wine, Rabobank, wine, wine markets Leave a comment

The Chinese economy is booming, recovering from the pandemic sooner and stronger than any other country, although the pace of recovery seems to have slowed. The wine economy in China is still struggling, however, with high inventory levels remaining due to last year’s lockdowns. Selling off the surplus stock without eroding price points and reputations is serious concern. Recently reports highlight creative solutions to the problem.

Doubling Down on China

Concha y Toro, the famous Chilean wine brand, is doubling down on its success in China according to The Drinks Business. CyT is strengthening its already strong presence in China by investing in its Shanghai operations, now part of its network of global offices, and taking advantage of Australia’s current crisis. China has imposed punitive tariffs on Australian wine, creating space for upmarket wines from Chile, which continues to have good relations with the Chinese government.

Concha y Toro is launching two upmarket brands in China, which may well appeal to buyers of super-premium Penfolds products, for example, who are put off the the new 200+% tariffs. What do you think of the label designs? The Cellar Edition wines feature a shell (concha in Spanish) framing a bull (toro). Direct and memorable, don’t you think? It should become the global logo for the brand in my opinion.

The Master Edition label is a playful nod to Boticelli’s “Venus on the half-shell,” as we used to call the famous “Birth of Venus” painting in art history class, paired with a Greek mythology minotaur (half bull, half man). Half-shell, half-bull, not half bad!

Meanwhile, Accolade, the big Aussie producer currently owned by private equity investor The Carlyle Group, is pivoting in response to Chinese tariffs on Australian wine. It will focus on non-Australian wines, including some from Chile, to keep its Chinese pipeline as full as possible.

Exploiting Opportunities

A recent China wine market report by Rabobank analyst Stacie Wan titled “Staying Alive in the Chinese Market” reveals three unusual strategies that distributors and retailers are using to cope with current problems. Distribution systems work best when pipelines are full of product, but with wine sales down, inefficiencies are exposed. So some distributors are adding non-wine products such as sauce aroma baijiu to their portfolios, to build critical mass and keep their networks busy.

Community group buying is a rising trend in China. Groups of consumers band together to purchase larger quantities of various products and gain better terms. Communal buying in bulk is apparently especially popular in lower-tier cities. Several important wine producers, both domestic (ChangYu) and import (Yellow Tail) are taking advantage of these opportunities, especially with their lower-priced brands.

Some wine companies are exploring opportunities to develop special low price products specifically for community group sales — much as some clothing producers make special products for off-price and outlet retailers. Interesting!

Magical Mystery Box

A final strategy cited in the Rabobank report involves “mystery box” sales. Consumers are offered mixed cases of unidentified wines at bargain prices. Buyers get wine, good prices, and a (hopefully) pleasant surprise. The mystery box idea struck a note for me because we purchased a mystery box from a well-known producer a few months ago and were delighted. There was a mix of wines we knew, private label wines we hadn’t seen before, and several limited-production wine club or tasting room only wines. Some of the wines were really terrific and none were losers. We were happy overall and recently purchased again when the limited-time opportunity re-appeared.

The Rabobank report notes that mystery boxes appeal to adventurous consumers, but the main point is how useful they can be for retailers and distributors. They are a good way to clear out excess inventory without dumping wines in traditional market channels. Consumers know that they are getting a lower price for the case they buy, but since price isn’t broken down by bottles, the integrity of any particular price point is not seriously undermined.

One limitation of the mystery box strategy is that it can backfire if you offer the boxes constantly. As Rabobank notes

Furthermore, this is not the most effective strategy for building long-term consumer brand loyalty. As a result, most players currently prefer to promote their mystery box wines as limited editions, rather than as quarterly or annual subscriptions. After all, a constant surprise ceases to be a surprise.

Will mystery box become an important part of the wine market? Too soon to tell, but rising internet sales make this sort of niche strategy feasible. It is one indication of the innovation taking place in China as players deal with adverse market conditions.