The Wine Economist

I’m here in Mendoza looking for clues to the future of Argentinean wine and it is pretty interesting work.  To Malbec … and Beyond!

Many of the wines we are tasting here are distinctive and delicious. The industry’s future is bright if certain economic problems can be overcome (stay tuned more about these  challenges in upcoming posts).

The Real Argentinean Wine Miracle

As I have talked to winemakers and industry experts it has slowly dawned on me what a miracle these fine wines are. Not a miracle of nature — Mendoza has long been known to possess superior terroir – but a bigger social and economic miracle. The fundamental idea of Argentinean wine has been transformed in just a few years.

The excellent wines we take for granted today did not exist in a serious way just twenty or twenty-five years ago. The standard of wine was hopeless low and the industry’s health was no better.

Why were the wines so bad? Well, Argentina has been a boom and bust economy for many decades and quality wine is a long term business. It is difficult to keep a focus on quality when both consumers and producers are riding an economic roller-coaster. This is one reason family-owned wineries are important here as in other parts of the wine world. Families can often think in terms of generations while financial investors focus on quarterly reports.

Industrial organization also leaned away from quality for many years. Growers would sell grapes to producers (who sought low prices) who would make bulk wine and ship it by rail to Buenos Aires, where negociants bottled it under their own labels and sold it to bargain-hunting consumers. This is not a supply chain that favors quality over cost.

Bad Incentives Make Bad Wine

A stubborn grower, and there were a few, who insisted on producing high quality grapes got the same payment per ton as his high-yield low-quality neighbor. No quality premium existed because all the grapes went into the same pink bulk wine.

Even the grape varieties reflected this sad story. Malbec is on everyone’s short list of hot selling wines today. But back in 1968 Malbec made up less than 20% of Argentinean production.

Nearly half (43%) of the wine grapes grown were pink-skinned heavy-yielding Criolla  (Mission grapes), which were made into the cheap oxidative wines stored in large wood casks. Not much varietal flavor made it through the aging process, or indeed survived fermentation in the absence of temperature control.

The wines that resulted, given the prevailing cellar practices, had almost nothing in common with the wines of today except alcoholic content. Since Argentina’s present as found here in Mendoza is so delicious, I set out to find examples of the past so that I could better gauge the degree of the transformation.

I didn’t find what I was looking for at the nice shop on the main square in Mendoza (or earlier in Buenos Aires, either). So I went looking at the Central Market in the heart of town, where wine tourists seldom go but typical families shop for fish, meat and vegetables. There I found the dinosaurs — styles of Argentinean wine still made for consumers with a taste for the past.

What I Found at the Market

I suspect that the bottles at the top of the page are Criolla blends and the closest thing to the old wines. They sure looked like they were very oxidized, with brownish sherry like color. Market price = 9.80 pesos, or just under $2.50 per bottle. They were displayed on the top shelf of the wine wall, up close to the florescent lights. Perfect storage conditions!

You can buy wines like this and other inexpensive products in big refillable jugs, too, at an even lower unit price. I saw these jugs back in Buenos Aires, too, and I am sure that they are ubiquitous outside the tourist zone.

The last photo shows cheap wines I found at a tourist shop a few blocks down from the central market. The sign offered six bottles for 42.90 pesos (less than $11).

The Taste of  History

So what does history taste like? Well, history is pretty bland if you go by the glass of vino tinto I was given, poured from the big jug, while waiting for my take-away empanada order.

But I hope you will understand that I did not actually taste these wines. I wimped out. My time in Mendoza is too short to drink bad wine with so much great wine available. But even if I had bought them all and pulled the corks, I would not have experienced the true taste of Argentinean wine past.

During our visit to Catena Zapata winemaker Pablo Sanchez advised me that even the most basic wines today (which make up the majority of sales in the domestic market) are far superior to the old pink wines. Better practices in the vineyard and the cellar today have raised the standards here just as they have for basic wine in the United States and almost everyplace else.

The bad old days of Argentinean wine are [thankfully] lost to history. The wine has changed but, more important, the idea of wine is transformed. The future? Well, that’s another story! Stay tuned.

“To Infinity … and Beyond!”

That’s the motto of Buzz Lightyear in the Toy Story movie series. The joke is on Buzz of course — there’s nothing beyond Infinity. It’s infinity all the way out. Try as you might, you’ll never get past it.

The Malbec Buzz

I’m thinking about Buzz and his Infinity dilemma because we are in Argentina right now learning as much as we can about the wine industry here, which is enjoying an unprecedented boom. Especially Malbec, which accounts for 60% of Argentinean wine exports to the U.S. market.

The Malbec boom must provide a Lightyear buzz for Argentinean wine makers. Malbec seems to go on and on … not to infinity, but certainly as far as the eye can see.

What Lies Beyond?

What lies beyond Malbec? That’s one of the questions I wanted to ask Andrés Rosberg, President of the Association of Argentinean Sommeliers and a judge for the Decanter World Wine Awards.Andrés was way ahead of me, of course. He invited us to lunch at Hernan Gioppini Restaurant (where he is executive sommelier) at the Fiero Hotel in the lively Palermo duistrict of Buenos Airea. As the wine and food arrived over the course of several hours, I found some satisfying answers to my “Beyond Malbec” question.

Knowing that we would expect Malbec, Andrés orchestrated a meal that surprised at every turn. Malbec ultimately made an appearance, but not until the final act in the form of a fortified Port-style dessert wine.

The road to Malbec (or beyond it, if you see what I mean) was an exploration of the nearly infinite possibilities that Argentina’s complex terroir provides.

Messages in the Bottles

Each wine had a story to tell. Gewurtztraminer (and a Blanc de Noir sparkler) spoke to the cool-climate potential of the Uco Valley.  Semillon, an underapprecaited variety almost everywhere, is underappreciated in Mendoza, too, where it has deep roots and “old vine” vineyards.Fine Semillon wines are here, however, waiting to be re-discovered.

Chardonnay spoke to Argentina’s ability to make distinctive wines from the “international” varieties. This wine argued for Argentina as a complete player and not just limited to one or two particular roles.

And the fortified Malbec? I guess it was there to tell us that Beyond Malbec may be more Malbec, but not just Malbec and not necessarily the same old Malbec, either.

But that still leaves a problem. “If you build it, they will come.” That’s a line from another film, Field of Dreams. Will Argentina’s future beyond Malbec be dream or reality? Will the world’s consumers answer the call? More to follow in upcoming reports.

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This is the first in a series of posts based on our recent visit to Argentina. I’ll be writing about the past, present and future of Argentinean wine (and wine tourism) and examining the strengths, weakness, threats and opportunities of this fascinating wine region.

Thanks to Andrés Rosberg for his hospitality and to Hernan Gipponi for a wonderful meal. Special thanks to my research assistants, Sue Veseth, Scott Hogman and Janice Brevik, for their help with this project.

Here is a list of the wines Andrés used to tell the “Beyond Malbec” story along with Hernan Gipponi’s cuisine.

Tasting Menu

Breaded veal tongue stuffed with brie cheese & sundried tomatoes and piquillo peppers sauce paired with Chandon Cuvée Reserve Pinot Noir

Baby squid & pickled vegetables salad
Rutini Gewürztraminer 2009

Rabbit liver & spinach ravioli with mushroom stock
Ricardo Santos Sémillon 2010

White salmon with ajoblanco, almonds, roasted tomatoes, zucchinis & bean pods
Miguel Escorihuela Gascón Pequeñas Producciones Chardonnay 2009

Iced lullo, litchis, caramelized pumpkin seeds & yogurt foam
Rutini Vin Doux Naturel (Sémillon – Verdicchio) 2007

Allspice philo pastry, chocolate cream, apple, saffron ice cream & cardamom milk
Rutini Vino Dulce Encabezado de Malbec 2007

I always look forward to the week between the Christmas and New Year holidays because that’s when the pace seems to slow down a bit and I can settle in to read The Economist‘s special double issue.

Of particular interest this year is the essay on page 123 called “Tyranny of Choice: You Choose.” The main point is simple, but the implications are quite broad, with particular relevance for today’s wine markets.

Good — Up to a Point

The simple point? Choice is good, but only to a certain degree. Too much choice is, well, too much and can sometimes stop decision-making dead in its tracks. I say that this is a simple point because we have all suffered from the problem of too many options overloading our preference systems. Or am I the only one who sometimes has trouble ordering coffee at Starbucks or a sandwich at Subway?

Government is a good example of this Paradox of Choice. One party rule is notoriously problematic.  Multiple parties provide useful competition. But at some point more political choice is really less –particularly less in terms of stability.  Fragile, shifting multi-party coalitions mean short governmental half-lives with no one looking after the whole since everyone’s focused on their own tiny slice of the electoral pie.

What makes The Economist article interesting is that it ties together so many elements of this dilemma, from literature to academic research and from potato chips to human reproduction.

Rollerblading Monstromart

Super-abundant choice is a fact of modern life. The Economist suggests that you …

Wheel a trolley down the aisle of any modern Western hypermarket, and the choice of all sorts is dazzling. The average American supermarket now carries 48,750 items, according to the Food Marketing Institute, more than five times the number in 1975. Britain’s Tesco stocks 91 different shampoos, 93 varieties of toothpaste and 115 of household cleaner. Carrefour’s hypermarket in the Paris suburb of Montesson, a hangar-like place filled with everything from mountain bikes to foie gras, is so vast that staff circulate on rollerblades.

One cost of this embarrassment of riches is confusion or, put another way, higher transactions costs. Making a choice means comparing the qualities and value of different options, which is difficult enough when there are only two brands of breakfast cereal, but mighty time-consuming and complicated when there are 200.

The Economist explores several dimensions of this problem, citing a Nobel Prize winning economist (Daniel McFadden), an Italian novelist (Italo Calvino) and cartoon character Marge Simpson!

Expectations have been inflated to such an extent that people think the perfect choice exists, argues Renata Salecl in her book “Choice”. … In one episode of “The Simpsons”, Marge takes Apu shopping in a new supermarket, Monstromart, whose cheery advertising slogan is “where shopping is a baffling ordeal”. “How is it”, muses Ms Salecl, “that in the developed world this increase in choice, through which we can supposedly customise our lives and make them perfect leads not to more satisfaction but rather to greater anxiety, and greater feelings of inadequacy and guilt?” A 2010 study by researchers at the University of Bristol found that 47% of respondents thought life was more confusing than it was ten years ago, and 42% reported lying awake at night trying to resolve problems.

Greater choice first delights us, then overwhelms us, then it can sometimes drive us crazy. There must be a “best” among all the rest. Which is it? And how will I know? The quest for the best can sometimes destroy the pleasure of the very good by introducing an unwanted but unshakable sense of doubt.

The Age of Anxiety

Which brings us to wine. It does seem like the problems of exaggerated choice apply especially to wine. Of those 48,000 items on the upscale supermarket shelves, chances are that 1500 or more are bottles of wine. Wine is the largest choice space in the modern grocery store, ten times richer in terms of the number of options than the #2 area (breakfast cereals) and much more complex.

Wine buyers have never had it better in terms of the number of choices available from around the world. And we’ve never had it worse regarding the possibility of confusion and the pressure to find our perfect wine. It’s the Age of Anxiety for wine.

I find it interesting that some of  the hottest products in the wine market seem to simplify wine just a bit and perhaps unintentionally  address this anxiety. Gallo’s inexpensive Barefoot brand wines have very done well in the last few years; most people view this as a price thing — the result of trading down. But Barefoot also offers consumers a more casual idea of wine that would appeal to anyone who wants to get out of “perfection” rat race and just enjoy wine without over-thinking it. (And every Barefoot bottle features a “Gold Medal” from a wine competition, giving buyers the security of a sense of quality.)

The hottest wine sectors today are Marlborough Sauvignon Blanc and Argentinean Malbec; is it a coincidence that these wines are easy to understand, with many good producers at various price points? The problem of choice still exists for buyers of these wines, of course, but perhaps more of the pleasure of choosing survives.

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Several people have asked about the series on BRIC wines.  Fear not — it will resume in a few days with a report on Russia,

I thought it would be interesting to take a look at what’s “big” in the wine market (where the most consumer dollars are going) versus what’s  “hot” (or “hot hot hot” as in the video above), showing the fastest growth.  I’m using U.S. off-premises wine sales data from Nielsen for the 52 weeks ending 9/18/2010 taken from the December 2010 issue of Wine Business Monthly.

Baseline information: Off-premises wine sales in the U.S. totaled $9,172 million in the period covered here according to the Nielsen report, with an overall growth rate of 3.2%.

Which product categories are the largest in absolute terms and which are growing the fastest? I’m going to break down the data by wine varietal, country of origin (for imported wines) and price category. Take a minute and write down what wines/countries/price points you think will be at the top in each category and see if you’re right. Here goes

Chardonnay Leads the Way

Forget what you thought you knew about Chardonnay being so yesterday and Pinot Noir kicking Merlot’s butt. In terms of the overall retail market sales, the giants (or are they dinosaurs?) still dominate.

BIG varietals

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American wine drinkers are nothing if not traditional, reaching again and again for familiar varietals, so the usual suspects come top of the table. Pinot Noir has indeed surged in the post-Sideways era, but its lead over wounded White Zin is not large and it still lags far behind arch nemesis Merlot.

Obvious Chardonnay is the consumer default with a 50% lead on Cabernet and double the sales of Merlot. Pinot Grigio, the #2 white varietal, lags far behind.

I find the varietal “hot list” below quite interesting. The fastest growing wine varietals  are Riesling, Pinot Noir (of course), Sangiovese and Sauvignon Blanc. (Interestingly, varietal Sangiovese is rising while Chianti is a shrinking category in the Nielsen league table.)

HOT varietals

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It seems to me that while the “big” varietals are wines that many consumers purchase to drink on their own (because of their high alcohol levels and for other reasons), the “hot varietals” are a bit more likely to be food wines. I wonder if that’s a trend?

World Wine Web

Most of the table wines that Americans drink are American — there is a very strong home country preference. Domestic wine sales totaled $6,524 million for the period covered here while imports accounted for $2,648 million. What countries supply the most imported wine as measured by total expenditures? Here’s the Big list:

BIG import countries

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As the table shows, Italy and Australia are #1 and #2 respectively in off-premises sales. It is interesting that France has fallen to #4 behind Chile. Argentina and New Zealand make the cut here (Spain did not!) as you might expect, but bear in mind that Italy still sells more wine in the U.S. than Chile, France, Argentina and the Kiwis combined. The concentration ratio in this market is very high: Italy and Australia may be struggling at the moment, but they are in a league of their own.

Italy and Australia will not be over-taken soon, but the market momentum seems to have has passed. Look at the big growth numbers that Argentina and New Zealand are putting up below! Wow. Annual growth rates of more than 20%!

HOT import countries

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Now look at the gap between the really hot ones and the rest! Germany comes in at #3 on hot list, but with a low 4.4% increase for the year. Sales of most wine imports (including Italy and Australia) have actually fallen in the last year. Spain and Portugal squeeze onto the list at #5 and #6 by simply avoiding utter collapse. The import wine segment is slumping badly, with Argentina and New Zealand the only significant exceptions.

The Price is Right

Finally, let’s look at the market in terms of price points.  What are the biggest and hottest parts of the wine wall in terms of price?

BIG price points

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You can see from the data why Gallo is having a good year (or probably having a good year, since they are a private company and don’t release data so I can only guess). Their brand portfolio is aimed at the heart of the market, from $3.00 to $11.99. Lots of good targets there!

You can also see why Constellation Brands is probably finding this a challenging year. They reconfigured their brand portfolio to take advantage of what they saw as upmarket opportunities.  They moved up the wine wall a bit but the market changed directions and went downmarket, leaving them in a less competitive position.

HOT price points

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But Constellation’s upmarket bet may yet pay off. The hot price segments are all in the wine wall’s upper strata.

The Old Elasticity Trap

The rise in spending in the super-premium + categories is an encouraging sign, but I think some caution is necessary in interpreting the data. Many observers see the big increase in expenditures on $20+ wines and conclude that consumers are coming back to this segment strongly — that the demand curve has shifted. But I suspect that there is a lot of bargain hunting taking place and that margins are falling – bad news. Maybe we are just following discounted prices down the demand curve.

For many of today’s buyers a $20+ retail wine is a highly discretionary purchase and so the demand curve may be quite elastic. Econ 101 students will remember that total expenditure increases when price falls for a product with an elastic demand.

The large percentage expenditure increases we seen in the data could result from discounting — $30 wines being sold off for $25 and so on — rather than an actual increase in demand or shift in the demand curve.  The increased revenues are good and inspire optimism, but they may disguise the bad news of shrinking margins.

(As I am writing this, the neighborhood Safeway is offering an extra 20% off any wine selling for $20 or more. I suspect sales revenue will increase at the lower retail markup.)

Overall conclusions? I’d rather not, thanks. These data are interesting more for the questions they raise than the answers they provide. But the questions about how the U.S. wine market is changing are worth pondering (hopefully over a nice glass of wine). Cheers.

Wine is good. Consumed in moderation it can even be good for you. But wine and a story is better. Wine famously stimulates all the physical senses (sight, smell, taste, feel and even sound if you touch glasses). But wine a story unlocks your curiosity and imagination, which are arguably the most powerful senses of all.

Recent initiatives in both Mendoza and the Napa Valley suggest that the power of a good wine story is undiminished. Herewith two brief reports.

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The wines of Argentina have been big winners in North American wine markets in recent years. Argentinean Malbec is the wine category that has experienced the fastest off-premises sales growth according to Nielsen data.  To the displeasure of many, I have found this trend worrying. Not because of the wine, but because of the story.

The story that is most frequently told when it comes to Argentinean wine is about value. For example, Alamos Malbec (the best selling brand in this market segment in the U.S.) is a $12-$15 wine that you can buy for just $8-$10, according to my street-smart friends. What could be better than that?

Well, it is a good story, but there may be problems.  Chile was branded as a value producer back in the 1960s and has found it hard to shake that label. Consumers expect to spend less for Chilean wine and so producers have struggled at times to squeeze more from less — not an easy thing to do with worldwide competitors breathing down your neck. I would feel better about the future of Argentinean wine if the mainstream narrative was a bit more complicated and less value focused.

So naturally I applaud the efforts of Área del Vino and Wine Sur to draw out the story of Argentinean wine and create a narrative with greater upscale potential. Their just-launched website is called Wine Sur: My Wine Stories and it invites local producers to tell their own stories, creating a colorful mosaic of images.

Not all the stories submitted so far are very memorable — some do a better job than others of giving a sense of the people and places that are the wine’s origins. One that I especially like is from Winery Alto Cedro for its Desnudos wine. Family heritage is at the heart of this story and local art is highlighted, too.

Altocedro Our idea was to relate the Cedar Tree for two reasons: the first is that we are 4th generation of Lebanese descent in Argentina and for us the Cedar is a sacred tree. The second is that in our land of La Consulta, we have more than 27 old cedars planted in the middle of the vineyard.  Desnudos is a tribute and collection of female nudes made by Mendocinean artists that illustrate various crops where we release this wine.

The Trivento Eolo Malbec’s story evokes terroir and highlights history.

Eolo received from Zeus the power to evoke or annul the winds. He governs them with absolute dominion, seizing and liberating them, engendering great changes in the heavens, on earth, and at sea. The Keeper of the Winds was seduced by the refuge at the northern edge of the Mendoza River in Luján de Cuyo, a traditional winegrowing area in Mendoza. The EOLO vineyard, planted in 1912, is defined by its relationship to the river. Soil, wind and water –in conjunction with man– have cared for these vines over generations. The result is the authentic expression of Malbec.

My Wine Stories is a small effort, but a useful and encouraging one. The stories are very brief (meant to be short enough to be used in social media, where attention spans are apparently particularly short ). Hopefully they can be expanded and set into a broader context so as to contribute to a more complex narrative of Argentinean wine.

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California’s Napa Valley is much more advanced when it comes to telling its story. Robert Mondavi built a great winery, but I think he was even more influential as a story-teller. His story was that the New World (California/Napa/Mondavi) could compete with the Old World on equal terms. The famous 1976 “Judgment of Paris” completed the story by having French experts rule in favor of California wines.

Napa Valley has a great story and one worth frequent retelling. The Napa Valley Museum in Yountville is hosting an exhibition called “Art & Wine: Expressions of an Industry“ through October 31 that does this very well. According to press materials it highlights “all things wine-related outside of the bottle” including the packaging and promotion of wine through displays of wine labels, cookbook photography, totes, wooden wine boxes, bottle tickets, decanters, corkscrews, heraldic banners, vintage posters, portraits of vintners and winery architecture. More than 100 objects are on display.

This is a very Mondavi-esque idea. Robert Mondavi tried to elevate the image of California wine by associating it with art, music, architecture and fine food. All it would take to complete the classic Napa story would be a link to the Judgment of Paris … and maybe something to nosh on. Well, OK, here it is.

Additionally, we are featuring the Judgement of Paris Revisited in conjunction with the closing reception of Art & Wine. The reception features a conversation with Warren Winiarski and Jim Barrett, moderated by George Taber commemorating the 1976 tasting revelation that brought worldwide prominence to California, and Napa Valley wines. This program is just $20 for members and $45 for non-members. Stag’s Leap and Chateau Monelena  wine and hors d’oeuvres will be served.

What a great event and what a great way to tell the Napa Valley story! A great model for other wine regions to consider as they try to develop their own stories or look for strategies to communicate the ones they already have.

A review of Vino Argentino: An Insider’s Guide to the Wines and Wine Country of Argentina by Laura Catena. (Chronicle Books, 2010.) Photographs by Sara Remington.

I’m making plans for some fieldwork in Argentina next year and so I was very pleased when Laura Catena’s new book arrived in the mail.  I think it is the perfect reference for anyone interested in Argentinean wine or planning a visit to the vineyards there.

Laura Catena is part of Argentina’s most important winemaking family. Her father Nicolás is Argentina’s  Robert Mondavi. He helped reinvent Argentinean wine at about the same time that Robert Mondavi was leading the Napa Valley revolution. Laura has been an active member of the family wine business Bodega Catena Zapata (serving as research director at one point) and owns her own winery, Luca, which is named for her son. Somehow she also finds time to be a practicing physician.  Mother, doctor, winery owner and now author. too. I think she must have a lot of energy!

Family History

The first part of the book is a brief history of wine in Argentina, which becomes in Catena’s telling also her family’s history. Not that she claims that the Catena clan go back to the first Spanish plantings, of course. It is just that the Catena family story mirrors so well Argentina’s modern history. Immigrants from Italy, the Catenas followed the railroad to Mendoza and found their calling in the vineyard and cellar.

Starting with her great-grandfather, Catena shows us how the family business and the Mendoza industry evolved. At first bulk wines were shipped to the big cities where they were often bottled and sold by local firms under their own labels (the same pattern as California in the 1930s). This eventually made way for a greater focus on winery brands.  Nicolás Catena was a leader in developing branded wine in Argentina and implementing effective national marketing programs.

Fifty years ago Argentina’s per capita wine consumption was among the highest in the world — its Old World immigrant roots clearly showed — but like the Old World its wine drinking culture has changed and domestic consumption has fallen dramatically. This problem inspired Nicolás Catena to look upmarket for higher margins and abroad for export sales. The change from an inward focus on bulk wines to outward strategy created the need for better quality. Much of the “family history” presented here is the successful and on-going quest to make world class wine.

Places, Faces and Wine

Wine may be sold in bars, restaurants, supermarkets and elsewhere, but it is made in the vineyard, so any book about a wine region must get down to the dirt. Vinos Argentino does this in an unusual but very effective way. We go on a tour of the main wine areas in Mendoza, Salta and Patagonia. The discussion once again is very personal. It is as if you are walking through the vineyard with Laura Catena and she is telling you all about it in the way a conversation naturally evolves.

First she might talk about the terroir– the soil and climate. And this reminds her of the types of grapes that are grown here and their history in Argentina. This makes her think about the history of the region and her friends and colleagues who made that history and make wines today. The path of the conversation is sometimes not very straight — just like an actual conversation — but there is much to be learned in the meanderings and I find it perfectly charming. The occasional wine tourism references (eat there, go to see this) are quite as welcome here as they would be on a stroll through the vineyard. The last part of the book provides tourist tips for Buenos Aires and some Argentinean recipes, too.

Lessons Learned

I learned a lot from Vinos Argentino. The first lesson is how much the wine industry has been affected by the economic cycles of Argentina generally (and how much the economic uncertainty that continues today conditions this sector’s future). You can’t really take wine out of the context of the broader political economy and society — a fact that is as obvious as it is easy to forget.

Perhaps because of this,  international (notice that I didn’t say “foreign”) influences have been unusually important in Argentina. As you walk the vineyard with Laura Catena a great many of the wineries she tells you about have international linkages, some going back 50 years. Catena says that about 45% of Argentinean producers are internationally-owned or use international partners or consultants.

International wine-making expertise is part of the story of course (Michel Rolland and his Clos de los Siete project appear in the Uco Valley chapter), but really I think the issue is capital. Argentina’s economic cycles make investment funding very difficult and international interests can bring needed capital as well as technical expertise and international marketing and distribution connections.

Breaking Down Terroir

The final lesson was about the Mendoza terroir.  There are several distinct wine regions located within Mendoza and, like New Zealand, Argentina does not have a detailed appellation system that adequately reflects the diversity of its terroir.  This might not have mattered much in the past, especially since the tradition was to blend using wines from throughout the regions. But I think moving beyond Brand Mendoza to exploit the individual terroirs is important if Argentina is to avoid Australia’s fate (they are desperately trying to rebrand themselves in terms of regional diversity now).

Walking the vineyards with Laura Catena, I think I got a pretty clear sense of the shape and feel of the land and true diversity of the wines produced. It made me optimistic about Argentina’s wine future and curious to try more of the wines (especially her Luca Pinot Noir). If that was Catena’s purpose in writing the book, it worked. I hope it enjoys a wide readership.

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Dozens of color photos by Sara Remington give a real sense of the faces and places. I wish there were more detailed maps, but I guess that’s what I have my wine atlases for.

Argentina is generally seen as the big winner in the current U.S. wine market. Sales of Argentinean wines have surged at every price point led by the signature Malbecs, (something that I wrote about in a recent post).  The big picture is great — perhaps the New World’s biggest success story since Marlborough Sauvignon Blanc hit the scene.

Both Sides Now

The devil is in the details, however, and a more detailed analysis of Argentinean exports suggests that some parts of the industry are facing significant challenges. As usual, my source for news and analysis about wine in Argentina is WineSur, which reports that small wineries are really feeling the squeeze in the critical U.S. export market. (See the report by Gabriela Mazilia. )

Small producers are what economists call “price-takers.” They cannot do very much to control the prices they receive on the export markets and they don’t have much control over input prices, either. While a great many business decisions are theirs to take, some of the most critical factors are beyond their control. This is true for all businesses, of course, but more so for some than others.

Mazilia’s report suggests that small Argentinean producers are feeling the squeeze from both sides of the market. Costs are rising rapidly, perhaps especially for the goods and services that winemakers require. Argentina’s  inflation rate is about 10% according to official statistics, but unofficial estimates put the number at about 25%, amongst the highest in the world today. Yikes!  The Economist‘s Big Mac Index reports that Argentina’s currency is much less undervalued now than a year ago even though the exchange rate has depreciated, which is consistent with rapidly increasing local prices.

Magnified Price Effects

Small producers would like to pass higher costs forward to consumers or backwards on to input suppliers, but neither of these options seems possible at this time. Mazilia’s report suggests that export price increases of 5%-10% are possible for wines that retail in the USD 10-18 range, where Argentinean wines are seen as good values. Increases for more expensive wines are apparently out of the question — the market for $20+ wines in the U.S. is just too competitive, too filled with expensive wines selling a a discount.

One problem Argentinean exporters face is that every 10% increase in the price they receive is magnified in absolute terms as the wine passes through the supply chain. One producer cited the dismal math that a USD 1 increase in FOB export price translates into a USD 4 increase in retail prices. Here is an example from the WineSur report:

A case in point is the winery Sur de los Andes. The firm’s owner and manager, Guillermo Banfi, announced: “In the course of this second semester we’ll raise prices from 5 to 10%, in particular in our line of classic wines. We won’t touch the prices of the great reserve line or of our icon wine. Margins have shrunk so much that there’s no way we can keep absorbing the high increase in costs.”

When asked how much of a margin of increase could be born by an Argentinian wine without losing market share, Banfi provided an example that illustrates the situation in the US, a reference market. “In the US, our wines in the USD 10-18 retail price segment sell very well – these are wines with an FOB price of USD 3-5. With an FOB price of USD 3, the consumer price is around USD 11. A rise of 5-10% would imply an increase of USD 1-2 in retail prices, which would have a negative impact on sales, since pricing is a very sensitive issue in this segment.”

Not Much Wiggle Room

Small producers are caught in a squeeze without much room to wiggle. If they don’t raise prices they will watch their margins disappear. If they do, well, they risk finding themselves in unfriendly market territory.

“The problem is that there will be a radical change of scenario for Argentinian wines in the USD 10-20 retail price range. Up to now, these wines have sold well because they are, on average, superior in quality to similarly priced European wines. But from now on, the gap in quality will be narrower, and we’ll be competing with wines of similar quality and price, from regions with a longer standing presence in the market.

Turbulent Tide

It sounds like Argentina’s small producers face an uncertain future, but this is nothing new. The great success of Argentina’s large international wineries in the U.S. market has masked a churning pattern among smaller winemakers. Each year several dozen small wineries enter the U.S. market, but each year others are forced to exit as the turbulent tide advances.

International connections, effective distribution, economies of scale and brand prestige are always advantages in competitive international wine markets. The are especially important to Argentina’s struggling price-taking small producers today.

In this global age we are accustomed to having the world’s assorted products (including wine) wash up conveniently on our local supermarket shores. We seldom give much thought to how they got there or why, but wines don’t make, move or sell themselves so there is always a story to tell.

Case in point: this bottle of 2008 Fairhills Mendoza Vineyards Carbernet Sauvignon purchased last week at a Cost Plus World Market store in Tacoma, Washington. It is the product of a rather complex process of globalization.

Uncorking a Bottle’s Biography

The Fairhills brand is South African, but the wine is from Argentina. Must be a story there. The logo at the bottom proclaims that it is Fair Trade certified – wine with an ethical intent. You don’t see Fair Trade wines every day. The red tag up on the bottle’s shoulder indicates market reality: marked down from $9.99 to $8.88.

(Some studies suggest that wine buyers are not willing to pay more for “ethical” organic or biodynamic wines. In fact, one study found that wines labeled “organic” sold for less than identical wines without the ethical indicator. I wonder if this inverse price/ethics relationship holds for Fair Trade wine as well?)

Fair Trade products, like this wine, ask us to think about supply chains more seriously because they promise to return a bit more to the original producers to help build sustainable communities. I’m interested in the Fair Trade wine movement (I wrote about Fair Trade wines here, here and here), so I thought I’d try to learn a bit about this particular bottle’s long journey.

Twists and Turns

The story begins, unexpectedly, at the Du Toitskloof Winey in South Africa, founded in 1962 as a cooperative by six wine families. Originally a bulk wine producer in the bad old days of South African wine, DTK as it is known has moved upmarket in the post-apartheid export-driven era and Fair Trade wines are part of its strategy.

Since 2005 DTK has worked with the Fairhills Association to produce Fair Trade wine. Fairhills brings together a group of South African vineyard owners and their workers, with the workers having a majority of votes. Fairhills wine farmers supply the grapes, DTK makes the wine and Origin Wine, the third partner, provides logistical and market support. The growers receive a premium for their Fair Trade grapes and funds are returned to the Fairhills Association for community investments, a typical Fair Trade practice.

The initial market for Fairhills wines seems to have been Great Britain, since they worked closely with the UK-based Fair Trade certification group there. Susy Atkins,  the Telegraph’s wine critic, reports that Fair Trade wines have good penetration in London through supermarket chains including Co-op and Sainsbury’s and are featured in annual Fairtrade Fortnight programs. Click here to view a list of Fair Trade wines available in the UK. Fairhills has the largest listing (44 wines).

Fair Trade Pipeline

The South Africa-UK wine pipeline proved very robust (South African wines are now the fastest growing segment of the British market) and helped to expand the market both in terms of supply (drawing Chile and Argentina into the mix) and demand (introducing Fair Trade wines to the U.S. and other markets). Argentina is the biggest supplier of Fair Trade wines to the U.S. and the Fairhills Mendoza Vineyards Cab that I purchased at Cost Plus is part of that pattern. Organic Wine Trade Company distributes Fairhills here along with their other “ethical” wine products.

Whole Foods Market is one of the most important retailers of Fair Trade wine in the U.S., which makes sense since they sell so many other Fair Trade products (coffee, tea, chocolate, sugar, energy bars, body care products, flowers and rice according to one list). Other national retailers that stock Fair Trade wine include Sam’s Club, Target and of course Cost Plus World Market where I bought this bottle.

TransFair USA reports that over 120,000 cases of Fair Trade wine were sold in the U.S. in 2009, up from about 20,000 cases in 2008. The growth rate is a source of optimism, but the absolute quantity is relatively modest  – about the production of a single medium-sized domestic winery. TransFair says that the 2008-2009 sales produced a “premium” of over $130,000 that was returned to the grower cooperatives — quite a lot relative to the low wages they receive as farm workers. The distributor website reports that:

Fairhills Cabernet Sauvignon benefits the local farmers of Bodegas y Viñedos de Marañon and three small producers along with their farm worker community in Mendoza, Argentina.  The Fair Trade initiative is dedicated to ten farms to improve the quality of life for 210 members and 300+ children. The initiative is one of the first in Argentina and has used their sales to upgrade various schools in the region, purchasing new toys, establish a soup kitchen, and purchase an ambulance for the local health care center.  Future plans are to convert from conventional farming to all organic, building a sports club, and continue improving health care clinics and schools.

The journey that brought this bottle to my cellar is thus quite complicated. The wine comes from Argentina, but it wouldn’t have got here without help from people in faraway London and South Africa. The fact that this complex web can return community benefits to Mendoza farm workers is heartening, even if the amounts are quite modest at present.

The Future of Fair Trade Wine

Fair Trade coffee is easy to find these days — in fact it is impossible to buy anything other than Fair Trade coffee on my university campus. Fair Trade chocolate is everywhere, too. But Fair Trade wine remains a tiny (but growing) market niche. I wonder if this will change and what barriers Fair Trade wine must overcome to achieve the success of Fair Trade coffee? With this question in mind I’m starting a small research project to learn more about Fair Trade wine’s present market condition and future prospects. Watch this space for occasional related posts in the coming months.

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Thanks to Kazuko Golden at TransFair USA for helping me with statistics about the Fair Trade wine movement. Thanks to Leigh Barrick for sharing her research on Fair Trade wine with me.

#1 Wine

Argentina’s wines are hot here in the United States. Recent Nielsen Scantrak off-premises  data show a 38.7 percent dollar value rise in sales of Argentinian wines for the 52 weeks ending April 3, 2010. That’s an enormous percentage increase, much greater than the total market (up 3.5 percent) and a good deal above the next biggest gainer (New Zealand with a 17.2 percent rise).

What’s Argentina’s secret?

The secret? As usual, there is no one simple answer. There are important factors on both the supply side and the demand side: good products, the right products at the right time and favorable economic policies.

Argentina produces excellent wines. Decanter magazine recently (June 2010 issue)  published a report on Argentinian Malbec that featured the largest tasting in their history — a record 255 wines. Four of them received  five stars, the highest designation. The Achaval Ferrer Mendoza 2008, which often sells for less than $20 here in the U.S., led the pack with 19/20 points.

Argentina is fortunate to be producing wines for the times. Many Argentinian wines are good values at a time when consumers are careful with their money and they represent good choices for ABC (anything but Chardonnay) and ABS (anything but Shiraz) buyers.

International Influences

#1 Export Brand

Argentina’s economic policies are another consideration. The favorable dollar/peso exchange rate contributes to Argentina’s competitiveness on the export market. And although I don’t know very much about them, I think that barriers to foreign investment in the wine industry must not be very high because so many important producers have international connections.

Bodega Colome is owned by Donald Hess of Switzerland, for example, who also owns The Hess Collection in the United States. Achaval Ferrer is a joint venture with a Montalcino winemaking family. Bordeaux wine investors are players in Diamandes and Clos de los Siete. O Fournier’s owner is Spanish. Cheval des Andes is a joint venture of Moët Hennessy’s Terrazas de los Andes and St-Emilion’s Cheval Blanc. Bodega Norton is owned by the Swarovski family of Austria (famous for their crystal.) Dig deeper and you’ll find even more international money and talent at work.

Top Export Brands

These are good reasons for Argentina’s recent success, but a recent article on WineSur.com titled “The Top 5 Export Brands” got me thinking that there might be other factors at work. I was particularly intrigued by the table showing the top bottled wine export brands to different markets. I’ve pasted the table below so that you can analyze it along with me. Click on the table to read the full article and view a larger image of the data.The first thing I noticed is how heavily weighted Argentina’s recent exports are toward the North American market. Britain, still the most important wine market in the world, has much lower export volumes as shown here. I suspect that one reason for this, however, is that these data are for exports of bottled wines (including bag-in-box and Tetra-Paks) and I’ll bet that Tesco and some of the big supermarket chains import their Argentinian value wines in bulk and bottle them in the U.K as house brands. Those export sales don’t show up here.

The second thing that caught my eye was the wide range of export prices. Alamos, the U.S. leader, sells for $30.57 per case export price, about the same as #2 Don Miguel Gascon. Marcus James, the top export wine in volume but only #3 in value, sells for just $12.54 per case.  Catena, the #4 brand, exported just 39,000 cases in the time period under consideration, but received an average of $64.97 for each one. Argentina’s exports to the U.S. (and the other markets shown here) span the price spectrum — another advantage.

Location, Location, Location?

Finally, I became interested in the particular brands that topped the export market tables and I think I discovered another secret weapon: distribution. It’s a cliche that in business the three most important things are location, location, location. Location is important in wine, too (ask any terroirist), but efficient distribution sure makes a difference and Argentinian producers have been wise in making good use of the most efficient distribution networks in each country.

Alamos has the highest export earnings by a good margin — why? Well Alamos is made by big gun Bodega Catena Zapata. It is a value line and is imported and distributed by the Gallo company. I suspect that Gallo’s large and efficient distribution network and its marketing prowess are reasons for Alamos’s great success. Significantly, Gallo also handles Don Miguel Gascon, the #2 export brand.

Marcus James, the #3 export brand, is a Constellation Brands product and is also backed by substantial marketing and distribution power. I was actually surprised to see Marcus James on this list because I didn’t realize they sold Argentinian wine. Guess I need to pay closer attention.  They used to source their wine from … Brazil!

Fuzion (a Shiraz-Malbec blend, I understand) is the best seller in Canada. It is made by Familia Zuccardi and distribution is one of its advantages, too. In Canada government wine and liquor shops are key sales vectors. The support of Ontario’s Liquor Control Board (in addition to successful viral marketing) seems to have made Fuzion a hit in a market that is otherwise very difficult to penetrate.  (At one time the Ontario Liquor Control Board was the world’s largest retailer of wine. I think Tesco is #1 today.) Distribution is key and both Alamos and Fuzion seem to have it.

The stock market has the jitters these days and one of the causes is the fear that, even with massive fiscal and monetary stimulus, we may be experiencing a jobless recovery. Things looks OK from the outside (some of the numbers are pretty good), but bad things are still happening deep down where it counts.

A Wine-Free Recovery?

There is some concern that the wine economy is suffering a similar fate. Not a wine-free recover, but just not the big turnaround everyone was hoping for. Although retail sales numbers are cheerfully positive, with overall sales rising at close to double-digit rates and increases even in the $25+ “death zone” range, there’s still enough disturbing news around to give anyone the jitters.

Are jitters justified? I decided to do some fieldwork to see what I could learn about conditions on the ground in my local wine market. An upscale supermarket down the street has recently undergone a major remodel and is have a grand re-opening. One of the areas that seems to have received a lot of attention is the wine wall. Since the supermarket chain is known to do very thorough market research I wanted to see what the redesign would tell me about state of the wine economy today.

First Impressions

My initial impression was very positive. The wine wall is substantially increased in terms of the number of square feet of display space. The quality of the space is much improved, too, with the old industrial shelving replaced in part by the sort of dark wood cases and racks that you see at fine wine shops. Good news! A big investment like this suggests optimism about the future of the wine market.

A second glance provided more information. The wine wall is large enough to need directional signs to help customers find their “comfort zone” area.  Some of the signs were what you would expect: “France/Italy,” Australia” and so on. Just what you’d expect. But other signs pointed to continued “trading down.”

I found areas marked “premium 1.5 liter,” “value wines” and “box wines” and one that said simply “White Zinfandel.” It’s obvious that the marketing and design people knew that many of their customers would be looking for low cost or basic wines and they wanted to help them find them.

Box wine sales surged in the “trading down” wine economy that wine people like to think is over, but apparently isn’t.  There were a number of quality bag-in-box wines for sale in this section, which was conveniently located adjacent to the expanded take-out  delicatessen and bakery areas.

The White Zin section held both the expected Sutter Home and Beringer products plus a limited range of inexpensive domestic rosé wines and a small selection of fruit wine and fruit-flavored wines. My wine snob friends are probably shocked to learn that White Zin, the wine they love to hate  is so popular that it has its own part of the wine wall.  That would be trading down in both price and quality, they say.

Unexpected Discoveries

Now it was time to study the main section of the wine wall carefully. I was impressed by the large selection, of course. Lots of wines. Lots of brands. But some of the wines had unfamiliar labels that I think may be part of a “dumping” strategy where big producers sell off surplus wine under an ersatz value brand to avoid weakening the price position of established brands.

This is a very common practice in Australia, where the wines are sold with very generic labels. They call them “cleanskins” and I guess they are selling like hotcakes. The surplus wine, some of which could be very good, may be trickling down into a sort of  branded cleanskins market here in the U.S. But there’s another trickle down effect that got my attention.

As I surveyed the wine wall I was struck by a small number of hard-to-find or impossible-to-buy wines that were sitting quietly waiting to be found — fine wine that I suspect didn’t find a home in the usual wine club / fine wine shop / restaurant supply chain.

Since we’ve recently returned from a Napa Valley research trip, I was especially struck by the presence of two wines from Stag’s Leap Wine Cellars – their  Fay Vineyard Cabernet and the famous Cask 23. The Fay sold for $87 or $79 for buyers with the store loyalty card. Buy a case and get a further 10 percent discount. The Cask 23′s price was $164.

You can buy Opus One for $209 ($179 with your loyalty card) or Sassicaia for $245 ($213). The Chimney Rock SLV Cab that I liked a lot when I tasted it in California was a bargain at $60 ($48 with your card).

Pétrus at the 7-Eleven?

It’s hard to believe that these great wines can be found on neighborhood supermarket shelves. I could be wrong, but I suspect that they would not be found there during good economic times. But bad times drives good wines down the supply chain. That’s trickle down [wine] economics.

What’s next? Pétrus at the 7-Eleven? No, although 7-Eleven does have an own wine brand called Yosemite Road.

I’m glad there is finally good news about wine sales in the U.S., but while trading down may have stabilized I don’t think the sour economy’s effects will soon disappear. And so the trickle down effect continues. No wonder everyone’s got the jitters.