Anatomy of Australia’s Wine Crisis

Australia’s wine bubble seems about to burst (as I reported in my last post) and a number of observers have jokingly compared it to the global economic crisis.  You have too much wine? Ha! We have too much bad debt! Shall we swap problems?

Since I’ve just written a book about about the financial crisis (Globaloney 2.0 — it will be out in December 2009), I started to wonder if I could learn anything by seriously comparing the two crises. Here’s a first draft of my report.

This Time is Different

One of the arguments I make in Globaloney 2.0 is that financial investors and speculators convinced themselves that their risky, highly leveraged holdings were really “safe as houses” (irony intended).  Although they saw the bubble building and realized that bubbles often burst, they convinced themselves that “this time is different.” (They always do this, as a new book by Carmen Reinhart and Ken Rogoff makes clear.) It’s what I call Financial Globaloney.

Their false assessment of risk (which created  moral hazard, which encouraged even riskier behavior) combined with leverage and liquidity to produce the boom and bust we are living through just now. Booms and busts are a persistent feature of financial markets and we shouldn’t be surprised when they come ’round again. This time is not necessarily different. Is the same true for wine?

The Twenty Year Wine Boom

Everyone knows about Australia’s recent wine boom and its imminent bust, but it is important to put these events into a broader context, to understand that the present crisis is nothing new. University of Adelaide Professor Kym Anderson’s 2004 book World Wine Markets: Globalization at Work tells the story.

The current Aussie wine boom began in the mid 1980s. Wine production had closely tracked slowly growing domestic demand for the forty years after World War II (Australia was a net importer during this period), but began to rise dramatically after 1987.

Changes in retail sales laws in the UK transformed the wine market there (I wrote about this in an earlier post). Supermarket chains became mass market wine sellers that searched the world for good value product to fill their shelves and own-brand bottles. Australia stood ready to answer this call. Wine was identified as a key potential export industry. Private and public resources were organized to support and expand it. Vineyards and cellars started to grow to meet rising export demand.

A number of factors contributed to the boom, including liberal trade laws, increased international investment flows and of course the French Paradox findings that made red wine popular for reasons of health. Here in the US the partnership between the Casella family of Australian winemakers and the Deutsch marketing/distribution family firm produced the Yellow Tail phenomenon, which helped create what we now call Brand Australia. The high ratings that Robert Parker and others gave to Australian fine wine didn’t hurt demand, either.

Vineyard area doubled then doubled again over the 20 boom years (see brief data appendix below). Since domestic demand did not increase nearly this fast exports had to rise, and they did. It must have seemed that the global markets could and would absorb any amount of wine, an attitude that encouraged further investment. This belief in infinite world wine markets gave investors confidence to make what might otherwise (or with hindsight) be seen as quite risky investments. Thus a classic bubble was born. Parallels between the wine bubble and the mortgage credit bubble are easy to see here.

The level of output was unsustainably high given modest Australian consumption, rising production costs, realistic limits to global market growth and increasing international competition. Recent problems such as drought and recession-induced collapse in demand for high priced wine may have triggered current crisis talk, Australian wine was already at the tipping point,

Not So Different: Australia’s Wine Bubble History

This is not the first time that Australia has experienced wine boom and bust. In fact, according to Professor Anderson, this is the fifth time Australian wine has experienced a wine boom.

The first boom (1854-1871) was driven increased domestic demand and ended when over-production caused prices to collapse. A gold rush brought lots of thirsty prospectors and business people to Australia (as happened in California a few years before), inflating a wine bubble. Protectionism abroad and high shipping costs limited export potential so when domestic demand stopped growing the over-sold market tumbled.

The second boom (1881-1896) like the current one was more export driven. Wine exports increased by 23 percent per year due to a combination of factors including liberal trade regimes abroad and preferential access to the key British market.

The third boom (1915-1925) was, like the first, internally driven but with an emphasis on supply over demand. Government policies and incentives combined with irrigation-generated high yields contributed to over supply. Wine production rose 12.7 percent year year during this decade — hard to support that kind of compound growth.

The fourth boom (1968-75) was mild by comparison and followed 20 years of much slower postwar growth. A number of factors contributed to the rising market including income growth, changing consumer preferences and improved wine marketing programs. As in all the other cases, the market soared until the momentum ran out and then slumped as prices fall back to earth.

So wine booms are nothing new for the Australian wine industry. Each boom was different in the details, of course — so “this time is different” is not entirely a lie —  but similar in the overall pattern and final result. No wonder, writing in 2004, Professor Anderson asked “… the obvious question of whether Australia’s current wine boom is to be followed by yet another crash. at least in wine grape prices if not in wine production and export volumes.”

Past as Prologue

Re-reading Kym Anderson’s essay today, five years after its publication, I am impressed by his foresight.  Anderson found several hopeful factors in the current boom — reasons why this time might be different — but everything about the essay is really a warning not to ignore the lessons of history.

Anderson’s concludes with a rather serious analysis what Australia needed to do to make its growth sustainable. The analysis was wise in 2004 and still looks very much on the mark today, although the problem is obviously deeper now. It is recommended reading for wine people in Australia and everywhere else, I think.

Wine and finance are very different economic sectors, but there are some parallels — cycles of boom and bust, for example, and a tendency to assume “this time is different.” I hope both industries take advantage of the opportunity the current crises present to rethink, relearn and restructure. If they don’t — if they simply reload —  then I think the next crisis won’t be far away.

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Here’s a bit of data to flesh out the story, taken from The Global Wine Statistical Compendium 1969-2005. Data are for Australia in 1995 and 2005.

  • Total vineyard area increased from 73,000 hectares to 153,000 hectares. Vineyard area roughly doubled between 1985 and 1995 as well.
  • Grape yield rose from 10.5 tonnes per hectare to 13.2 t/h.
  • Wine grape production rose from 577,000 tonnes to 1.8 million tonnes due to the combination of greater vineyard area and higher yields.
  • Per capita production rose from 27 liters per capita to 71 l/c.
  • Per capita consumption rose from 18 liters per capita to 22.5 l/c. That leaves nearly 50 l/c for export markets.
  • Total value of exports increased from USD 301 million to USD 2.129 billion. All that increased production had to go somewhere.
  • Average unit value of bottled wine exports rose from USD 3.04 per liter to USD 3.65.  New Zealand was getting more than USD 6.50, however.
  • Average unit value of bulk wine exports fell from USD 1.12 per liter to USD 1.04.

Australia at the Tipping Point

I’ve been writing about Australia’s developing wine crisis for a couple of years now and I’ve often felt like Chicken Little, warning that the sky was falling. The problems kept accumulating, to be sure,  but the ultimate crisis never seemed to come. Was I being too negative, too dismal, exaggerating the woes and ignoring the underlying strength of the industry?

Unfortunately not. It’s just that the tipping point hadn’t been reached. But we’ve arrived there now, at least according to a report called “Wine Restructuring Action Agenda,” which suggests that the crisis is already here and there’s nothing to do but deal with it.

Cold Hard Facts

The report was issued yesterday in the form of a joint statement by four industry groups, the Winemakers’ Federation of Australia, Wine Grape Growers of Australia, the Australian Wine and Brandy Corporation and the Wine Research and Development Corporation. It went out to all winemakers in Australia and will be followed by regional meetings in the coming weeks and months. The statement makes sobering reading.

Structural surpluses of grapes and wine are now so large that they are causing long-term damage to our industry by devaluing the Australian brand, entrenching discounting, undermining profitability, and hampering our ability to pursue the vision and activities set out in the Directions to 2025 industry strategy.

Coupled with inefficient and/or inappropriate vineyard and wine operations, oversupply is amplifying and exacerbating fundamental problems in the industry, notably our decreasing cost competitiveness. As such it is compromising our ability to adopt new pricing structures and market solutions and adapt to changing market conditions.

Comprehensive analysis and consultation suggests at least 20% of bearing vines in Australia are surplus to requirements, with few long-term prospects. On cost of production alone, at least 17% of vineyard capacity is uneconomic. The problems are national – although some regions are more adversely affected – and are not restricted to specific varieties or price points. The industry must restructure both to reduce capacity and to change its product mix to focus on sales that earn viable margins.

Bailouts are not an option and neither governments nor industry bodies should be expected to provide the answers; tough, informed decisions must be made by individual growers and wineries, from as early as the 2010 vintage.

Mountains of Wine

Australia has an accumulated surplus of 100 million cases of wine that will double in the next two years if current trends continue, according to the report. The annual surplus is huge – equal to all UK export sales and there is no clear prospect of finding additional demand, either domestic or foreign, to fill this gap.

New Zealand Sauvignon Blanc, I understand, is now the best-selling white wine in Oz. Not the best selling import, but outselling any category of Australian white wine!

In fact, wine exports have fallen by 8 million cases or more than 20 percent in the last two years, according to the statement, with the largest declines in the high value wines that Aussie winemakers hoped would be their future.

Inexpensive and bulk wine sales have grown, but at prices that are unsustainably low. One of the messages here is that a great deal of the Australian industry is the red, unable to meet operating costs. Even the domestic market is under attack, with falling consumption and rising imports.

The problem is structural, not cyclical or temporary. The surplus won’t be cured by a return to global economic prosperity, for example. The demand is not responsive enough to rising income.

Better weather will make the surplus worse, of course, by increasing supply and not even bad weather will make much of a dent in it. Drought, water shortages, global warming – these factors that continue to plague Australia — would reduce the surplus by 10 percent at best.

Continued over-production will put further pressure on price, the report says, making all the problems worse. There is only one solution: restructuring.

Grubbing Up

So Australian wine producers will be meeting in the coming weeks and months, getting the bad news and hopefully acting on it so that restructuring, including grubbing up uneconomic vines, can begin. Here is the timetable:

• From 23 November 2009, detailed and confidential supply data summaries will be provided to regional associations. These will examine each region in isolation and in relation to the national picture, with a focus on levels and patterns of viability.

• From 30 January 2010, a package of tools will be available to help individual vineyard operators assess their performance and viability. This will include: a checklist; an upgraded Deloitte Ready Reckoner to assess winery profitability by market, channel and price point; and an upgraded Vinebiz program to assess vineyard profitability.

• From early next year, briefings will be held in 14 regional centres (covering all states) to discuss regional data and issues and offer business stress testing to assist with decision making.

The Federal Government has been approached to help facilitate this initiative, and state input is being sought.

• WFA and WGGA will hold discussions with the Federal Government about improved exit packages for growers and small wineries seeking to leave the industry along the lines of drought and small block irrigator exit packages.

Chicken Little Talk

So now we have two of the most important actors in the world wine game committed to restructuring — Australia and the European Union. The EU reached its tipping point a couple of years ago and adopted a restructuring program in the slow, torturous EU policy way.

Many people were disappointed with the final EU reform package — too little, too late. But maybe that’s Chicken Little talk. It will be interesting to see if the Australian producers are more decisive and if they can find a way to pull themselves back from the tipping point.

Wine and the China Syndrome

A few years ago I edited a book on globalization for a New York Times series. I was given everything that was published in the NYT in the 20th century and asked to tell the story of globalization’s rise and fall and rise again. One of the things I uncovered as I studied the history of world trade over those 100 years was what I call the China Syndrome.

Nightmares and Dreams

The China Syndrome is both the dream that China will buy all the goods we try to sell her and the fear that she will return the favor and take over our markets. The Times was full of China Syndrome a hundred years ago. History buffs might want to look up an article called “The Future of our Trade with China” that promoted the dream on April 13, 1900 and an early suggestion of the nightmare in “Japan and China find a Ready Market Here” published on September 3, 1905. Both are reprinted in my NYT volume.

The same dreams and nightmares are commonplace today. I was reminded of this recently while reading the Grape Wall of China blog, a reliable source for China wine news and views.  An article by Jim Boyce (aka Beijing Boyce) caught my eye: “No Worries: Australian targeting China wine market at every level.” The article tells of Australia’s dreams for Chinese wine sales.

The Blunder Down Under

The Australian wine industry is dreaming about a Chinese future because their present reality is an emerging nightmare. Australian wine is being battered by a number of factors, both natural and market driven. Australian wine sales are falling here in the United States and in Britain, too, I understand. Although there are many distinctive and delicious Australian wines, “Brand Australia” is pretty much defined by one-dimensional Shiraz and over-oaked Chardonnay, both of which have fallen from consumer favor. The “brand” was easy to understand and promote, but it didn’t have legs. Many consumers seem to have moved on and there are plenty of options for them to choose from. The recession only makes things worse.

The situation in some parts of Australia is really dire. Constellation Brands, for example, is closing its second Australian winery for lack of either a market for its output or a buyer for its assets. The global recession puts the big multinationals like Constellation under more pressure than in the past. They are less able to afford to nurse along failing brands. That’s bad news for the particular part of Australian wine that seems to define the brand. It’s time to dream up a better plan.

Australia has adopted a new marketing plan called Landmark Australia that is meant to highlight the quality and diversity of its fine wine industry. It’s a good idea but a difficult one to put into practice — hard to un-ring the Yellow Tail bell, if you know what I mean. And I am generally suspicious of regional or national marketing plans because I think collective brands (especially quite diverse and ill-defined ones) are always harder to sell than private brands.

Working in China … or Not

The Landmark Australia plan may be working in China. Or maybe not.

Beijing Boyce reports that Australia is promoting its new image pretty vigorously and has risen to #2 in bottled wine imports after France. The French have 40% of the fine wine market to Australia’s 20-22%. The U.S., Italy and Chile trail far behind. So perhaps Australia will be successful in redefining itself in a new market and maybe, ultimately but with more difficulty, in markets like America and Britain where it is already established. The geographical proximity to China is certainly an advantage.

There’s evidence of the China Syndrome dream in the data, but also hints of a possible nightmare. It seems that Australia is doing even better (in terms of rising market share) in the bulk wine market than in sales of bottled wine. Grape Wall reports that

… in the first half of 2009, Australia ranked second as a source of imported bulk wine. While Chile (~15 million liters) represented half of the ~31.5 million liters entering China, Australia came second with a quarter. Argentina (last year’s number two, with a quarter share) and the United States (~6.5 percent each), Spain (~5 percent), and South Africa and France (just over 1 percent each). This is quite a leap from the past four years, when Australia represented from 2 percent (2005) to 10.5 percent (2007).

One reason for higher sales at the low end of the market is that surplus bulk wine is being dumped (sold below cost). Hard to compete with that, of course. I know it is better to get something than nothing for all that surplus wine, but it is hard to be optimistic when this market segment is Australia’s greatest Chinese success. Australia wants to get out of the bulk market, in terms of its brand, not deeper into it.

China versus Colorado

How real is the dream part of the China Syndrome for wine? I asked Tom Hedges of Hedges Family Estate (an important independent producer here in Washington State and a pioneer in the Red Mountain AVA) because he is particularly knowledgeable about export markets in Asia. Tom put the dream into perspective. Here is his take:

As an American producer, we have the U.S. market, which today is number one or number two in the world for total consumption.  An example is flying to Denver costs $300 round trip, and takes no time.  Our potential to sell in Colorado alone is equal to or better than that in all of China;  the Chinese consume very little wine, in total, of which 85% is Chinese production.  And, being [an emerging] consuming market, they want only two kinds of wine:  Famous and cheap.  About 99% of the world’s wineries are neither, which means you have to develop a market for your brand.  Costly!

Tom’s clear conclusion was that he could achieve more and do it more economically by focusing on Denver and Boulder instead of Shanghai and Beijing.The allure of China is great,” he says, “the economic reality not so great.  American producers still have lots of Colorados to conquer here in the U.S.

This view aligns perfectly with my own, for now at least. Not many of those folks who dreamed the China Syndrome dream a hundred years ago woke up to great wealth, although a few probably did. I guess that’s why the call them dreams.

Wine Recession: Winners & Losers

Some people think that the long hard winter of the economic crisis is coming to an end and “green shoots” are emerging. It is too soon to tell if this view is correct, but not too early to begin to assess which parts of the wine economy have been hardest hit by the recession and which have actually benefited. Herewith a brief analysis of winners and losers.

Wine Market Breakdown

There are several ways to break down the winners and losers in the wine market. The first and most obvious is by price segment. Distributors are finding wines in the $25 and up category difficult to move through normal retail or “off premises”  sales channels. This doesn’t mean that everyone is buying Two Buck Chuck, however. The “super-premium” $10-$15 segment continues to grow, for example, although the trading down effect is still significant. The woman who was willing to pay $20 two years ago now aims to spend $15 or less, with similar changes further down the line.

Some wine brands have been particularly well positioned to attract value-seeking buyers. Gallo’s Barefoot wines, for example, have gained market share among the “fighting varietals” and the CMS by Hedges red and white blends have done well in the $10-$12 category, as have many others.

Since most Wine Walls are arranged with the most expensive wines on the top shelf and the cheapest at the bottom, it is almost as if the top shelf has been eliminated and all the other wines moved up one rank. Whether this is a temporary or a permanent shift remains an open question. I explicitly do not assume that everything will reset back to “normal” once the recession’s game of musical chairs has come to an end.

On-premise sales have declined, too, as restaurants have felt the recession’s sting. It has been especially interesting to watch as restaurants adjust by switching to lower cost wines from beyond the “usual suspect” regions. Reds from Spain and whites from Oregon, for example, can be sold profitably at lower price points than the better known French and Californian alternatives. Because buyers may not be as familiar with these wines they can enjoy the adventurous experience of “switching over” rather than simply “trading down.” Restaurants can maintain their margins at lower prices.

Wine Geography

Inevitable the recession has had uneven effects on different regions and countries. The news from Northern California is not good, for example, with many reports of surplus grapes, some that will not find a buyer this year. Cost is a big factor. Napa and Sonoma are high cost growing regions. The rule of thumb is that $2000/ton grapes produce $20/bottle wine — that’s how it pencils out when all the costs and mark-ups are accounted for. It is difficult to know who will buy wine made with $3000/ton grapes in the present market if, as we are told, the $25+ segment is a “dead zone.”

There is better news here in Washington state, on the other hand. Sales of Washington wine are rising at a 9% rate according to recent data. This makes sense because so much of Washington’s wine is positioned in the $15 and under category. About three quarters of all Washington wine is produced by Ste Michelle Wine Estates’s brands such as Chateau Ste Michelle and Columbia Crest that provide good quality and good value.

Argentina is another winner. Much like Washington State, Argentina produces good value wines at every price point and has increased sales across the board, although I suspect that Malbec at $10-$12 leads the way. While the overall US wine market has grown by 4.8% over the last year according to the most recent Nielsen Scantrack numbers, sales of Argentinian wines have risen by 46.8% — a tremendous if unsustainable rate of growth. By comparison Chilean wines sales have risen by 12.7%.

New Zealand’s wine industry is heading toward a crisis, as I have written before, but this seems less about the recession than a simply matter of demand and supply. You cannot double and redouble vineyard acreage forever and expect the export market to absorb every drop.

Australia is suffering, too, but like New Zealand I think the recession is a secondary “tipping point” factor. Wine imports from Australia are down 2.5 % for the last 52 weeks and Syrah/Shiraz sales are off 5.2% for the same period. Australia is facing all sorts of problems — drought, fire, recession and so forth — but the biggest problem maybe that “brand Australia” has gone out of sytle, taking the whole Syrah/Shiraz category with it. Even unfashionable Merlot has done better, with 0.8% growth.

The French Connection

I think France is the big loser from the recession, especially the segments that previously earned a “prestige premium,” particularly Bordeaux and Champagne. There is enough Champagne squirreled away in producer cellars to supply the market for several years. I think the big houses would pass on making any new wine this year if they could.

Even the famous chateaux are cutting price in Bordeaux this year, so I can only imagine what things are like for the producers of ordinary bottlings and bulk wine. French wine is a drag on the market even in Britain, where South African wines are surging ahead. Brand France, like Brand Australia, is in steep decline, although for different reasons.

There is a lot to be learned from a close study of the wine recession. The most important, at this point, is that it is more than a decline in demand. There are hints of more profound structural changes taking place. The more things change, the French say, the more they stay the same. I wonder if that will be true this time as the recession’s grip slowly weakens?

8/31/2009 update: An article in today’s Times of London suggests how severe the crisis is in Champagne. (Click on the link to read the rest of the story.)

Hopes of a glut of cheap champagne are set to be dashed when vineyards meet next week to agree on a big cut in production to prop up prices.

With sales falling, producers may be ordered to leave up to half their grapes to wither on the vine in an attempt to squeeze the market.

Merchants are pushing for an historic reduction in yield as they seek to ensure that champagne remains an expensive luxury. “Everyone agrees that production has to be cut because no one here wants to see prices fall,” an industry insider said. “The only disagreement is on the scale of the cut.”

The backdrop to the debate is a slump in sales for champagne makers, from 338 million bottles in 2007 to 322 million last year and a predicted 270 million this year. The fall stems in part from a slide in demand, estimated at about 10 per cent, and in part from destocking by distributors, notably in Britain and the United States.

9/3/2009 update:  A great article in today’s Wall Street Journal on the crisis in Champagne. Check it out!

Wines from Spain: Challenges and Opportunities

You know that a market niche is expanding when Constellation Brands decides to move into it, as it  has done with Red Guitar, an old vines Tempranillo-Granacha blend from Spain’s Navarra DO that sells for about ten bucks.

Red Guitar is marketed as “a rich, smooth and stylish celebration of the Spanish lifestyle” — a wine for the times, I guess, when consumers are looking for products that let them trade down in terms of price while trading up to a fun, more casual way of living.

Don’t Know Much

I didn’t know very much about the wines of Spain and the Spanish wine industry, so I went back to the classroom this week to try to catch up at a three day seminar on Spain’s wines organized by The Wine Academy of Spain and taught by Esteban Cabezas. My fellow students came mainly from within the wine industry — sommeliers, distributors and retailers. I learned a lot and sampled dozens of great wines. We didn’t taste Red Guitar, but we did survey the market from $5 bottles on up to the highest levels, including table wines, Sherry and sparkling Cavas. Yes, I know. Tough work …

Education is important to the future of the wines of Spain.  As I have written before, the number of unfamiliar regions and grape varieties is a challenge that must be addressed if wines from Spain are to achieve their obvious market potential. Constellation Brands’ decision to market Red Guitar as a “lifestyle” brand probably reflects the difficulty of selling wine from unfamiliar places made with unfamiliar grapes in a market where the international  varietals and styles are the lingua franca. Spanish winemakers need to get the word out — to educate consumers and sellers. Classes like the one I attended are a good step in this direction.

Uncorking the Potential of Wines from Spain

It’s useful to think about Spain’s wine industry using a basic SWOT (Strengths-Weaknesses-Opportunities-Threats) framework. Wines from Spain have many strengths that go beyond their obvious quality in the glass. Spanish food and culture are hot and Spain is a popular tourist destination, factors that can be leveraged in the marketplace. Intangible cultural factors have always helped sell Italian wines, so it is not unreasonable to think that Spain will benefit from them as well. Red Guitar’s marketing strategy is an obvious attempt to do just this.

There are weaknesses, too, of course. While the sparkling Cavas are very popular, offering Champagne quality at beer prices in some cases, other segments of the Spanish industry suffer from consumer ignorance or indifference. Sherry wines from Andalusia, for example, suffer the same challenge as Riesling wines. Consumers think they know what they are (simple, sweet stuff) but they are wrong. The diversity of styles and complexity of the best wines gets lost. For those who know them Sherry wines are the great bargains of the wine world. But most consumers never find out what they are missing. That needs to change.

The amazing diversity of Spain’s table wines is a strength in this market, where consumers are unusually willing to try new products if they perceive good value. But diversity is also a weakness to the extent that it confuses consumers (especially American consumers)  who are looking for a “brand” identity and can’t find it. Spain doesn’t have  a distinct regional identity that would draw in consumers initially and then encourage further experimentation as some other wine producing areas do.

In Search of “Brand Spain”

New Zealand has “brand” Marlborough Sauvignon Blanc, for example, which put that country on the wine map and gave millions of wine drinkers an excuse to try NZ wines. Oregon has its Pinot Noir, which has helped make it a wine region of international note despite its surprisingly small total production. Spain (like Washington State wine in this regard) produces so many different types and styles of wine that no one of them defines it. The regional identity is unclear. This is a barrier when trying to break into new markets, but a strength once a market beachhead has been established.

Although my terrioriste friends cringe when they hear me say this, I think it would be great if Spain had a Mondavi or Antinori who could define a “brand Spain”  in the global market. I think that a number of quality producers are trying to achieve this, but the industry is still pretty fragmented. Perhaps the consolidation that is sure to accompany the current economic downturn will move this process along.

The continuing economic crisis  is a great opportunity for Spain to expand export market share, especially in the United States where the market for wine is till growing in the mid-market segments. Spain, like Argentina, has a reputation for good value and distinctive wines and this is very useful right now.

Catch-22

It is important, however, to avoid being defined by low price alone. Spain’s first and fourth largest export markets (Germany and France) buy mainly low cost wines to stock the shelves of Aldi and similar discount sellers. Spain needs to focus on the UK and US (numbers two and three on their export table) where higher prices and margins are possible.

Another threat to Spain’s success in the international market is the temptation to conform too closely to the international market style (Pancho Campo, Spain’s leading wine authority, called this “the Australian style” in a Skype-dialogue with my class). Wines that are all alike become commodities at some point and it seems to me that Spain, with its already huge lake of surplus wines, wants to get out of that part of the market.

But there’s a Catch-22. It is easier, perhaps, to break into the market with a good value me-too wine. But it is hard to build upon that foundation (hence Australia’s current wine slump). Better to be yourself, distinctive, even quirky, it you can get consumers to give you a try.

As you can see, the prospects for Spain are as complex and multi-dimensional as the wines themselves.  I am optimistic that Spain’s wine industry will navigate this complicated passage successfully. Look for more on this topic in future posts.

Note: I would like to thank the Wine Academy of Spain and Catavino for allowing me to participate in the seminar on wines of Spain. Special thanks to my professor, Estaban Cabezas, and to Simone Spinner.

Tasting Note 8/11/2009: We tried the Red Guitar with dinner tonight and it was completely lacking in distinguishing qualities. It is hard to imagine that anyone who was introduced to the wines of Spain by Red Guitar would try another Spanish wine. Last night, however, we had the Borsao Tres Pichos, an Old Vines Granacha that sells for only a few dollars more, which was completely enchanting. You need to try Spain’s wines to know if you like them, but quality varies (and not just with price), so choose with care.

Wine, Recession and Argentina

The global economic crisis has been bad news for Argentina, but good news so far for Argentinian wine. Will the wine part of the story have a happy ending or, like so many Argentinian economic booms, turn eventually to bust?

Bad News and Good

The Economist Intelligence Unit reports that Argentina’s economy has been hard hit by the economic crisis. The economic forecast is gloomy (see below) with the only good news being that inflation, while still high, is falling.

Given rapidly declining business and consumer confidence, the government’s fiscal stimulus measures will have a limited effect, and we expect the economy to contract by 3% in 2009, before only a mild recovery in 2010.

Unofficially measured inflation will ease to 10-15% in 2009, as private demand falls. The official rate will end 2009 at 6.8%, with a similar rate in 2010.

The peso will continue to depreciate in 2009 owing to weaker foreign-exchange inflows, before the pace of depreciation slows in 2010. The current-account position will weaken in 2009-10.

The Argentinian wine economy situation is sunnier.  The May 2009 issue of Wine Business Monthly includes two reports that paint a bright picture of Argentinian wine trends.

The first story is a competitive analysis of Argentina wine in the United States market.  It reports that U.S. imports of Argentinian wine have risen dramatically in recent years, from 2.6 million cases in 2006 to 4.3 million in 2008.  The total value of Argentinian wine in the U.S. rose from $75 million to $146 million in this period.

It is important to put this increase in perspective, however. Total Argentinian imports are roughly equal to the annual output of a single US winemaker, Washington State’s Chateau Ste. Michelle. So the Argentinian presence is rising, but from a modest base.

Molto Malbec

Unsurprisingly, Malbec is Argentina’s calling card in the U.S. market. Malbec’s share of Argentinian wine imports increased from 35% to 48% over 2006-2008 measured by volume and from 44% to 55% measured by dollar value. I was interested to learn that Argentina wine sales are rising at all price points, not just in the value brand segment as you might imagine.  But value is still important.  Argentinian wine prices are rising, but still relatively low.  The article reports that the average FOB price has increased from $29 to $33 per standard 9-liter case.

In the same issue the results of the Nielsen company wine market survey for the period ending 2/7/2009 are reported.  Argentinian table wine imports were up 40% by dollar value for most recent year.  This compares to a 10 percent increase for Chile, one percent for Italy and a one percent decline for Australia.  Overall growth in imported wines was 2.4 percent by dollar value for the most recent year.

The 40 % annual rise is spectacular, but  Argentinian wines account for just 1.4 percent of U.S. domestic wine volume compared with two percent for Chile, nine percent for Australia, almost 10 percent for Italy. This shows that Argentina either has a lot of room to grow in the U.S. market, as optimists will perceive, or a lot of work to do to escape niche player status.

American Exceptionalism

I think the Argentina producers were wise to focus on the U.S. wine market for their export surge.  Although the European Union is more important to Argentina in other major export sectors, the U.S. is the target wine market, and that’s a good thing in this economic environment.  EU wine consumption has long been in decline because of demographic and market shifts, for example, while wine sales have been rising in the U.S.

The recession is likely to depress wine sales growth in both the U.S. and the EU, but the impact will be less in the U.S., I believe, if only because I think the recession will be shorter here. My current thinking is that the U.S. economy will benefit from greater short term fiscal and monetary stimulus, compared with the EU, and more effective medium term structural adjustment.  That said, the recession is and will be very severe.

Early U.S. evidence suggests that wine sales have actually continued to rise during in the first year of the recession, when measured by case volume, although the dollar value of those sales has declined as consumers trade down.

Opportunities and Threats

Reading the latest articles on WineSur, a noteworthy Argentinian industry website,  it pretty clear that Argentina producers appreciate both the opportunities and threats inherent in the current situation.  The opportunities — to establish a market presence built around good value and the rising popularity of Malbec — are significant. But I think it must be hard for Argentinians to see silver linings without looking around for associated dark clouds — their country has suffered repeatedly from the global market booms and busts.

Some of the threats are strictly economic. Argentinian producers are currently benefiting from a falling peso value relative to the US dollar, for example, which helps their wine hit market-friendly price points in the US.  But the falling currency is in part a reflection of high domestic inflation rates, which ultimately lead to higher production costs. A lot will depend upon how the inflation (cost) and exchange rate (export price) factors balance out in the future.

Some of the threats relate more to the fickle nature of the wine market itself.  Malbec and Argentina are nearly synonymous today, but this could change as other wine regions adopt their signature varietal. A recent visit to the Walla Walla AVA, for example, found many producers experimenting (successfully, I think) with Malbec.  Argentina has the first mover advantage in Malbec and must capitalize on this because it will face more competition in the future.  This happened to New Zealand (Sauvignon Blanc) and Australia (Shiraz) and I do not think Argentina will be different.

In exploiting its Malbec lead Argentina will need to strike another difficult balance, between establishing a useful “house style” that will build market identity and letting this deteriorate into a stylistic “monoculture” that soon bores consumers.  It seems to me that Australian Shiraz is currently suffering from the “monoculture” curse, perhaps unfairly, while New Zealand still benefits from a popular “house style,” although I’m not sure how much longer it can ride the gooseberry wave, especially given the vast quantities of Sauvignon Blanc that need to be sold.

Argentina is at a crossroads at a critical moment and moving in the right direction.  Count me cautiously optimistic regarding the future of Argentinian wine.

Update: Just hours after I posted this piece about Argentina the following item appeared on the Decanter.com website.

Argentine wine harvest down 25%

May 1, 2009  / Jimmy Langman

Due to climatic conditions, this year’s wine harvest in Argentina will be down 25% as compared to last year.

According to Argentina’s National Wine Institute, hail in some provinces, and overall higher temperatures in February and March, are factors in the lower production output this year.

The lower production this year has occurred despite Argentina having a 12% increase in land under cultivation for wine grapes.

Guillermo Garcia, president of the National Wine Institute, said: ‘If there had not been an international crisis, we would not have been able to provide wine to countries with developed markets.’

Garcia added that Argentine wine companies need to begin keeping more than three months of stock on hand to make up for such production shortfalls.

Exequiel Barros of the Mendoza-based Caucasia Wine Thinking consultancy told decanter.com that many Argentine wineries are worried about their ability to supply medium-priced wines but added: ‘We need to see how the international outlook develops this year before we can dare to make any projections.’

In Chile, wine growing areas that are not irrigated, such as Cauquenes in the Maule Valley, are predicting a similarly low harvest, with an estimated drop in production from 30 to 40% because of higher temperatures and low rainfall.

Most wineries in Chile, however, are reporting a good harvest. ‘The lack of rain has been good for this year’s harvest. But wineries in the far south, such as in the Bio Bio, may experience changes to quality because of the higher temperatures,’ said Edmundo Bordeu, professor of oenology at Chile’s Catholic University.

Australia’s Wine Crisis Deepens

It seems like I’m always writing about problems in the Australian wine industry (see Big Trouble Down Under, Bottom’s Up and Fosters, Wine, Rice and Drought in Australia or Australian Winequake).

It’s ironic that the Australian industry is so threatened given that many of the wines are so good (see Robert Parker’s reviews, for example), but you cannot judge the health of a wine industry by the top wines alone.

Two recent reports combine to paint a dismal picture.

Rock Bottom

There aren’t many names in Australian wine that are bigger than Wolf Blass, so his comments at a recent Barossa Generations lunch at the Peter Lehmann winery were newsworthy enough to be reported on Decanter.com.  Blass blasted out at what he sees as wrongheaded Australian wine strategy, which he said aimed to promote “overproduced wine from Australian irrigated fruit” in export markets.

These simple wines, he argued, cannot compete with products from South Africa and represent the wrong way to think about Australia’s wine future.  The right way for Barossa, he said, was to focus on full-bodied Shiraz – balanced wines with not too much alcohol. Australia will hit “rock bottom” if it continues in this direction, Blass said.

I’m not surprised that Blass would favor quality over quantity as a global wine strategy and it is part of Australia’s official wine marketing plan.  This is obviously the way forward, but supply hasn’t caught up with demand.  Australia’s production still falls disproportionately in the threatened Yellow Tail category and changing directions on the supply side is easier said than done.

Blass’s remark about South Africa caught me by surprise, I must admit, since most of what I’ve read recently about South Africa has stressed the challenges they too face.  If Blass is right, then I need to rethink South African wine – look for a blog post in 2009.

How to Fill a Lake

The 10th annual Australian Winegrape Crush and Price Report was released recently and it shows just how big the gap between demand and supply Australia faces (and why, presumably, it ends up promoting the “wrong” wines just to try to clear stocks).  Here are some of the findings, quoted from a summary of the report that I received .

  • 2008 total crush – up 32% to 1.8 million tonnes (red up 45% and white up 20%).  Districted weighted average price up 28% to $817 per tonne (red up 30% to $923 per tonne and white up 24% to $566 per tonne).

Good news so far.  Higher price, higher output — can’t beat that if you are a producer.  But of course this comes after a number of drought years have helped to dry up the huge oversupply created earlier in the decade, so we need to keep this context in mind.

  • Demand (required intake) is expected to grow by 109KT, or 6%, over the forecast period (2009 to 2013).  The largest amount will be an expected 31KT increase in demand for warm-inland whites (up 16%) while the fastest growing sector will be cooler-climate whites (up 25KT or 10% off a lower base).
  • The Australian crush is forecast to grow by 260KT over the forecast period with the biggest contributor expected to be warm-inland whites (up 180KT) while the tonnages of cooler-climate reds are expected to constrict (down 30KT).

Now here’s your problem.  We are back to the pre-drought scenario of supply growing much faster than demand, especially for the warm-inland whites, which I think means Chardonnay and Semillon.  Supply of these varietals is projected to rise nearly six times faster than demand.  That’s how you fill a lake.

  • Growth in supply exceeds the growth in demand over the forecast period, resulting in an oversupply of fruit, by 7%, in 2013.
  • By 2013, warm-inland whites are expected to be in significant oversupply (21% over) while moderate oversupply of cooler-climate reds is expected to remain (7% over), albeit down from a serious oversupply in 2009 (18% over).  Warm-inland reds are expected to be in modest shortage by 2013 (8% undersupplied) and cooler-climate whites in balance.

When Even the Good News is Bad

You know you’ve got a problem when the good news is that you will have a moderate oversupply, down from a serious oversupply.

  • The top five varieties expected to be in demand in 2013 are Pinot Noir, Cabernet Sauvignon, Pinot Gris, Sauvignon Blanc and Viognier.  Off a low base, Tempranillo also deserves special mention.

What’s missing from this list?  Chardonnay and Merlot, the money grapes.  And Shiraz, the grape that defines Australian wine in the export markets.

  • In 2013, the top five oversupplied varieties are expected to be Chardonnay, Muscat Gordo Blanco, Merlot, Semillon and Sultana.

Here they are — Chardonnay and Merlot finally make the list, but it is the wrong list, the wine glut list.

These are just projections, of course.  Demand can be fickle, as the Pinot Noir boom shows, and supply is by its nature hard to predictable.  What I take from this, then, is that the basic structures of supply and demand are currently misaligned and look to stay that way through the five years of the forecast.  In the long run, something will have to change.

This brings me back to Wolf Blass’s comments.  He criticized the marketing strategy’s focus on trying to sell what Australia has a lot of (the oversupply wines) rather than trying to sell your best product (investing  in reputation) and letting the markets for lower quality wines sort themselves out. This would be a pretty controversial thing to say in Australia — no wonder it make the news.

This would be a big change and, to repeat, changing directions is easier said than done.  I wonder if there is some grubbing up in Australia’s wine future?

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