Wanted: Retail [Wine] Therapy

I know that it is not easy to make good wine. And wine can be difficult to sell, too. But apparently buying wine is even harder.

That ’70s Wine

At least that’s the word from some top wine critics. Lettie Teague’s column in this weekend’s Wall Street Journal was ostensibly about that 1970s favorite, Pouilly-Fuissé, but much of it was actually a gentle rant about the difficulty she experienced in trying to buy a few bottles for a tasting. Seems the specialist wine merchants she contacted just didn’t have much in stock. She had to work pretty hard to put together a reasonable sample.

Is it just a Pouilly-Fuissé problem? Maybe, but Teague reported much the same experience a couple of weeks ago when she tried to put together a tasting of wines  from Washington state. Teague’s merchants carried just a bottle or two of Washington wine, same as that 70′s wine. That’s all we need, they told her. No one cares, they said.

What do Washington wines have in common with the French? I used to think it was latitude but now I know — you can’t buy them in New York! (BTW word of mouth evidence suggests that Washington wines might be easier to find in New York than Teague’s article indicates.)

Mind the Gap

I know there are many factors at work here including New York’s peculiar retail wine regulations, the dollar-euro exchange rate and especially the recent “flight to safety” among wine sellers who seek to minimize inventory in a very uncertain market.

America’s byzantine interstate wine trade regulations are part of the problem, too. I’ve often looked across the pond to Britain and imagined how great it would be to have a unified wine market (without dozens of state and even local regulatory regimes). Wine is easier to sell in Britain because of this and so I’ve always thought that it was easier to buy, too. I guess I forgot my own frustrated wine buying experiences living in London a few years ago, when I tried to find interesting U.S. wines to share with British friends;  pretty much all I could find in my local drinks shop was bottom shelf generics.

I was reminded of this by one of Jancis Robinson’s recent Financial Times columns where she vented her frustration about trying to buy just a bottle or two of very good wine for dinner. You can buy vast quantities of cheap and cheerful wine as Tesco, she said, and of course you can purchase many of the finest wines on earth by the case and have it delivered to your door the next day. But what if you just want one bottle of something a notch or two above the supermarket category?

Yes, you can do it, she said, but it isn’t easy. And then she listed the five British merchants that she thinks fill the bill. Five! Ouch. “… this list is just about it – in a country of 33.4m wine drinkers,” she moaned. The gap between BOGOF Tesco and a case of Chateau Lafite is bigger than I thought! Robinson cites the increasing dominance of the big supermarket chains as a critical factor driving the specialist wine merchant out of business. Tesco, of course, is now the world’s largest wine merchant and 70% of British wine comes from a supermarket shelf.

Decanter published an article last year (in the 2009 California supplement) bemoaning the fact that so few American wines are available in the UK. Bottom and top are easy enough to find, but nothing much in the vast middle. They cited a number of factors including American winemakers’ resistance to the deep discounts needed to make export sales, high British retail margins and the incompatibility of American wine styles and British palates. Whatever the reason, it seems that British wine buyers are surprisingly under-served when it comes to America’s diverse wine array.

Why Can’t a Wine Be More Like a Book?

It occurs to me that the situation facing wine buyers today is a lot like book buying was twenty years ago. It was easy to find best sellers and trashy paperbacks. And specialist shops catered to particular interests at a price. But much of the vast book supply was very difficult for buyers to access.

And then came Amazon.com, of course. And now the world of new and used books is only a click away.

Wouldn’t it be great if there were an Amazon.com for wine? That would be one “killer app,” as they say. But I don’t think it is going to happen, at least not soon. Amazon.com announced plans to start selling wines online a couple of years ago, but nothing seems to have come of it and it is easy to see why.

Although bottled wine does share many of the attributes that made books Amazon.com’s initial target market, there are a number of discouraging negatives to consider. Wine is heavy and costly to ship compared to books.  A books doesn’t care if the weather is hot or cold while it is in transit, but your half-case of Chianti surely does. And of course there are the legal barriers that restrict interstate shipping at every turn.

I’m hoping that someone will come along with that Killer Wine App that makes fine wine buying as efficient as shopping for books, but until then I think that retail [wine] therapy will remain a source of frustration, not relief, for at least some of us.

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Jancis Robinson’s column in Saturday’s Financial Times suggests that wine books share some of the same distribution frustrations as wine. She reports a trend towards self-publication of specialist wine books.

Stein’s Law and New Zealand Wine

Stein’s Law, named for presidential economic advisor Herb Stein who coined it, holds that if something cannot go on forever it will eventually end.

If that sounds like an obvious conclusion remember that, Freakonomics aside, most of what economists do is point out the obvious to people who somehow fail to see it.

Think about everyone who was surprised that the housing bubble imploded and that credit crashed. Everyone knew that rising housing prices and expanding mortgage debt couldn’t go on forever, but many acted like it would never end. If only they had remembered Stein’s Law!

I wonder if this is a Stein’s Law moment for the New Zealand wine industry?

Objectively the New Zealand wine industry has all of the classic characteristics of a bubble (and I’m not talking about sparkling wine here). The industry has expanded at a break-neck pace in recent years, fueled by foreign investment. The home market is quite small, so increasing output has been pushed into export markets, especially Australia, the U.S. and Great Britain. New Zealand wines are best sellers in each of these markets.

Incredibly, New Zealand has been able to continually expand export sales while maintaining its historically high export price. (No country has received a higher average price for its table wine exports in recent years.) The high prices, of course, draw in more investment, so production continues to grow and the cycle repeats.

Chateau Ponzi

If I told you a story like this about a financial investment of some sort you’d probably tell me that it sounds like a Ponzi scheme — no way this can go on forever. Pretty soon the market will be saturated and prices will have to fall. This is what worried the New Zealand winemakers I talked with when I visited there a few years ago: the moment when exports at a premium price would become unsustainable. They worried that their fine wines would become commodities, sold in bulk at permanently lower price points.

Any luxury good retailer will tell you that it is hard to push prices back up once buyers come to expect discounts.

Yesterday’s Marlborough Express suggests that the tipping point may have been reached. The article reports that

New Zealand Winegrowers’ annual report released yesterday shows exports surged 24 per cent to $992 million and the industry is on track to reach the $1 billion mark this year, a year ahead of expectations.

This was largely driven by bulk exports, which Mr Smith said were a concern to the industry. Historically, bulk wine exports have accounted for less than 5 per cent of total export volume; in the past year this quadrupled to nearly 20 per cent as producers looked to shift excess inventories.

Bulk exports might relieve pressure on wineries in the short term, but in the long term they could damage the market positioning and the reputation of New Zealand wine, Mr Smith warned.

The fact of falling prices due to bulk sales is hard to dispute.  I have not seen big discounts on New Zealand wine here in the U.S., but the Marlborough Express reports that

A surplus of Marlborough sauvignon blanc is driving down wine prices, says a Nelson wine producer. Brightwater Vineyards’ owner, Gary Neale, says his company is up against an oversupply of discounted Marlborough sauvignon blanc exports.

Mr Neale sells his wine for 10.50 (NZ$25.80) in Britain, but British consumers are being offered three bottles of Marlborough sauvignon blanc for 10 , or 3.99 for one bottle. An email from his Sydney agent tells of New Zealand wine being sold at A$4 a bottle, and Marlborough sauvignon blanc is selling there for as little as A$2.75 when buying six bottles.

“In the past, Australia has been a very easy and a profitable market, but Australia is absolutely flooded with cheap Marlborough sauvignon blanc,” says Mr Neale.

Two Buck Kiwi Wine

With the Australian dollar trading at about 83 U.S. cents this morning, that makes makes the Marlborough six-pack price a little over $2.25 US per bottle — Two Buck Chuck (TBC) range.

An article posted today on Decanter.com reports low prices in the U.K. market, too, although not so low as in Australia, and sounds an optimistic note.

The sale of £3.99 Marlborough Sauvignon Blanc is a short-term ‘blip’, according to the European head of New Zealand Winegrowers.

Following the record 2008 and 2009 vintages, increased production created an oversupply problem, giving rise to the first-ever £3.99 New Zealand wines as producers tried to clear tank space.

But David Cox, European director for New Zealand Winegrowers told decanter.com: ‘We are going to see the odd £3.99 New Zealand wine but not very often. I don’t think the consumer will ever get to the stage where they think they can get New Zealand wines for under £4.’

£3.99 translates to about $6.50 US — well clear of the TBC price, but frighteningly low for New Zealand wines in the UK market. Let’s put this price in context.

New Zealand producers received an average price of $6.00 for their exports in 2001-2005. Retail prices in the export markets were necessarily much higher to reflect transportation and distribution costs, tariffs and retail mark-ups. No wonder so many Marlborough Sauvignon Blancs have been priced in the $15-$20 range in the past.

If NZ wines are retailing for the equivalent of $6.50 in London then, working backwards, this suggests that net producer prices have plunged to less than $3, at least for the bulk wine product. That’s a huge drop and it is hard to see how production is sustainable at this price point.

All Black?

So is this it? Has the bubble burst? Is the future of New Zealand wine all black? No. The reputation of New Zealand wine is very strong and it may well be that consumers will be able to differentiate the bulk product at bulk price from the premium product higher up on the shelf as they do for products from France and California. The danger is that the whole national brand is devalued. That would be a devastating blow.

It would be a mistake to over-react to this news, but it would also be a mistake not to react at all.

Stein’s Law holds here as it does in so many cases and the surpluses will go away one way or another — either because the growers act to control them or else because the market collapses and they get sold off at bulk wine prices.

Chateau Cash Flow: The Rise of House Brand Wine

Decanter.com reports that house brand wine sales are rising in Great Britain even as the overall market slumps.

Retailers are reporting impressive growth of own-label wines as cash-strapped customers look to rein in their spending.

A Datamonitor survey reports 41% of all grocery sales in the UK are now own-label, up from 38.2% in 2008, and wine sales are following the upward trend.

Supermarket retailer Sainsbury’s told decanter.com its own-label wines had grown at double the rate of its wine range this year. A spokeswoman said: ‘Last year we revamped our own-label packaging and we have put a lot of effort behind the range in store and in the media.’

House brands aren’t so important in the U.S. wine market [yet] but they may well be in the future. The best known U.S. house brand wines are Charles Shaw (a.k.a. Two Buck Chuck) at Trader Joe’s and Kirkland Signature at Costco. Big Box retailers Target and Wal-Mart have launched their own house brands in recent months and other retailer’s have commissioned discount brands (not yet closely associated with their names) in an attempt to get a grip on the trading-down market. Look for this trend to continue, especially if the economic downturn persists.

Chateau Cash Flow

House brands are a solution to several problems, which is why they are likely to increase in importance. On the consumer side, they provide buyers with reputational assurances. You might wonder if a $3 wine can be any good, but you are more likely to try it if Trader Joe’s or Wal-Mart stands behind it. As I have written before, a $3 unknown wine at Safeway makes you think “how can it be any good?” while a $3 wine with the Trader Joe’s imprimatur makes you think “how bad can it be?” You might buy the latter but not the former.

The British have years of experience with house brands — it is why they are [for now] the world’s most important wine market and why Britain’s supermarkets are arguably the most sophisticated wine distribution machines on earth. The U.S. is catching up, but Britain still leads.

Reputation is especially important when consumers are trading down, moving into unfamiliar territory on the lower shelves. Decanter reports that while some British consumers are trading down to house brands, building that market, existing customers are trading up within the house brand portfolio! If this trend continues it will be hard to resist the house brand strategy.

Supply Side Wine

House brands have big advantages on the supply-side, too. Producers with surplus wine are often happy to sell it off through house brand bopttlings because it generates cash flow without directly undercutting their own brands and market. In my international economics class we call this “dumping.” You sell off unintended surpluses (of which there are plenty just now) through retailers in a different market segment, allowing you to maintain reputation and price points in the home market. If you start discounting wine to sell it, we have learned, it is sometimes difficult to regain the ground you have lost.

Some British retailers have moved aggressively into the supply chain, buying up grapes and surplus wines and acting as full-fledged negociants, but it isn’t really necessary to make such a large commitment to get into the house brand wine business. There are plenty of regional and national firms who can quickly respond to demand. No large investment is required, cost is low.

House brands can also have a somewhat fluid identity (not tied tightly to a particular region or style), which allows them to benefit from global opportunities, sourcing Sauvignon Blanc from Chile, for example, and Pinot Noir from Northern Italy or the South of France.

The main problem is to be sure that quality is good enough. Otherwise you have put your own brand in jeopardy.

Three Way Battle

The world’s wine markets are a battleground for three models of wine sales. The German model is based upon low cost (one euro per liter) and hard discount sellers like Aldi. The American model is all about corporate brands like Gallo and Constellation Brands. The British model is built upon upscale supermarkets and the house brands they sell.

Recent news suggests that the British model is gaining ground, both in the UK and here in America, where it is the model that drives Costco sales (Trader Joe, on the other hand, uses a version of the German system). It will be interesting to see if this trend persists once the recession eases up.

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.

Decanter’s Wine Power List

Decanter, the self-proclaimed “World’s Best Wine Magazine,” takes its rankings very seriously. Wine rankings, of course,  and, in the July 2009 issue, Power rankings. Who are the most powerful people in the world of wine and what does the power list tell us? Let’s see if we can find the message in this bottle.

The Power List

The names on the power list are very interesting but the story that they tell about wine today is perhaps more important. Here are the first ten (top ten) people on the list.

  1. Richard Sands, USA, Chairman, Constellation Brands
  2. Robert Parker, USA, wine critic
  3. Mariann Fischer Boel, Denmark, EU Commissioner for Agriculture
  4. Mel Dick, USA, Southern Wine & Spirits (wine distributor)
  5. Annette Alvarez-Peters, USA, Costco wine director
  6. Dan Jago, UK, Tesco wine director
  7. Jean-Christophe Deslarzes, Canada, President of Alcan Packaging
  8. Jancis Robinson, UK, wine critic, author and journalist
  9. Nicolas Sarkozy, France, President of France
  10. Pierre Pringuet, France, Pernod Ricard

Since Decanter is a British magazine with very small US distribution you might be surprised that three of the top ten positions (and both of the top spots) are held my Americans, but don’t be. Constellation Brands is the largest wine company in the world and accounts for one out of eight bottles of wine sold in the UK. And Robert Parker is best known for his ratings of French wine, not Napa bottlings, which is important to British buyers and merchants. The presence of Sands and Parker at the top of the list does not reflect any sort of US-centrism, just the realities of the global marketplace. It really is a global list. Or at least, like those famous New Yorker cover illustrations, the globe as seen from London.

I won’t list the second ten names (out of 50 in total), but the I think they illustrate the global reach of the wine market today: America, China, Chile, Australia, Spain and so on. Even India, an emerging wine market, makes the top 50 ranking.

The list is complete and up-to-date (Gary Vaynerchuck, the US internet wine guru, shows up at number #40), but there are some interesting gaps. Fred Franzia, the godfather of Two Buck Chuck, is nowhere to be found, for example, despite his obvious influence on the US market, while Judy Leissner of Grace Vineyard in China, who perhaps represents the future of Chinese fine wine, makes the “Ones to Watch” list.

No wine economists make the list, alas. Greg Jones, the respected Southern Oregon University wine climatologist, is the only professor (#33). Maybe next year …

The Story

It is fun to see who makes the list and who doesn’t (why Jancis and not Oz?), but the ranking is more interesting if you strip out the personalities and consider what market forces they represent. Herewith my version of this  story.

The world of wine is very unsettled. Although wine is one of the most fragmented global industries (much less concentrated than beer or spirits, for example), size matters more and more as consolidation continues. [Hence the power of Constellation Brands, Pernod Ricard and Southern Wine & Spirits.] Reputation matters, of course [Parker and Robinson], but the world is changing and everything is up for grabs from how and where wine is sold [Costco and Tesco] to how the bottle is sealed [Alcan].

Although change is generally associated with New World wine, this is no longer the case. The biggest threats to “business as usual” for Old World wine come from inside the European Union itself. On one hand, the new EU wine regime [Mariann Fischer Boel] will pressure Old World wine to compete with the New World head-on and without continuing EU support. On the other hand we have an unexpected prohibitionist movement [symbolized by Sarkozy] that seeks to regulate wine like the Americans do (even as some parts of America are changing) — as a dangerous controlled substance. It is thus imperative for Old World wine to master the tricks of the New World industry — tricks that Constellation and Southern and Costco symbolize.

These changes take place, of course  within the context of the expanding global market, global climate change and a continuing global economic crisis (that’s where a wine economist would have been a useful inclusion).

I won’t pretend that the Decanter Power List is a scientific ranking (Decanter doesn’t claim this in any case), but it is an interesting peek into how wine insiders view their industry. I’ll be curious to see how the names and the story lines change when the next Power List appears.

The Center Does Not Hold

Two recent articles in the Financial Times give a strong sense of the structural (as opposed to cyclical) forces that are transforming the world wine market.

The Age of Uncertainty

Jancis Robinson’s column in the March 21 FT is titled “Wine’s Age of Uncertainty,” echoing John Kenneth Galbraith’s 1977 book and 13-part BBC television series.”The wine world,” she writes,  “is currently every bit as riddled with uncertainty as any other.” And that sure is true. None of the quotidian constants seem to hold. Robinson writes that …

Perhaps the greatest certainty might be said to be that vines will bring forth a crop each autumn and the Bordelais will do their best to sell it the following spring. But even the Bordeaux 2008 en primeur campaign, just about to kick off, seems desperately uncertain.

London is the center of the Bordeaux trade, of course, and the prominence of Bordeaux wines among collectors has been both cause and effect of London’ rise as the nexus of global wine markets.  Now, however, this “virtuous” cycle seems to have turned inconveniently “vicious.”  London and Bordeaux seem to be collapsing together, and uncertainty creates anxiety and even fear.  Robinson searches in vain for some stabilizing force in global wine.

One would normally look to nature to offer some degree of certainty in contrast to the quicksands of commercial activity, but even the effects of the seasons seem to be less and less predictable, resulting in the increasing incidence of drought, bushfires, floods, frost and dramatic storms. These in turn have led to wine gluts and shortages, in Australia particularly, with concomitant effects on prices.

Nothing is reliable. Even our money betrays us.

These [problems] have been exacerbated by the current giddy gavotte of the world’s currencies, with particularly gloomy and inflationary effects on the price of wine in the UK. Britons are bracing themselves for the full effects of the slide of the pound on shop shelves, and it is hardly surprising that the wine trade is lobbying hard against any increase in UK excise duty. Already, pathetically few pence actually go to pay for the wine in any bottle retailing at £4.99.

These combined effects — recession, falling pound, potentially rising wine taxes — threatened Britain’s hold on its position as the leading global wine market.  But wait, it gets worse when you take into account adaptive expectations.

And then there is the general uncertainty now for any UK supermarket customer as to whether and when individual wines will be discounted. The pervasive discounting culture has lulled them into being afraid to buy any full price wine for fear of seeing it on promotion the following week.

How deep are the strains?  Robinson tries to put a happy face on the situation to end her column (“Perhaps, in wine anyway, it is not that we are more uncertain, just much better informed than we used to be,” she writes), but the evidence for something bigger at work is just too persuasive. We are better informed, but there’s more to it than that.

Drying Up

UK Loses Thirst for Bordeaux Wines” is the title of the second FT article, which appeared on March 23.  It provides more evidence of the death spiral that has seemingly ensnared London and Bordeaux.

British merchants are selling fine wine back to counterparts in Bordeaux and exporting it to Asia as domestic demand for the most expensive wine slumps and sterling weakens against the euro.

Everything seems to be be conspiring against London and Bordeaux, pushing the wine back to France and then on to Hong Kong, where a new market center has emerged now that HK’s high wine tariffs have been lifted.

Meanwhile, the price of fine wines sold in the UK has fallen by some 20 per cent since June, according to Liv-Ex.The return of wine to Bordeaux occurs as total French wine production is falling, raising fears that France is losing global market share to other producers like Italy.

And not just Italy, of course.  U.S. wine exports to Britain have quietly been increasing in the last year, overtaking France as the number one import,  as demand for French and Australian goods have slumped. It’s not all Stag’s Leap or Screaming Eagle, of course, but that’s not the point.  Every national wine market is stratified and Britain’s is not exception.

None of this is proof, of course, that London has permanently lost its place as the center of the wine world.  Maybe it really is just a cycle, where London’s falling status today will be reversed in 2010 or 2011 or whenever the heck the economic crisis ends.  But what if that doesn’t happen?  What if real structural changes are at work?

Then perhaps the center of the auction world will relocate to Hong Kong and the center of the retail wine universe will be the United States, with Costco and Trader Joe’s taking center stage. Nothing is certain — Jancis Robinson is right — and the Age of Uncertainty (Galbraith) yields uneasily to the Age of Anxiety.

More to follow.

Crisis and Change in the Wine World

When the economic crisis began to unfold last year many people said that it wouldn’t affect the world of wine — people will still want to drink, they said, even more so when they are worried or depressed.  Recession is good for wine, they assured us.

Well, we all know now that that line of reasoning was misguided.  The crisis is hitting almost every shelf on the Wine Wall as consumers cut back and trade down (only a few value brands like Barefoot Cellars seem to be benefiting).  The most recent issues of Wine Spectator and Decanter feature cover stories that are designed to appeal to recession-shocked bargain-hunting wine enthusiasts. (See note below.) Wine industry publications are packed full of stories about how producers, retailers and restaurants are coping with declining demand.

Cycle or Shift?

Now that we know that economic crisis is having a real impact on wine, it is time to think more seriously about what form that impact is taking. Most people that I have talked to are thinking in terms of boom-bust cycles. The current downturn will be very difficult — and a shake out will take place across the industry — but, they say, the wine economy will bounce back again once the economy itself starts to recover.  This is probably the correct way to think about the future of wine markets, but it isn’t the only way.

A second possibility is that the crisis will produce a long term structural change in the wine market.  The market won’t bounce back from its low, but rather will reset itself and proceed along a new and possibly unpredictable future path. Economists who study other sectors (finance, automobiles, agriculture) and taking the possibility of structural shifts seriously.  Could it be happening in the world of wine?

I have given a lot of thought to question of cycles and shifts over the years.  My best known work in this regard is a comparative economic history of public debt in advanced economies called Mountains of Debt: Crisis and Change in Renaissance Florence, Victorian Britain and Postwar America (Oxford University Press, 1990).  (Mountains went out of print in the Clinton years when the US deficit went away, but George W. Bush and the current crisis convinced the publisher to bring it back).

One point of the book is that some crises are more significant than others.  Sometimes a crisis is a tremor that shakes things up for a while but leaves the landscape pretty much unchanged.  Other crises are major earthquakes, with more lasting long term implications.  Maybe this is a “Big One,” at least in terms of wine. I’m going to use the next few blog posts to think through this important question.

The Market Center Shifts

One early indicator of structural change comes from London, the center of the wine world.  Great Britain, as I’ve said before, is the most important wine market in the world. The British don’t drink the most wine in the world or produce the most, either, but they buy a lot of wine from other countries, making them the largest import market and therefore the focus of international competition (Germany and the United States along with Britain form the Big Three import markets).

But this may be changing.  Britain’s economy is being badly battered by the economic crisis, as an article in yesterday’s Financial Times makes clear.

As the UK economy contracts at its fastest rate since the second world war, the … Industry Watch report predicts that more company casualties will follow in 2010. It says 39,000 businesses, or one in 50, are likely to fail next year.

Britain’s banking sector is in bad shape, perhaps even worse than the US industry, and its government budget deficit is also spiraling into the red.  This has general wine market effects similar to those in the US (cutting back, trading down, switching over), but some different ones, as well, the most important of which is due to the exchange rate.

As Britain’s economy has imploded the pound has collapsed as well. The pound has fallen by about 25% against both the dollar and the Euro. It took about $2 (or €1.30) to buy a pound a year ago, now it is selling for $1.45 (or €1.06) today.  This means that imported wine (which in Britain is, well, wine) costs much more because of the exchange rate at the same time that the slumping economy (and lowered expectations) are undermining demand. The US dollar, on the other hand, has appreciated relative to most currencies apart from the yen, promising wine buyers lower prices to match their reduced economic circumstances.  So the recession is affecting wine in Britain more than the US wine market.  A shift is taking place — is it temporary or will it be permanent?

Although it is too soon to know for sure, I think it is possible that these factors could cause London to lose its preeminent position in the world wine market.  I see indicators in the decline of the Australian industry (complicated by other factors, I know — but the collapse of the British market is part of it) and the recent global focus on Argentina and its excellent wine values (both Wine Spectator and Decanter make this point).

Although Argentinean producers are looking to export wherever they can get a foot in the door, my strong sense is that they see their future in the U.S. market more than Great Britain.  Perhaps they are at the head of the pack as the world wine market resets and proceeds on a different path.

[Note: Wine Spectator includes 18 tips on stretching your wine dollar. My favorite is tip #7: buy by the case and get a discount (page 55 of the April 30, 2009 issue).  Sound advice, although the particular example cited may miss the point: "A 10 percent discount on a $300 case translates into a saving of $2.50 per bottle. That adds up fast."  The problem, of course, is that the people who used to buy those $300 cases are cutting back the hardest and I'm not sure that $2.50 a bottle  is going to turn them around.]

Breaking In

I’ve written before about the British wine market, the most important marketplace in the world of wine.  Everyone wants a place on Britain’s Wine Wall, but breaking in isn’t easy to do, as a recent Decanter article and a conversation with one of my former students makes clear.

Decanter Discovers Washington Wine.

Many Washington winemakers are keen to try to get their feet in the door of European markets.  They figure that the time is right: the dollar is cheap and their wines are excellent. They cannot help but be pleased, therefore, with the July 2008 issue of Decanter magazine, which features an article about Washington wine by regional wine critic Paul Gregutt.  Three pages of text, maps, photos and wine reviews – it’s a nice package.  Several of the wineries mentioned even backed up the effort with two pages of advertising.  A really good display for Washington wines in the world’s most influential wine magazine.

But there’s a problem. British buyers know about these great wines now (more than ten wineries are mentioned including Columbia Crest, Seven Hills, L’Ecole 41 and Reininger), but only one (Columbia Crest) has current British distribution.  Want one of the other nine?  Call the winery in Washington State, the Decanter listing says. You’ve got to wonder how many buyers will do this and how many will just turn the page to the next New World wine – one that is actually available in Britain. You need publicity to get distribution, I know, but publicity without distribution doesn’t make the cash register ring.

On a different note, I have to wonder about the quoted price for the Columbia Crest Horse Heaven Hills Chardonnay.  Wine Spectator gives it 91 points and lists the price at $15.  The British price is apparently £19.53 or about two and a half times as much in dollar terms.!  It’s not going to be easy to break into European markets under these circumstances,

When Gallo Went to Europe

Gallo today is a classic American integrated wine multinational.  Although it is based in Modesto, in the heart of California’s Central Valley, and the bulk of its business is U.S. market, Gallo has complex international linkages.  Gallo sources wine from Italy, France, Australia and New Zealand and sells wine in Europe, Japan, and Latin America.  But it wasn’t always that way.  Gallo’s was drawn into the global marketplace in the 1980s, attracted by the markets in Britain and Germany.

I asked my former student Steve Emery to tell me what happened when these American wines (and American wine ideas) invaded Europe.  Steve is CEO of Earth2O, an Oregon company that bottles and distributes water from pristine Opal Springs near scenic Bend, but in the late 1980s he was Director of Sales for Gallo’s program to establish its varietal wines in England, Ireland and Germany.  His experiences say a lot about the nature of global wine then and now and the problems of breaking into new markets.

Getting Gallo into Europe was difficult, Steve told me, although ultimately successful.  Even though Gallo is a huge presence at home, it was an unknown quantity abroad.  I remember seeing Gallo wines on the shelf of my local wine shop when I taught in England in 1989 and I was surprised at the price point.  Gallo wines seemed expensive to me, about the same price as the most popular French and Italian wines on the shelves.  I expected Gallo to be a cheaper brand like it was at home.  But the advantage of lower price wasn’t really possible in the British market, given such obvious barriers as transportation costs and not-so-obvious hurdles such as the British wine tariff.

Many countries tax wine imports, whether to collect revenue, protect domestic winemakers, or try to shift consumption to other commodities such as local beers and spirits.  Britain is not unusual in this regard.  What makes Britain different is that the tax is relatively high and levied on a per-bottle basis (and only on non-EU wines, of course).  Britain collects more than $2 on each bottle of imported. (£1.29 according to a recent Rabobank report).  The flat per-bottle tax has a way of shifting the demand for wine towards more expensive products.  A $2 tax on a $2 wine represents a 100 percent tax. For a $4 wine, a $2 tax increases the price to $6, a 50 percent rise.  For a $10 wine, the tax raises the price to $12, only a 20% increase.  So the tariff falls heaviest on lower price goods and shifts the market upscale towards better or at least more expensive bottles and wines produced in the EU, not the New World. The cost advantage that Gallo enjoyed  in the United States was partially offset by the British tariff regime.

But that wasn’t the main problem, Steve told me.  The British supermarkets were savvy retailers – some of the wine buyers were highly trained Masters of Wine – the highest designation in wine education.  But they were organized to purchase and market wines based on geographic region rather than brand or type of wine.  As Steve says, they didn’t think in terms of brands (apart from the obvious fact of their own store brands).  This is true even today.  If you go into a Marks and Spencer store in Britain, you will find a world of wine available, but the wine is mainly organized and labeled according its place of origin rather than a US-style brand.  The wine’s “pedigree” (Friuli D.O.C. Grave Merlot, for example, or Macon Rouge, appellation Macon Rouge contrôlée) is listed in big letters, but the maker’s name and the brand – custom bottled for Marks and Spencer – are tiny by comparison.  The wines that Gallo sent to Europe were California wines, a useful geographic designation, but Gallo was the brand that defined the wine, not California.

British wine marketing was also different in other ways.  Steve told me that the British weren’t applying the basic Wine 101 lessons he learned with Gallo in the U.S. – lessons about where to put the most profitable wine (right at eye level on the shelf), where to position your target products in a wine cooler (on the right, where most people will look and reach first) and the many strategies of point-of-sale merchandising. They also introduced print advertising to the wine market successfully.

Gallo had to adapt, Steve said, to be successful in the foreign environment, even replacing the practical screw caps on its least expensive wines with more traditional cork closures (creating a shortage of corks in the process).

The German Problem

Germany was even more difficult, Steve said.  That’s easy to understand given the focus on bargain basement wines.  It doesn’t seem like most German buyers are interested in paying for a brand.  Low price seems to be the main factor and cheaper wines were readily available, Steve said, from Germany, Italy and France.  The supermarket wine buyers didn’t want to talk to him, Steve said, so Gallo resorted to guerrilla  marketing.  They got into the stores through the meat department, using a technique called cross-merchandising.  They sold the wine as the perfect accompaniment to beef, chicken and fish rather than wine alone.  Every meat purchase was therefore a potential wine sale as well.  You are probably familiar with cross-merchandising yourself, even if you’ve never heard the work before.  It is the process that has placed small displays of wine all over your supermarket, so that you never miss an opportunity to pair up wine with whatever you actually came to buy.  The Germans seem to understand cross-marketing very well now.  I visited my local Trader Joe’s this morning and found wine everywhere. I think there was probably more wine spread throughout the store than in the wine section itself.

The wine business is very competitive and Gallo found that the “rules of the game” were much different in Europe.  Wine is regulated as an alcoholic beverage in the U.S., so every aspect of its sales is subject to federal or state regulation.  In Europe, however, Steve said, wine is just another product and the competition is much freer.  That’s why he was able to bargain with the meat department managers in Germany rather than go through the wine buyer department.

Gallo was very successful in Britain and in Europe and many other American wine companies have followed them, but that hasn’t eliminated the challenge of breaking into new markets.  I wish our Washington winemakers good luck in their well-timed assault on the Old World markets. It’s not going to be easy.

Sideways meets Bridget Jones

It is easy for wine enthusiasts to get carried away sometimes and to over-think the whole idea of wine. Sure cure for thinking too much: go to a movie.

The Sideways Effect

Most readers will already be familiar with the Sideways effect, named for the 2004 motion picture of the same name. In this film one of the protagonists, Miles, expresses a deep love for Pinot Noir and a complete disdain for Merlot. He loves Pinot because it is so fragile …

“It’s a hard grape to grow. As you know. Right? It’s, uh, it’s thin-skinned, temperamental, ripens early. It’s, you know, it’s not a survivor like cabernet, which can just grow anywhere and thrive even when it’s neglected. No, pinot needs constant care and attention. You know? And, in fact, it can only grow in these really specific, little tucked-away corners of the world. And only the most patient and nurturing of growers can do it, really. Only somebody who really takes the time to understand pinot’s potential can then coax it into its fullest expression.”

Merlot, by contrast, must be simple, sturdy, unsophisticated, easy. Anyone can make Merlot. Who wants to drink that — loser wine. (Wine geeks will remember that Miles’s most treasured wine — the one that he desperately drinks out of a styrofoam cup in a moment of self-pity — is ironically a mainly Merlot Cheval Blanc from Bordeaux.)

You may love the film or hate it, but its effect on the wine market is well known: it took an emerging Pinot Noir trend and magnified it, making Pinot the hottest grape in the vineyard. And it contributed to the decline in Merlot sales, too. It’s interesting that a movie could so shape the image of these wines as to produce significant market effects.

But that’s here in America. This could never happen in Britain, where wine consumers are more sophisticated.

The Bridget Jones Effect

But wait. It has, according to an article in The Telegraph. Chardonnay sales are slumping in Great Britain and British wine critic Oz Clarke blames it on Bridget Jones, the movie character who drowns her troubles in glass after golden glass of cheap Australian Chard. “Until Bridget Jones, Chardonnay was really sexy. After, people said, ‘God, not in my bar.” according to Clarke. Now, I guess, it’s loser wine like Merlot.

“Bridget Jones goes out on the pull [WineEconomist translation: singles bar scene], fails, goes back to her miserable bedsit, sits down, pours herself an enormous glass of Chardonnay, sits there with mascara running down her cheeks saying, ‘Dear diary, I’ve failed again, I’ve poured an enormous glass of Chardonnay and I’m going to put my head in the oven.’” Clarke writes, “Great marketing aid.”

A retail market analyst estimates that 7.5 million fewer shoppers picked Chardonnary this year in Great Britain. Sales of other white wines such as Sauvignon Blanc and Pinot Grigio have risen.

The biggest direct effect is in Australia, the source of much of Britain’s popularly priced Chardonnary. Foster’s has reportedly announced that it will not pay more than about $300 per ton for bulk-wine Chardonnay grapes next year, a low price and bad news for growers there. That will put the squeeze on them and they must wonder at the strange logic of the wine world where they suffer because Bridget Jones can’t seem to meet the right guy.

Wine and Identity

I haven’t seen the Bridget Jones films but I’ve watched Sideways and it is pretty clear to me that wine is a powerful image in the film because it is so obviously a metaphor for the main characters. Miles is just like the Pinot Noir that he describes — fragile, tragic and perhaps (and only perhaps) worth the effort that it takes to reach him. Jack, his gregarious, promiscuous buddy, really is Merlot. Easy, simple, stupid at times, and very very popular.

The larger lesson to be learned from all this is the power of identity in consumer behavior. Affluent consumers don’t purchase products so much as they construct personal identities. Goods and services are not ends but means. This is true in many product areas (homes, fashion, autos), so why shouldn’t it be true for wine, too.

Although we may like to think that it is the wine that is the focus of our passion, the Sideways and Brenda Jones effects suggest that identity — how wine makes us think and feel about ourselves — may sometimes be more important than the wine itself in shaping the decisions that wine drinkers make.

The Sub-Prime Wine Crisis

What does the sub-prime mortgage crisis have to in common with the market for wine today? More than you might think! Read on …

Liquidity Problems

Here’s a simplified version of the sub-prime mortgage crisis narrative. A housing bubble masked the inherent risk of the mortgaged-backed securities that financed the bubble itself. Investors were unable to fully assess risk because the complicated financial vehicles were not very “transparent” and the rating agencies did not prove to be trustworthy guides.

When the crisis came, liquidity dried up and the market deflated (crashing in some cases). The solution to the problem, many think, is to increase transparency — to make it easier to figure what is in a mortgage-backed security and how to assess its risk and return.

Some wine buyers will find it easy to relate to elements of this story, according to the Project Genome study recently released by Constellation Brands (I have written about Project Genome in my post “What are wine enthusiasts looking for?”).

According to this study, the largest single group of wine consumers are”overwhelmed” by the choices confronting them and cannot adequately assess the risk they face when staring down a crowded supermarket wine aisle or endless restaurant wine list. Their “liquidity crisis” is a real one — they are afraid to invest in complicated wine products due to a lack of confidence in their knowledge and lack of transparency regarding what’s really in the bottle. Intimidated, they buy a lot less wine than other groups. They lose and winemakers lose, too.

Project Genome estimates that overwhelmed consumers represent 23% of wine buyers, but make just 13% of all wine purchases. They are the “bottom of the pyramid” of wine and many industry people figure that a fortune awaits anyone who taps this market.

Making Wine More Transparent

So what’s the best way to make the wine buying process more transparent and end the overwhelmed consumer’s liquidity crisis? Better information is one approach. Wine critics are the bond rating agencies of the wine market. Their scores give many wine buyers the confidence they need to make what really is a risky purchase. At their best, wine critics serve a useful function of reducing uncertainty about what’s in that bottle and whether it is worth the price.

But there are dozens of wine critics and their ratings, using different scales and ranking protocols, do not always agree and are not always a clear guide. How many disappointing wines have you bought because of the “89-point” rating on the shelf tag? It only takes a few highly-rated losers to discourage an overwhelmed buyer from taking a chance.

Wine critics are part of the answer, but they are also part of the problem. What other options are available? The May 15, 2008 Wall Street Journal included an interesting article by Charles Passy (the “Cranky Consumer” columnist) that examined how some wine retailers are trying to demystify wine. “For Novice Shoppers, a Little Wine 101” describes four retailers, WineStyles, Total Wine & More, The Grape and Costco, and their different marketing strategies (I wrote about Costco’s system in an earlier post, “Costco and Global Wine“).

I’ve been to a WineStyles store so I can give a personal report. The store is arranged according to wine style profiles (crisp, silky, rich, etc.) rather than varietal type, production region or retail price. So if you know you like a crisp wine, you go to that wine rack and you find wines such as Washington Riesling, Chilean Sauvignon Blanc and South African Chenin Blanc. You are directed to the style you like and hopefully encouraged to try unfamiliar types of wine. If consumers can actually figure out what they like about wine and if they develop confidence in the style categories, this system helps them make better and more self-assured choices.

Food and wine writer Cynthia Nims reports on another strategy on her blog, Mon Appétit. Cynthia discovered a line of branded wines called “Wine that Loves” that are intended to simplify the wine-food pairing choice. Are you looking for something to serve with roast chicken? Pick up “Wine that Loves Roast Chicken.” Fish tonight? Look for “Wine that Loves Grilled Salmon.”

The chicken wine is “Predominantly Garnacha” according to the label — not a wine that an overwhelmed consumer would probably risk as a varietal choice, but might try and like in this format. The salmon wine is a Pinot Grigio/Garganega/Chardonnay blend. I like this concept because it links wine to food, which is very important, and encourages experimentation. It will be interesting to see if buyers embrace it or if it is just a novelty that soon fades.

The British System of House Brands

Great Britian is the most important wine market in the world in part because British retailers have developed a number of successful strategies to increase wine buyer confidence. Supermarkets are the big players in the U.K, and house brands are key to their wine strategies. Tesco, Waitrose, Sainsbury’s and Marks & Spencer all have their own brands of wine (sourced from around the world). Buyers are willing to try an unfamiliar wine because their confidence in the supermarket chain transfers over the the wine.

(It doesn’t hurt that at least some of the house brand wines are very good, of course. A M&S house brand wine is one of the highest-rated New World Sauvignon Blancs in the current Decanter ratings, for example.)

Trader Joe’s uses this strategy here in the U.S. (I have written about this in 300 Million Bottles of Two Buck Chuck). Trader Joe’s sells vast quantities of Charles Shaw (a.k.a. Two Buck Chuck) wine each year and the key is reputation. Not the wine’s reputation — the store’s. Trader Joe’s has a reputation for value and quality, which lends credibility to their house brand wine. As I have said before, the miracle of Two Buck Chuck isn’t that you can sell a wine for $1.99, it is that you can get anyone to buy it. The $1.99 price point just screams “rotgut.” But people happily buy wine at Trader Joe’s  at price points they would never think of considering at Safeway or Kroger because they have confidence in the TJ brand.

My local upscale grocer, Metropolitan Market, is trying the house brand route, apparently with success. For the last year or so they have occasionally stocked limited-release house brand wine specials such as the 2007 Columbia Valley “White Selection #1″ shown here. The wines go for $8 per bottle or $88 per case and they are stacked in big displays that remind me of, well, Trader Joe’s.

These house brand wines are kind of interesting. The first release of the year was a Rosé — hardly an easy sale given upmarket consumer resistance to pink wines (too close to White Zin!) and the chilly spring we have had — and now a white that turns out on close inspection to be an oak-free Semillon blend. I like Semillon quite a bit, but I don’t think you could sell it by the case at a neighborhood grocery store with a traditional brand name and varietal label. But “Met Market White #1″ and the Rosé are products that buyers seem to embrace as safe bets and good values because of the store’s reputation for quality.

They fly out the door, according to the satisfied customers in line with me last week. You might have trouble selling them as ordinary branded varietals, but they go down easy as trusted house brand wines. The British know the wine game really well. We are smart to learn from them.

Confidence Game

Everyone is trying to solve the overwhelmed consumers’ liquidity problem. Here in the Pacific Northwest we have consumer friendly labels like House Wine (produced by the Magnificent Wine Company) and Wine By Joe, an Oregon brand. Like the Met Market generics, these are good quality upmarket answers to the question, what should I buy to drink tonight? The reputations these brands have developed for value and quality makes buying their wines a comfortable experience for many consumers. (My Costco sells the House Wines brands by the case.)

Take a close look at your supermarket wine aisle and I think you will see a lot of products designed to make wine easier to understand and buy. With so much creative energy at work here, I am confident that the needs of overwhelmed wine buyer market are being well served. Maybe they’ll stop being overwhelmed and their liquidity crisis will end. I wish I had the same confidence about the financial markets!

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