Premiumization: Is This the Wine Market’s New “New Normal?”

Is the current U.S. wine market the new “new normal” — can the recent upmarket shift in wine sales be sustained into the future? Two recent Wine Economist columns have detailed the surprising bifurcation of the U.S. wine market and tried to understand what forces are behind it. Wine sales below about $9 are stagnant or falling while upmarket sales revenues are increasing, with the largest percentage rise in the $20+ segment.

This is a surprising state of things, I argued two weeks ago, because the conventional wisdom once held that the Great Recession had created a “new normal” that centered on trading down behavior and discounting strategies. Not many people argued that we’d be “trading up” in the post-recession world.

And, as I noted in last week’s column, it is not clear that it is a simple return to previous behavior. I analyzed several theories for the change and concluded that none of them told the entire story, but together they explain the situation fairly well. So now we have to ask if those trends will continue — if the new market structure is the new “new normal” — or if the upmarket movement is unsustainable.

My answer — typical of an economist — is that it depends. It is really too soon to tell what will happen in the long run because there are so many unpredictable factors to consider. But since I asked this question I feel I ought to give more of an answer, so here’s my attempt at crystal ball gazing.

It’s too soon to tell about the U.S. market in the long run, but the current pattern is likely to be sustained for the medium term, although not necessarily due to the same factors that created it in the first place. Here’s my reasoning.

Decline and Fall of Down-market Wine

Inexpensive wines are not going away, but it seems unlikely that they will soon return to solid growth. This might be because of the alleged “bad wine” effect that I talked about last week, but it is more likely due to supply-side effects.

With water issues rising to the surface almost everywhere and higher irrigation costs in many places, the economic sustainability of low-cost wine grapes is in serious doubt at current prices. Jeff Bitter’s presentation at this year’s Unified Symposium in Sacramento included photos of acres of healthy Central Valley grapes left to rot on the vine because they were not worth the cost of harvest this year and probably not worth irrigation costs next year.

What is the future of these vines? Thousands of acres of vines have been grubbed up in California in recent years to make way for other crops with higher potential value — almonds and pistachios are the most frequently cited crop alternatives, but I’m sure there are others.  Imported bulk wines can easily fill in the gap left by falling California production in the short run, but sustainability issues (both economic and environmental) are a global phenomenon.

Low-cost wine grapes (and the wines they produce) are not going away, but there is limited incentive to invest here and so the focus is upmarket, where margins are better and business sustainability is more feasible.

Up the Down Staircase?

The upmarket movement in wine sales is likely to be sustained at least for some time because it is driven by factors affecting both demand and supply that are not specific to the U.S. but part of strong global trends. The supply-side element is easy to understand. Intense competition has cut margins on basic wines to the bone (and even deeper than that in some markets). Follow the money, Deep Throat said, and wine producers are listening to that advice now more than ever.

Once again, that doesn’t mean that basic wines and the bulk wine trade that has evolved around them are going away. It is simply that this is not the market segment that will get investment in future. Producers are likely to focus even more on the premium, super-premium and ultra-premium segments in the future. Every wine producer I have talked with around the world is focusing on moving up the up staircase and plotting effective distribution and marketing strategies.

On the demand  side I would point to the increasing importance of retailers like Trader Joe’s and Whole Foods and their many upscale local market competitors that attract customers by providing them with a sense of authenticity and affordable luxury in the quotidian consumption experience.

Products of origin and artisan creations with sustainability credentials — these are the hallmarks of the new retail environment and upscale supermarkets and a growing number of their customers seek out wines that fit that profile. Even hard-discount Aldi is playing along on the wine aisle, providing unexpectedly premium wines in their U.K. stores.

Bronco Busting

Don’t believe that the shift is important? Well, it wouldn’t be the first time that I’ve been wrong, but I think you will find evidence all around you if you look for it. Let me give you just one data point to get you thinking.

Consider the Bronco Wine Company, the famous maker of Two Buck Chuck and many other inexpensive wines. Bronco chief Fred Franzia once said that no wine should cost more than $10 and he built the 4th largest wine company in the U.S. by making those wines both for his own labels and, under contract, for other firms.

Where is Bronco headed today? Well, Two Buck Chuck is still in the picture and I think it is probably still selling about 5 million cases a year as it was the last time I wrote about it. But Bronco is busting out of that market segment via a variety of new products that, while they don’t aim for Screaming Eagle or DRC cult status still fit the profiles I’ve outline here. Several of Bronco’s wines illustrate the upmarket trends that I see for the future, including Garnet and Green Truck.

Garnet Vineyards are maybe not what you’d expect from the maker of Two Buck Chuck. They are all about cool climate Chardonnay and Pinot Noir from Monterey and more cool climate Pinot Noir from the Sonoma Coast. The highly-regarded Alison Crowe (author of the popular blog The Girl and the Grape)  makes the wines . The Garnet Rogers Creek Vineyard Sonoma Coast Pinot Noir ticks the boxes key to buyers seeking authenticity and sells for $29.99 on Amazon.com, about ten times the price of a bottle of Two Buck Chuck.

(Editor’s note: Bronco is the sales agent for Garnet but does not make this wine — see Alison Crowe’s comment below, which clarifies the relationship. Thanks to Alison for her correction.)

The long list of wines that Bronco produces and/or distributes includes six different organic wine brands plus a number that are vegan-friendly. Green Truck wine from Mendocino County is a good example. The wines are made from organic grapes and when I searched to see the nearest retailer to me there was Whole Foods near the top of the list.

Buckle Up!

Wine is looking up! The new normal will focus on wines that tell as good a story as other contemporary market products, such as craft beers and spirits and locally-sourced food products. It’s a great opportunity for wine producers, but the market is very competitive and will only get more so.

Buckle up!  It’s going to be a wild ride.

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I thought you might enjoy this 2007  video of  wine critic Oz Clarke and “Top Gear” presenter James May meeting Bronco’s Fred Franzia. Their reaction to Two Buck Chuck may surprise you. Cheers!

Trading Up? The New Conventional Wisdom About the U.S. Wine Market

Last week I wrote about the unexpected state of the U.S. wine market today, where sales of wines above about $9 are strong and growing while the below $9 segments are stagnant or in decline. Thinking back to the dismal state of the wine market a few years ago, with trading down and heavy discounting, the current situation comes as a big surprise.

What accounts for the transformation of the U.S. wine market? And is this the “new normal” that we should expect for future years? Let’s look at the emerging conventional wisdom on these questions.

Trading Up?

I don’t know many people who think that the shift toward more expensive wines is a simple reversal of the recession years’ trading down, although that doesn’t mean that it doesn’t happen. Consumers seem as price sensitive as ever, which is why store shelves are still papered with “shelf talkers” like the one shown here that beckon buyers with discounted prices.

Yes, discounting is still going on, although perhaps not quite at the same level as during the Great Recession. The best argument for trading up is that consumers who had an opportunity to sample better wines during the deep discount days and  liked them now are feeling more economically secure and are continuing to buy them at higher prices. I’m sure that this is happening to a certain extent, but I don’t think it is the whole story.  Consumers are simply too focused on price to have suddenly changed.

Price resistance means that most consumers aren’t willing to pay more for the same or similar wine, but they are willing to spend more for something different. Who is doing this?

The Millennial Theory

One theory holds that the changing shape of the wine market is driven by younger wine drinkers — we often call them the millennials here in the U.S. but I have also seen the term “echo boomers” used and Constellation’s latest Project Genome study calls them “engaged newcomers.” As a group they tend to buy wine less frequently than some other groups (they also drink spirits, craft beers and so on) but spend more per bottle. This is the opposite of my behavior as a young wine drinker and probably a good thing.

If what we think we know about millennials is true, then they can account for some of the trend towards higher price wine sales, but they are certainly  not the whole story.  They don’t explain the shift away from lower-priced wines because they were never the driving force there. And they cannot account for all of the upmarket shift because at this point they don’t buy enough wine to move the whole market this way. Millennials are part of the story, but not the whole answer. What else?

The Bad Wine Theory

One very interesting theory is that the relative quality of wine below about $9 has fallen, driving customers away in search of something better to drink. They have found it, too, in craft beers, ciders and spirits.

W. Blake Gray recently made this point in a column titled “Wine under $10 sucks. Should we care?”  Tim Atkin made a similar point about wine in the UK market.  It’s very difficult to find decent wine below £5, he says, which is a change from the past.

A recent article on Bibendum’s website tells the sad UK story, which this graphic illustrates. If you want to get value in wine in the UK, it seems you have to move upmarket. The actual cost of the wine is more than a third of the total cost of a £20 bottle, but less than 10% of the cost of a £5 wine. Shocking!

This deteriorating value of inexpensive wines, if true, is a surprising situation. Only a few years ago we experienced something of a revolution when the character of commercial quality wine improved  quite dramatically (I called it the Miracle of Two Buck Chuck in my book Wine Wars). A structural surplus of decent wine and grapes on the U.S. and world markets made it possible for winemakers to assemble products at low price points that rivaled some brands in higher price segments. The unexpected value they provided drew millions of consumers into the wine markets Is poor quality and value pushing them away?

Well, poor value is certainly part of the answer in the U.K., where high wine duties have distorted the market and undone much of the miracle of the past. And I have some friends in California who complain that cheaper and lower quality bulk wine imports are now filling bottles of California-brand wine. The brand is associated with California (like Barefoot, for example) but the wines themselves come from many places (and are so-designated on the packaging).

Have quality and value suffered? I’m an economist not a wine critic, so I will leave it up to you to decide, but some of my California friends think that’s what’s happened. If this is true, then where is the better California wine going? Some of it is sitting in tanks, which are pretty full after a couple of generous vintages in a row. The rest? Some of it, I think, fills the bottles of wine brands specially created for the new market environment.

The Branded Age

This supply-side theory holds that smart wine executives have noticed that many consumers are willing to pay more for something different (and are put off by the commodity wines) and they have responded by creating new brands to fill specific upscale market niches. This helps explain the great proliferation of wine brands and even virtual wineries on the scene.

Each year I enjoy Jon Fredriksen’s talk about the state of the U.S. wine market at the Unified Wine and Grape Symposium, but recently I have noticed that his list of the hottest wine brands is full of unfamiliar (to me) names. These aren’t new wineries, simply new brands created by innovative existing large- and medium-sized wine firms.

Jon’s data suggest to me that these are some of the wines that are attracting buyer interest and pulling the market along. An example? Take The Wine Group, which is the second largest wine producer in the U.S. with 57.5 million case sales according to Wine Business Monthly. A few years ago I thought of them in terms of brands like Almaden and Franzia wines, which are  in that lower market tier that is stagnating today.

Now when I think of The Wine Group I think of Cupcake Vineyards, which at 3 million cases is small compared to Franzia’s 26 million, but perfectly fits that upmarket profile and is often priced right at or just above key $9-$10 threshold along with Apothic, 14 Hands and other hot brands.

Which Theory? The New New Normal?

No single theory explains what has happened and the market is full of special cases. Take Argentinian wines, for example. Customers are buying more expensive products from Argentina now in part because the cheaper labels have disappeared. With inflation still soaring and the exchange rate stuck, many Argentinean firms cannot afford to export cheaper Malbecs to the U.S., which shifts the center of gravity upmarket.

All these ideas (and others, too) are part of the explanation of today’s transformed market. It’s a perfect story of effects (or a train wreck, depending which end of the market you are in). Is this the new “new normal” and, if so, how long will it last? That’s a question for next week.

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Thanks to everyone who commented on last week’s columns — great ideas! Keep them coming.

The Surprising Rebound & Unexpected Bifurcation of the U.S. Wine Market

Let’s climb in my time machine and go back a few years to 2008-2009, when the impact of the global financial crisis was beginning to be felt in the wine markets. It was a pretty gloomy time and there was a lot of talk about the need to reset our expectations to the “new normal.”

Gone were the days of great expectations as everyone scrambled to cope with the changing economic and consumer environment. What did we imagine the future would hold? Well, opinions varied, of course, but the “conventional wisdom” generally revolved around a few dire trends.

Trading Down and Trading Over

One of the most-cited trends was trading down. It sure looked like wine consumers were pulling away from wines at higher price points and shifting to less expensive products — or even moving away from wine altogether. Here’s a video that captures the moment fairly well (it was the first time I was ever interviewed by an animated character)

Trading down seemed like an unstoppable force at the time, although I suggested that it was more complicated. I noticed the strength of the Barefoot wine brand and proposed that it wasn’t just the price of the wine that made it so appealing to recession-battered wine drinkers, it was also the casual image that it offered with its surfer dude footprint in the sand style.

No one wants to admit to themselves that they are trading down, I wrote. Not good for self-esteem. But we can all embrace the idea of trading over — over to a more relaxed, less serious (and incidentally also maybe less expensive) idea of wine. Relax (there is even a brand of Riesling called “Relax”) and just enjoy wine. That’s what I thought I saw in the marketplace.

The $20+ Dead Zone

Whether it was trading down or trading over, the result was the same: the $20 and up segment of the wine market was declared a “dead zone” where nothing moved.  People still drank more expensive wines, then just didn’t buy them. They “drank up” from their cellars rather than “trading down” at the wine shop.

Wineries found that many wine club members were pulling back from scheduled shipments. Restaurant wine sales took a very big hit, too, as consumers dined out less frequently and economized on wine purchases when they did. Restaurants coped by trading down themselves, putting more pressure on wineries.

Dumping, Discounting and Flash Sales

Some wineries held their prices and absorbed inventory accumulations rather than discount or dumped excess wine on the bulk market (where Cameron Hughes and others found some outstanding bargains for their customers). They saw price cuts as a one-way street. You can lower prices, but can you raise them back up again when good times return?  Some wineries split the difference by bringing out second labels to sell for less — chateau cash flow wines — while holding the price line on prestige brands.  Lots of mistakes were made along the way and some wineries fell out of the market.

Many discounting strategies were rolled out. Safeway stores began running promotions where $20+ wines could be purchased for 30% off the regular price (or 40% off with a 6-bottle purchase) — a clear attempt to reduce inventories in the “dead zone” category. A number of “flash sale” wine websites appeared that allowed wineries to sell off surplus stock quickly and outside of the usual sales vectors.

Sometimes wineries found themselves caught in competition with their own wines as buyers (wine club members, restaurants, a few distributors) dumped their stock back on the market, under-cutting carefully calculated producer pricing strategies.

There were some great bargains for buyers who recognized them (and had the credit card headroom to take advantage), but there were not very many true winners among wine producers, especially those in the higher price ranges. The frankly defensive strategy of generating cash flow while protecting key price points was the best that many wineries could hope for.divide

Up the Down Staircase

Would consumers shift back when the recession was over? Not many people held out hope for a reset of the reset. So the current state of the U.S. wine market, which Jon Fredrikson has called “A Tale of Two Markets” comes as something of a surprise.

The U.S. wine market has split in two as the table above shows. (The table shows recent data for off-premises wine sales as measured through the particular retail channels monitored by the Nielsen Company. These data are indicative of what’s going on in the broad market.)

While the market is expanding at a moderate +3.4% pace (at least it is growing, unlike wine markets in some Old World regions), there is a clear division between wines selling at prices below $9 and those that sell for more. Although the cheaper wines make up the majority of the market by volume, they are shrinking in dollar sales value, especially the $6.00 to $8.99 segment.

The New Conventional Wisdom?

More expensive wines, on the other hand, represent a rising market segment. All price segments over $9 are growing as per these data, with the fastest growth at the highest price point — $20 and above!

This is truly a dramatic turnaround for U.S. wine. What is behind this unexpected change?  I’ll survey the new conventional wisdom in my next column.

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BTW that’s a really old picture of me in the video — I hope that  I’ve improved with age since 2008. The Costco reference is a bit off in that interview, too. Costco sells wine at a low mark-up, but they don’t try to compete at the very bottom of the market as the video images suggest. I don’t think I’ve ever seen boxes of Franzia at a Costco, for example.

Exchange Rate Lessons from Australia’s Wine Boom and Bust

Kym Anderson (with the assistance of Nanda Aryal), Growth and Cycles in Australia’s Wine Industry: A Statistical Compendium 1843-2013). University of Adelaide Press, 2015. (Available as a free pdf download — follow the link above.)

ozKym Anderson’s new book on the five major boom-bust cycles of the Australian wine industry is a landmark wine economics study. Like all of Anderson’s work, it is data-driven and provides both the casual reader and focused student with a wealth of information.  A detailed Executive Summary is followed by 73 pages of analysis (and ten more of references), 86 revealing charts and more than 450 pages of tables.

Answers and Questions

I’m not sure I have ever seen such a detailed account of what happened to a wine industry, when, where and how. The data span the decades, regions, grape varieties, international regimes and economic cycles.  Such a wealth of information is valuable both for its ability to answer questions and for the way that it provokes them.

I won’t attempt to summarize Anderson’s big volume here (Andrew Jefford did a great job of this in his Decanter column) but I thought I might illustrate the sort of focused analysis that the book makes not just possible but convenient.  We are always looking for lessons from history and I think Australia’s wine business cycles are useful in this regard, especially the fifth cycle, which began in 1986 and continues today.

Exchange Rate Effects?

Anderson describes the recent collapse of the Australian wine industry as the result of a “perfect storm of shocks” including drought and rising irrigation water prices, the global financial crisis, the rise of the Australian dollar (driven by mineral exports to China), increased competition from other wine-exporting countries, and China’s austerity policies (which have reduced demand for luxury wine products). He could have added vineyard  heat spikes, wildfires and the gradual but significant effects of global climate change to the list of challenges. Perfect storm, indeed!aud

Since we are currently experiencing a period of major exchange rate realignment, with the U.S. dollar on the rise and the Euro seemingly in free fall, I thought it would be useful to tease out the many ways that the Aussie dollar impacted its wine industry in recent years.  According to news reports currency instability was the hot topic at the ProWein wine fair this year, so analysis of the possible effects is timely. Here are some brief points taken from the Executive Summary.

  • The 1986 boom began, Anderson tells us, as a response to the historically low value of the Australian dollar (hereafter abbreviated AUD), which encouraged exports by reducing their price to foreign buyers. The AUD’s low value was due to falling prices for mineral exports.
  • Wine exports boomed, rising to 2.3% of all Australian exports by 2004.
  • Wine prices increased, stimulating vine plantings, higher production and more exports but higher prices also  limited domestic wine market growth making Australian producers more dependent on export markets.
  • Rising exports increased the incentive for investment in developing overseas markets for Australian wine, both through generic marketing and private brand promotion. Meanwhile, other countries also began to expand wine exports, too, contesting key market spaces.
  • The AUD began to rise in 2001 (driven by Chinese mineral demand). Competition in export markets made it difficult to pass through rising foreign exchange costs to export customers, so much of the burden was passed back in the form of lower AUD export receipts and, in due course, lower wine grape prices.
  • Meanwhile, the strength of the AUD made imports cheaper, including wine imports, which increased dramatically. Especially affected were Sauvignon Blanc imports from New Zealand and Champagne imports from France.
  • New Zealand Sauvignon Blanc became the best-selling white wine in Australia. Not the best-selling imported white wine. The best selling-white wine, period!
  • Wine grape prices collapsed and the value of vineyard land fell, in some cases to the same low value as unimproved farm land. This is the bust that the Australian industry is still recovering from.

Lessons for the U.S. Today?

The exchange rate isn’t the whole story of Australia’s fifth wine cycle by any means, but you can see that it had important effects. The long term instability in the exchange rate translated into booms and busts in wine exports, imports, wine prices, grape prices, land prices and so on.

Anyone who thinks the current rise of the U.S. dollar won’t impact the U.S. wine industry or have global repercussions should take a look at Anderson’s study of Australia. The U.S.story will be different, and the impacts less just because our domestic market is so much larger, but there will be significant impacts.

This is just one of the analytical threads in Kym Anderson’s important new book. I invite you to dig and see what questions his work raises and what lessons you can learn.

Stein’s Law and the Coming Crisis in Argentinean Wine

Stein’s Law, named for famed economist Herbert Stein, holds that if something cannot go on forever it will stop.  Unsustainable trends ultimately yield to the inevitable in one way or another.

Stein’s Law seems to be simply stating the obvious, but you would be surprised how many people find a way to ignore the obvious when it is in their interest to do so.  As Upton Sinclair wrote, “It is difficult to get a man to understand something if his salary depends on his not understanding it.”

Argentina’s Inflation Problem

And so we consider the case of the Argentinean wine industry. It’s not just the wine sector, of course, it’s the whole Argentinean economy, but wine is especially affected.  Something’s going to happen according to Stein’s Law, because it can’t go on forever as it has up to now, but it is hard to know exactly what.

The problem begins with Argentina’s high inflation rate. The official statistic puts the annual increase in consumer prices at around 10%, but this number is viewed with disbelief by the international economic community. The Economist magazine quit publishing the official figure in 2012, saying “Don’t lie to me, Argentina” to the officials there. The most commonly cited estimate of the actual inflation rate is 25% per year.

Inflation is a sensitive political issue in Argentina as it is in every country that has ever experienced a hyperinflation crisis (think Germany, for example). Some in Argentina go to great lengths to deny the obvious reality of inflation.

The story (which may be true) is told about a McDonalds restaurant in Buenos Aires that displayed all the usual products on its big backlit menu board except the signature Big Mac. Where’s the Big Mac? Oh, we have that price hidden around the corner so that no one will see it — especially the people from The Economist magazine who use it to estimate the purchasing power of the peso in their Burgernomics index!

Inflationary Squeeze

As a recent article on The Drinks Business website suggests, high inflation is putting the squeeze on Argentina’s wine producers. (The squeeze is made worse,  I understand, by government policies that restrict imports of products used in wine production as part of a general policy to control foreign exchange reserves). Production costs (grapes, labor, etc.) may have doubled over the past four years, putting a squeeze on margins.

It is difficult to pass these peso costs along to consumers in the U.S., Canada, the U.K. and Brazil, the main export markets. Consumers are price sensitive and while the average export price of  varietal Cabernet and Merlot wines have risen by 7.2% and 24.8% respectively in the past year, this provides only limited relief from rising costs since Malbec takes the lion’s share of the export market and its dollar export price has risen by just 1% in the last year and by an average of only 2.8% per year since 2009.

Purchasing Power Inaction

The textbook remedy to this situation is for the foreign exchange value of the peso to fall to achieve what economists call Purchasing Power Parity. In a system of market determined exchange rates, according to the PPP theory, a 25% fall in the domestic purchasing power of the peso due to inflation should result in a 25% decrease in its foreign exchange value.

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And indeed the peso has depreciated, but not by nearly enough to overcome the inflation difference between Argentina and the four main export markets. The peso has fallen in value by about 20% in the last two years, if we look at the official exchange rate, so each dollar of export earnings brings in more pesos,  but inflation-driven peso costs have increased by much more.  That puts a real squeeze on margins. This can’t go on forever — something has to give.

[I’m told that the black market exchange rate is 8 pesos per U.S. dollar, far below the official rate of about 5 per dollar. Such a big differential is often an indicator of crisis to come.]

Something’s Gotta Give

What happens when a country gets itself caught in a squeeze like this? Well, the conventional wisdom is there needs to be a sharp currency devaluation followed by monetary tightening to control inflation. This is a painful process and Argentina has been through it before. What if the government ignores the conventional wisdom? Internal adjustment must eventually take place to restore competitiveness if external adjustment through the exchange rate is ruled out.

A recent Wall Street Journal article about real estate prices in Buenos Aires shows one pattern of adjustment. The dollar prices of luxury apartments have tumbled as owners seek to cash out of their real estate investments and buy into the more credible U.S. currency.  The WSJ reports that

In May last year, Argentine President Christina Kirchner strictly limited access to U.S. dollars and other foreign currencies in a bid to stem capital flight. With the Argentine peso facing about 25% annual inflation (government figures, widely discredited, set the rate much lower), and an unofficial exchange rate that has effectively devalued the peso sharply, demand is high for dollars.

These days, the main feature that foreign buyers say they look for in a Buenos Aires property has nothing to do with closet space or a wide terrace. It is a seller with a bank account outside Argentina to which they can legally wire funds. This is a way to get around having to convert any dollars wired into Argentina into pesos at the official rate, after which it is nearly impossible to convert back into dollars at the official rate.

Something will have to give in the wine industry, too, if the exchange rate doesn’t adjust and the currency controls continue. In the meantime, I think every effort is being made to control costs and to keep margins out of the red. But, as Herb Stein might say, this can’t go on forever so somehow it will stop.

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Herbert Stein may be best known today as father of Ben Stein, the actor, law professor, and columnist, but he was ever so much more famous in his day as a chairman of the president’s council of economic advisers

Little known fact: the Pabst beer company held an economics competition in 1944 (the year of the Bretton Woods conference)  for the best plan to sustain high employment in the post-war era. Herb Stein’s plan was named the winner from among the more than 36,000 entries. He was 28 years old and the prize was $25,000 — the equivalent of $330,000 today.

Fluid Dynamics: Charting the Global Wine Market

I’m in Innsbruck today, on my way home from the annual meetings of the American Association of Wine Economists. About 160 of us gathered last week in Bolzano, Italy, which is surely one of the most beautiful wine cities in the world, to ponder the state of the world of wine.

I’ll be writing about the meetings in future posts (and about fieldwork we did while in Italy, too),  but for now I want to focus on the conference’s final session, which was on the global wine market.

The gist of the session was that the global wine market is going through a period of seemingly chaotic change (hence the “fluid dynamics” title to this post). Several new trends are emerging and each of them can be tracked, but it is hard to know how they will interact in the global markets.

I’m not sure any one of the speakers (see list below) stressed the uncertainty of the dynamic interaction, but this was the message that came through to me.

Up the Down Staircase in Europe

In Europe, for example, there is some good news in the form of increased wine consumption among young people — a possible reversal in the secular decline in wine consumption in “old world” countries (a group that includes Argentina) which has been responsible in part for the global wine market surplus. A good sign that demographic trends may be changing in a positive way.

On the other hand, there is bad news about the EU wine market reforms that were designed to dry up Europe’s wine lake by rationalizing the wine system there and forcing/permitting wine producers to compete head to head with new world wine companies. The recession’s effects are being used as a tool by anti-reform interests and it now appears possible or likely (depending upon who is talking) that the whole reform program may be ditched in order to stabilize grower incomes.

Although European consumers may be drinking more wine, it is not the wine that the reforms were designed to eliminate, so structural imbalances (and high budget costs) may soon return.

Bulking Up (and Down)

Australia is another dynamic wine region. While wine officials have high hopes for China in the future, the present is problematic. Bottled wine exports (with their higher value added) have dropped quite suddenly and more of the export demand is now being met with lower value bulk wine. This is not a step in the right direction for the long term, of course, although I’ imagine that some Australian producers are happy to export in any form.

Javier Merino from Argentina noted the recent growth in both Chile and Argentina (Argentina is the mirror of Australia, reducing its bulk wine exports and increasing bottle wine sales) as well as the economic problems that both nations face (exchange rate issues in Chile, inflation in Argentina).

China is on (almost) everyone’s mind, of course, as it appears to be one of the major growth areas for the near future, but Brazil and Russia are growing, too, and on the radar for countries with extra wine to sell (which is more or less everyone).

This Changes Everything

But South Africa may be a different story. Nick Vink said that he believes that South Africa’s markets of the future are Africa and India (not Britain and the US) as wine consumption rises in these regions and favorable wine market reforms are implemented (a particular problem in India, I believe, but probably in many parts of Africa, too).

Wine markets shifting to Shanghai? That’s interesting. To Nairobi? That’s very interesting! Nonlinear dynamic systems are very sensitive to initial conditions and the Africa shift (or any of the other changes mentioned here) could very easily “change everything” in faraway corners of the world of wine.

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Here’s a list of the wine economists who spoke at the session on the Impact of the Economic Crisis on the Global Wine Market

  • Kym Anderson (University of Adelaide, Australia)
  • Johan Swinnen (University of Leuven, Belgium)
  • Nick Vink (University of Stellenbosch, South Africa)
  • Julian Alston (University of California, Davis, USA)
  • Javier Merino (Área del Vino, Mendoza, Argentina)

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The Wine Economist is going to take a short “Fourth of July” break to give me time to get my notes in order. We’ll be back in a few days with more from our fieldwork in Italy. In the meantime, run out and buy a copy of Wine Wars — it makes great holiday reading.

Is Bordeaux Still Relevant?

The brand is Bad Boy Bordeaux

Is Bordeaux still relevant? Relevant to those of us in the United States, I mean. It used to define fine wine, but now we don’t seem to buy much of it – the momentum’s shifted to Asia. It’s just another “brand” to many Americans, and not one that is especially successful.

Shanken News Daily recently published Bordeaux export data that suggest that interest in Bordeaux has dropped off sharply in the U.S., now the world’s biggest overall wine market but no longer a powerful player in the Bordeaux game.

Bordeaux By the Numbers

Germany leads the Bordeaux export league table measured by volume with 2.9 million 9-liter cases in 2010. China, Belgium, the UK and Japan follow, with the U.S. and Hong Kong lagging behind.

Things change markedly when the ranking is by value not volume. Hong Kong received €251 million worth of Bordeaux wine followed by the UK, China, Belgium, Germany and then the United States and Japan. U.S. Bordeaux purchases amounted to €99 in 2010, down from €247 in 2008 (when the U.S. was second only to the British in Bordeaux imports).  Outrageous pricing is the problem, the Shanken report suggests, and not just the dismal economic climate.

U.S. importers paid €99 million for 1.3 million cases of Bordeaux in 2010, or about a bit more than €76 per case. Germany, on the other hand, paid €111 million for 2.9 million cases, which works out to less than €40 per case — a very different kind of Bordeaux. By comparison, Hong Kong paid €251 million for 0.8 million cases of Bordeaux for an average of over €300 per case. Obviously there are many Bordeaux wines and markets, not just one. And obviously the United States is not a leading player in any of them.

Vintage Arias

I was thinking about all the fuss that there is about Bordeaux, the annual en primeur circus and the critic ratings of these wines and suddenly I found myself humming an opera tune. What can opera teach us about Bordeaux wine? Maybe nothing! But please read on anyway.

Bordeaux’s problem is that it is so expensive. Opera has that problem, too. Opera is arguably the most expensive form of art. Large capital expenditures are required (have you priced an opera house recently?). The sets and costumes used in high end opera are so expensive that they are stored for future use and rented out to earn a few extra bucks. Opera is enormously labor intensive, too.  You need soloist singers, a chorus and an orchestra and conductor. Dancers are often also required. Most of these artists have trained for years and years, so we might add in human capital costs, too.

There may be some type of regularly produced art that is more expensive to make, but I don’t know what it is. It isn’t a surprise, therefore, that opera evolved as an art for rich elites and the opera houses became gilt palaces of conspicuous consumption. The tunes made it out onto the street, of course, and into the parlor, too, when sheet music publishing caught on, but the focus was on Grand Opera, the elite patrons who watched it and the elite artists who performed it.

Opera video: Champagne not Bordeaux and J. Strauss not R. Wagner, but you get the idea.

Elites and Masses

Opera soon went global as the influence of European elites spread to the Americas and Asia. You can still see evidence of this cultural flow in the beautiful opera houses scattered across the world wherever colonial centers emerged  and in faded news articles about the famous (if fading) touring opera stars who performed in them.

Then technology in the form of broadcast radio and recordings (and then television, dvds etc.) brought opera to the masses. Opera on the radio here in the U.S. began  in 1931 with the first Metropolitan Opera broadcasts. The regular Saturday performances, sponsored for years by Texaco, became  part of the common experience of American life. Opera really meant something.

But technology, which initially democratized opera, eventually became a corrosive force, too. Technology allowed opera to move from free broadcast media to pay-to-listen satellite radio and pay-to-view HD opera showings in movie theaters.  More significantly, however, communications technology opened up an alternative universe of tunes to whistle and performances to enjoy.

Back to Bordeaux

Opera lost its privileged status and became just another artistic niche. Attention was paid, as it must, because of the quality of the works and the sacrifices of those who organized and performed them, but opera’s high cost became harder to justify. Attention became focused on the tried and true “war horses” that would be certain to sell tickets. New operas were still written and sometimes performed, but not as often as one might hope. Opera still means something, but it is not the same.

It seems to me that the attention given to Bordeaux bears more than some superficial similarity to our attitude towards opera, although I naturally do not want to push the analogy too far. Bordeaux, like opera, used to be a signifier of taste both among elites who could afford it and the masses who could not. (And probably still is in Hong Kong and China.)

Like opera, top flight Bordeaux is a victim of its successes and excesses – now so expensive that even rich Americans balk at the prices. The focus is on those wines at the top of the 1855 Classifications and a few others that have been identified by Parker and other critics.

It is What it Is

But Bordeaux is not the only game in town. The globalization that made Bordeaux prices soar has also opened up a world of excellent alternatives. There are a lot of great wines; maybe Chateau Lafite is as great as La Traviata, but only a few will have the money, taste and opportunity to sample either one at its best.

I started this essay by asking if Bordeaux is still relevant and I have decided that it is, but in the particular way that great opera is still relevant.   Opera no longer informs us about music (or culture)  generally as it once did. Opera is about opera now and that is good enough. And Bordeaux is (just?) Bordeaux. At least that’s how it looks here in the U.S.

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Reading this post, I think it is a fair criticism to say that I may have overstated the prior cultural significance of both opera and Bordeaux in order to make their current status seem like a great fall from grace.  This may be true about opera, but I’m not sure about Bordeaux. I see a great disconnect between the attention given Bordeaux and sales here in the U.S.

Another criticism is that I have ignored Bordeaux’s premier status in the wine auction market. This is true, although I am not sure if the fact that Bordeaux has become a prized “alternative asset class” investment necessarily weakens my argument.

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