Juice Box Globalization: Is this the Future of Wine?

applegrapeI’m back from the Unified Wine & Grape Symposium and busy trying to process all that I’ve learned while simultaneously catching up on the work that seems to have piled up while I was away. You know the feeling …

One theme of the seminars this year was the impact of globalization on the U.S. wine industry. I thought I would approach this topic in two parts. First, let me tell you a little of what I said on the Tuesday Globalization panel and then I’ll try to synthesize what learned from the discussion in a follow-up post.

Thinking Outside the [Juice] Box

My remarks were an attempt to get the audience to think about the impact of globalization in a broader context (it’s that liberal arts thing I do in my day  job as a college professor). Globalization isn’t a simple thing, I told the audience, and it isn’t a one-way street, either.

Don’t think that globalization is just competition from imports from other countries (although that’s part of it, of course) or just export opportunities abroad (as important as they can be). Globalization is both of them and many more influences, too.

One way to understand wine globalization a bit better is to look at globalization in another industry and seek out parallels and note contrasts, too. The apple industry is a bit further along the globalization process than wine, so maybe it reveals something about the road ahead.

The apple market has always been segmented, for example, but globalization has magnified the category distinctions and intensified competition within them.  Maybe that’s happening to wine? Here are three flavors of apple globalization that may or may not have lessons for wine business in the future.

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Juice Box Globalization

Consider the common juice box. If you have children or grandchildren or pack your own lunch you probably have these things around you all the time. Who knew that they embody an extreme form of globalization?

Take a look at the list of ingredients. Water, juice concentrate, etc. — no surprises there. But look where the juice concentrate comes from: USA of course but also Argentina, Austria, Chile, China, Germany and Turkey.  The apple juice concentrate that supplies the juicy fruit taste could come from any of five countries on four continents. Wow! That’s globalization for you.

The concentrate is a completely generic product (simply apple — not some particular variety of apple) traded in highly competitive global markets where cost (for standardized quality) is king and minor changes in exchange rates, transport costs and trade fees can have big effects.

As we consider the major increase in bulk wine shipments around the world — 45 percent of all New World wine exports are now big bag – big box bulk shipments – you can’t help but wonder if Juice Box globalization might be on the horizon.

Granny Smith Globalization

I’m old enough to remember when Granny Smith apples entered the U.S. market in 1971 (from New Zealand, as I recall) as a premium product. The Granny Smith was developed nearly 150 years ago by a grandmotherly Australian woman named Smith who discovered the natural cross in  her garden  and propagated it.

Initially, I think, the appeal of Granny Smith was that it was a premium Southern Hemisphere apple that filled a seasonal market niche in United States. Now however, Granny Smiths are grown pretty much everywhere and have lost some of their premium appeal. Highly integrated international apple companies source them from everywhere and distribute them everywhere.

Granny Smith globalization is not nearly so extreme as Juice Box globalization, but it is still quite dramatic. It reminds me of some of the bulk wine trade today, where certain varietal wine brands at certain price points are increasingly sourced from all over the world. Product differentiation in some segments is increasingly based upon brand rather than appellation or country of origin — which can change from California to Chile to Italy and beyond from year to year — just like the  Granny Smiths.

Honeycrisp Globalization

The best margins in the apple business today are probably found in what I call the Honeycrisp market segment where innovative super-premium products command high prices. The Honeycrisp apple was developed by the Agricultural Experiment Station at the University of Minnesota to be an eating apple with distinctive flavor and especially texture profiles that consumers seem to love. Patented and licensed, it has been a very profitable product.

The plant patent on the Honeycrisp has apparently expired, so production is increasing and prices have fallen a bit, but the idea behind it is still strong. Plant scientists in Europe have developed new specialized patent apple products to take over where Honeycrisp left off. Sue is especially fond of  Kiku and Kanzi, which I think are variations on the Fuji variety from Japan that were developed in Northern Italy and the Netherlands respectively and are grown in limited quantities here in Washington State.

Honeycrisp globalization is about product innovation and product differentiation. Follow the money: the tight margins created by Juice Box and Granny Smith globalization have nudged the Honeycrisp strategy into the spotlight.

Apples, Oranges and Wine

Is there anything to be learned about wine by thinking about apples? Or is it an “apples and oranges” thing? Well, my goal was to get people thinking and I admit that when I asked the big audience if they thought that there was something to the Juice Box (or Granny Smith or Honeycrisp) idea of wine I saw many heads nodding “yes.”

Not a surprise, of course. Apples and wine are specialized industries, but they are both businesses, too, and perhaps the similarities that people see are because of that. Maybe this little lecture has got you thinking, too. If so, come back next time when I’ll talk about some of the interesting ideas I heard from other speakers regarding globalization and U.S. wine.

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Here’s a video about Kiku — about as far from a Juice Box (in terms of product differentiation) as you can get.  Enjoy!

The Unified Symposium: Globalization, State of the Industry and Book Signing

I hope to see many Wine Economist readers next week at the Unified Wine and Grape Symposium in Sacramento, California. The Unified is North America’s biggest wine industry gathering. Here’s how the website describes it.

Built with the joint input of growers, vintners and allied industry members, the Unified Wine & Grape Symposium is held annually in Sacramento, California and is the largest event of its kind in the western hemisphere. Serving as a clearinghouse for practical information important to wine and grape industry professionals, the Unified Symposium also hosts a trade show with over 650 suppliers displaying their products and services to the more than 12,400 people who attend annually.

It’s a Really Big Show (as Ed Sullivan might have said) and I’ll be part of three events: two sessions and a book signing. I’ll paste the details of the sessions at the end of this post.

  • I’ll be on the panel for the general session on globalization and the U.S. wine industry that starts at 9 am on Tuesday, January 29,
  • I’ll be moderator for the “State of the Industry” panel that starts at 8:30 am on Wednesday, January 30, and
  • I’ll be signing copies of Wine Wars at the Wine Appreciation Guild booth in the trade show from 12:30 – 2 pm on Wednesday.  Please stop by Booth # 1620 and say hello if you are there.

Here are the details:

How the Global Wine Market Affects U.S. Production

U.S. growers and wineries are directly or indirectly impacted by the global wine market. Bulk wine movements ebb and flow based upon changes in currency valuations, relative costs of production, transportation costs, and supply and consumer demand. U.S. producers are accustomed to competition from branded imports, but numerous U.S. brands also source bulk wine internationally to meet cost-of-goods targets or to satisfy consumer demand for popular wine styles or varietal grapes in short supply. These trends affect U.S. grapegrowers and wineries, and this session will help you understand the market forces that will likely affect your business.

Moderator:

Jeff O’Neill, O’Neill Vintners & Distillers, California

Speakers:
Kym Anderson, University of Adelaide, Australia
Greg Livengood, Ciatti Company, California
Stephen Rannekleiv, Rabobank, New York
Mike Veseth, The Wine Economist Blog and The University of Puget Sound, Washington

State of the Industry

The State of the Industry session will provide a comprehensive look at every aspect of the wine industry, from what’s being planted to what’s selling. This 2½ hour session features highly regarded speakers and delivers incredible value for attendees who need to understand the market dynamics of the past year and are seeking insight into the market trends that will define the year ahead.

Moderator:
Mike Veseth, The Wine Economist Blog and The University of Puget Sound, Washington

Speakers:
Nat DiBuduo, Allied Grape Growers, California
Jon Fredrikson,
 Gomberg, Fredrikson & Associates, California
Charles Gill, Wine Metrics, Connecticut
Glenn Proctor, Ciatti Company, California

Red Mountain: Think Global, Drink Local

Red Mountain is Washington’s smallest AVA and perhaps its most distinctive. This compact patch of dirt (see larger map below) has produced the grapes for some of the state’s most celebrated red wines. There’s a real sense of place in the wines according to critics, so the “drink local” part of this post’s title makes sense. But think global?

Well, yes. The wine world is very interconnected; international influences are surprisingly common and take many forms. A visit to Red Mountain (Sue and I were joined by research assistants Bonnie and Richard) revealed two of globalization’s many local faces.

The Italian Job: Col Solare

You might not expect to find one of the legendary names of Italian wine here on Red Mountain, but as you motor up Antinori Drive towards the beautiful winery at the top of the road the association becomes clearer. Col Solare (Italian for Shining Hill) is a joint venture of Tuscany’s Marchesi Antinori and Washington State’s Ste Michelle Wine Estates (SMWE). There has to be a story. Here it is.

It must have been about 20 years ago that Piero Antinori came to America, looking for a wine-producing partner. He wasn’t interested in making an American super-Tuscan. He wanted to do what he thought America did best: Cabernet. So, as the Ghost Busters used to say, “who ya gonna call?” if you want to make great Cabernet? The answer was obviously André Tchelistcheff, the legendary wine maker at Napa Valley’s Beaulieu Vineyards and consultant to many important wineries (including Chateau Ste Michelle).

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Where in America can I make distinctive Cabernet? Tchelistcheff knew what advice to give because in fact he had already given it to his nephew Alex Golitzin who founded Quilceda Creek winery, which makes some of Washington’s highest-rated Cabernets. Tchelistcheff’s advice to Antinori was much the same and resulted in the partnership with Ste Michelle Wine Estates and the Col Solare winery we see today.

The first wines, starting with the 1995 vintage, were made with grapes sourced from several Columbia Valley vineyard sites and produced at a nearby SMWE facility, but eventually the focus on Red Mountain grew stronger and the showcase winery was finished just in time for the 2006 crush. The estate vineyards radiate like the rays of the sun on the hillside below the winery.

The partnership has grown since that first step. SMWE is now the sole importer of Antinori wines into the U.S. market and in 2oo7 the two partnered again to purchase the Judgment of Paris champion Stag’s Leap Wine Cellars. Quite a successful partnership — you’ve got to believe that Tchelistcheff earned his consulting fee.

Col Solare is interesting to me because of the global-local connection. The wine is Cabernet-based, as Antinori wanted, but with a distinct Red Mountain twist, which means that it includes a little bit of Syrah in addition to the usual Bordeaux suspects since Syrah does so well here.

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Col Solare is an impressive achievement. Everyone we talked with on Red Mountain seemed glad to have them there. SMWE and Antinori are good neighbors, good customers for the local growers and good advocates of Red Mountain and its wines.

Red Mountain isn’t a first class wine tourist destination yet — the infrastructure needs further development and another couple of winery tasting rooms wouldn’t hurt either — but Col Solare is already a destination winery and worth the trip.

The Swedish Solution: Hedges Family Estates

Another destination Red Mountain winery, Hedges Family Estates, shows a different aspect of the local-global connection. Tom Hedges is a local boy, who grew up in the Tri-Cities area before the region became known for wine. He studied international business at the University of Puget Sound and then at the Thunderbird grad school in Arizona. I guess you could say that he got into the wine business through the side door — through the business side. Here’s how the Hedges website explains what happened next. 

In 1986 … Tom and Anne-Marie created an export company called American Wine Trade, Inc., based out of Kirkland, Washington State; they began selling wine to foreign importers. As the company grew, it began to source Washington wines for a larger clientele leading to the establishment of a negociant-inspired wine called Hedges Cellars. This 1987 blend of Cabernet Sauvignon and Merlot was sold to the Swedish Wine and Spirit Monopoly, Vin & Sprit Centralen, the company’s first major client.

So you could say that Hedges Cellars was created to satisfy a global demand. Soon Hedges was breaking ground on his Red Mountain estate. Today Hedges is the largest family winery in Washington and was instrumental in establishing the Red Mountain AVA.

It really is a family operations. Tom and his French-born wife Anne-Marie are proprietors, brother Pete Hedges makes the wines, Tom and Anne-Marie’s daughter Sarah is assistant winemaker and son Christophe is director of sales and marketing. The wine portfolio ranges from the Hedges Red Mountain estate wine (a Bordeaux blend, but with a bit a Syrah) to the popular CMS blends and the House of Independent Producers wines.

Taken together I think Col Solare and Hedges Family Estates show the local-global nexus at its best, bringing international attention and expertise  to local wines and taking those wines to global markets. We are often told that globalization suffocates local enterprise, but these wineries show that it can, in the right circumstances, breathe life into them.

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I can’t leave Red Mountain without mentioning two other stops we made that day. It was about time for lunch when we finished our visit to Col Solare and that can be a problem since I don’t think there are any restaurants on Red Mountain.  But we had planned ahead for a picnic and so we headed to Fidélitas, where we bought a bottle of Charlie Hoppes’ delicious Semillon and dined out on the patio overlooking the vineyards. Turns out we didn’t need to bring food — Charlie had arranged for a local barbeque food truck to be available for weekend visitors like us — nice touch!

Our next stop was the world’s best vineyard tour. Michael and Lauri Corliss (of Corliss Estates) had arranged for us to meet Mike McClaren and James Bukovinsky, who were working in one of  the Corliss Red Mountain vineyards just up the road from Fidélitas  supervising  the mid-October harvest. We spent the best part of two hours with Mike and James, visiting every nook and cranny of the complicated site, learning about the careful matching of grape variety and terroir and tasting the perfectly ripe fruit. A real taste of Red Mountain.

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Thanks to Bonnie and Richard for their able assistance. Thanks to Wysteria Rush and Marcus Notaro at Col Solare and Tom Hedges and Deborah Culverhouse at Hedges Family Estates. Thanks to Michael and Lauri Corliss and Mike McClaren and James Bukovinsky for their hospitality.

Photos: (1) Col Solare winemaker Marcus Notaro (in his  classic Inter “Roberto Baggio” jersey), (2) the view down Red Mountain from Hedges, and (3) Mike, Tom and Richard in discussion at Hedges. You can see how tiny Red Mountain is on the map below.

Extreme Wine South Africa: The International Connection

One of the issues I wanted to explore during my visit to South Africa was the nature of international investment, partnerships and strategic alliances in that country.  There is so much about South African wine that is very old and traditional that I wondered how it was  dealing with the new and global. Here’s some of what I found out.

[This is part of a series of posts reflecting on my recent visit to South Africa.  Click here to see all the posts in this series.]

The International Connection

I am interested in international economic connections in particular because they have proved to be so important elsewhere in the Southern Hemisphere wine world. The modern wine boom in New Zealand really took off when the international wine trade was opened up, for example, along with opportunities for inward investment. Now the export-focused NZ wine business is largely foreign owned,  part of the Faustian bargain that generated New Zealand’s great success.

International investment, partnerships and strategic alliances have been important in Argentina, too, with European, American and Chilean relationships exerting strong influence.  Chile and Australia also have important stories to tell in this regard, too, but as they say on Facebook “it’s complicated” for these two countries — too complicated to be included here.

The Screaming Eagle Connection

What’s the story in South Africa, I wondered as I walked into CapeWine 2012? I didn’t have to wait long to find out. The opening general session featured remarks by Charles Banks, former managing partner of California cult winery Screaming Eagle,  and Troy Christensen, CEO of Accolade Wines, which is the phoenix that has risen from the ashes left behind when Constellation Brands offloaded their wine assets in Australia and Europe. Banks and Christensen were seen as leading indicators of international interest in the South African wine industry.

Banks received special attention, which probably isn’t surprising given his Screaming Eagle background. He is CEO of Terroir Capital, an investment group whose international holdings now include Mulderbosch Vineyard and Fable Wines in South Africa. He is very positive about South Africa’s wine future and obviously purchased assets there with an eye towards taking them to the next level.

Mulderbosch was already a global brand, he told the international audience, and he saw potential to increase quality and expand scale. With Fable Wines Banks intends to take a highly-regarded existing South African winery (Tulbagh Mountain Vineyard) and rename (to make it more pronounceable, Banks said), rebrand and re-position it in international markets. The focus is on old bush vine Chenin Blanc and red Rhone varietal wines.

So clearly South Africa is on the wine investment radar, I concluded, despite what American investor Bill Foley told Lettie Teague in a recent Wall Street Journal article. But how deep does the interest go?

A Half Dozen Answers

I got my answer and more at a seminar the next day that was organized and led by Mike Ratcliffe, the managing director of Warwick Wine Estate. Mike wanted to showcase international investment in the South African industry and he decided to do it through a tasting of the six wines shown in the photo at the top of this post and listed below. Each wine had a different international story to tell and together I think they give an idea of the variety of actors, interests and motivation.

 # Wine & Vintage
1 Waterkloof Circle of Life White 2011
2 Delaire Graff Botmaskop 2009
3 Glenelley Lady May 2009
4 Anwilka 2008
5 Fable Bobbejaan 2010
6 Vilafonte Series M 2009

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Waterkloof  Wines is the creation of UK wine executive Paul Boutinot, whose title is listed as “Custodian” on the website, which suggests that he is in this for the long run.  Boutinot, his UK business, is an ambitious and successful enterprise that produces, imports and sells wine; it was named Sommelier Wine Awards “Wine Merchant of the Year” four years in a row. The South African winery is a personal investment that reflects Boutinot’s passion for wine and sincere interest in terroir. I expect it will also benefit from his business background and distribution experience.

Delaire Graff Estate is the project of Englishman Laurence Graff, Chairman of Graff Diamonds International and I think you can see the luxury lifestyle influence in the video and on the website. The intention was to create more than a winery — Delaire is a destination resort that includes the winery of course, but also luxury lodges, a “destination Spa,” and two restaurants in an atmosphere filled with art and natural beauty.


Madame May de Lencqauesaing is the proprietor of Glenelley Estate and you are correct if you guess that she is French. She was born in Bordeaux and managed her family estate Chateau Pichon Longueville Comtesse de Lalande until its sale to the Roederer Champagne house in 2007.  Since then she’s focused on her South African estate, which makes “South African wine with a French Touch” according to the website.

Anwilka is a multinational partnership between South Africa’s Lowell Jooste of Klein Constantia, Hubert de Bouard, co-owner of Chateau Angelus in Bordeaux and Bruno Prats, former owner of another Bordeaux property, Chateau Clos d’Estournel. The bulk of Anwilka’s production of its Syrah-Cab-Merlot blend is exported, according to a Wine Advocate note, and sold through the Bordeaux marketplace.

The fifth wine was the Bobbejaan from Fable Wines , which I’ve already discussed. It added an American name to the mix and was the perfect prelude to the final glass.

Mike Ratcliffe saved his own project for the last act, but it was worth waiting for. Vilafonté  is an ambitious collaboration between South Africa, represented by Ratcliffe, and America in the form of head winemaker Zelma Long and head winegrower Dr. Phillip Freese. Long is legendary in California for her work at Robert Mondavi, Simi and her own family winery, Long Vineyards. Freese was head of winegrowing for Mondavi for 13 years and designed the first Opus One vineyards.  He has consulted with several South African wineries including Warwick. Like the other wines in the tasting, Vilafonté was a South African wine made to international standards and positioned for export.

These wines will be good ambassadors for South Africa, I believe, and represent intelligent (and generally delicious) international initiatives and collaborations. Each international investment brings something useful to the South African wine table while highlighting the best of what’s already here.

I know that there are other international investments in South Africa (Donald Hess’s investment in Glen Carlou springs to mind)  and I know that all of them have not worked out as well as the ones showcased here (I won’t name names). It’s too soon to tell how the story will turn out in the end, but on balance it seems to be a healthy collaboration so far.

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This is the last post in my series on South African wine, but look for the topic to come up again in other contexts. Thanks to Mike Ratcliffe for organizing the seminar and encouraging me to attend.

I hope you don’t mind the videos that I’ve inserted in the post. I found them on YouTube and I think they add something to the story.

Wine’s Future: Tight, Fat, and Uncorked

Hot, Flat, and Crowded was the title of New York Times columnist Thomas Friedman’s bestselling 2008 book about the future of globalization (Friedman released an upgraded 2.0 version of the book in 2009 — times change, I guess).

Global climate change, the rising global middle class and population growth were the three key issues that he identified in the book, which advocated a “green revolution” that would renew America.

In an interview with Fareed Zakaria (excerpted on the book’s Amazon.com home page), Friedman exlains that

There is a convergence of basically three large forces: one is global warming, which has been going on at a very slow pace since the industrial revolution; the second–what I call the flattening of the world–is a metaphor for the rise of middle-class citizens, from China to India to Brazil to Russia to Eastern Europe, who are beginning to consume like Americans. That’s a blessing in so many ways–it’s a blessing for global stability and for global growth. But it has enormous resource complications …

And lastly, global population growth simply refers to the steady growth of population in general, but at the same time the growth of more and more people able to live this middle-class lifestyle. Between now and 2020, the world’s going to add another billion people. And their resource demands–at every level–are going to be enormous. I tell the story in the book how, if we give each one of the next billion people on the planet just one sixty-watt incandescent light bulb, what it will mean: the answer is that it will require about 20 new 500-megawatt coal-burning power plants. That’s so they can each turn on just one light bulb!

Recently I’ve been thinking about the “big picture forces” that are shaping the future of wine and Friedman’s unholy trinity keeps coming to mind. If the world is becoming hot, flat and crowded, then obviously these forces will affect the world of wine, too. But what other forces are involved? What are the key wine-specific factors that should be considered when looking to the future?

After giving this question some thought, I’ve settled on a trio of trends that are inspired by Friedman’s book and in fact overlap with his list just a bit. Over the next few weeks I’ll explore the the implications of a wine world that is Tight, Fat, and Uncorked. Here is a brief introduction.

Tight [Markets]

Wine markets go through the sorts of cycles that are so common with agricultural products. The Turrentine wine brokerage firm has formalized wine’s particular cycle in its famous “Wine Business Wheel of Fortune.”

The period of low and falling wine prices, which brought so many consumers into the wine market (and pushed some growers and makers out of it) has come to an end here in the U.S. and prices are on the way up. Markets have already started to tighten up and some are close to seizing up. The low price part of the cycle was unusually long (for reasons I’ll discuss in my next post) and the cycle’s tight turn may be long, too.

Tight markets will affect the whole wine supply chain and impact different parts of the market differently. We haven’t seen wine markets this tight in a while and it’s going to be interesting to see what happens.

Thick Around the Middle

The World is Flat is the title of another Thomas Friedman book and when it came out I boldly declared it Globaloney (which is the title of one of my earlier books).

Friedman’s “flat” back then referred to global competition and the mythical “level playing field” where everyone competes with everyone else. Geography didn’t matter any more, Friedman seemed to suggest, because some smart guy in Bangalore could take your job in an instant by offering to do it better or cheaper or while you are asleep. The book was really a call for America to invest in itself — in education and technology — and the flatland analogy was supposed to motivate politicians and policymakers to take action.

When Friedman says the world is flat today, he means it in the sense of flat organizations. He specifically argues that the rising middle class around the world is a powerful force for change and this I believe is not globaloney, although I wonder if he would say exactly the same thing today, with the “occupy” movement still active and the gap between the 1% and the 99% so prominent in the public mind.

The world wine market isn’t getting flat so much as fat.  Even though the prices of some “1%” wines have fallen, there is still a gap big enough for the 99% to want to “occupy.” The impact of the growing global middle class will be very important in the long run. The wine market is becoming “fat” in the sense of being “thick around the middle” — middle class, middle market, middlebrow. That’s global trend #2.

Now Lose the Cork

The cork in question is a symbol of the practices and traditions associated with an aristocratic view of wine that will not be swept away but that will be joined by many other, more “democratic” practices as the era of tight and fat unfolds.

Generational transition, the adoption of wine by new global middle class consumers, the lingering impact of the economic crisis and America’s continuing recover from its Prohibition hangover will all play a part in this story.

Tight, Fat and Uncorked: if this sounds terrible for the future of wine, please relax. It’s not all bad (or good either), it won’t all happen at once or in the same way and it it’s not [just] about the wine.

I invite you to read along over the next few weeks as I try to work out these ideas in Friedman-esque style. I hope to benefit as I usually do from the comments, critiques and creative ideas of my readers.

State of the Wine Industry: Global Perspectives

I’m back from Sacramento where I moderated two panels at the Unified Wine and Grape Symposium, North America’s largest wine industry gathering.  I chaired the morning “State of the Industry” session (estimated audience = 2200 according to one news report) and a smaller afternoon break-out on “Leveraging Global Supply.”

You can find a list of the session speakers at the end of this post and you can read a comprehensive  news report here. I thought I would use this space to outline what I said   in the morning session. My job was to try to provide a global frame for the speakers who followed.

Silver Linings and Dark Clouds

Global Perspective. Wine is a global business. When David Ricardo wrote his economics textbook almost 300 years ago the example he used to illustrate international trade was the wine trade between Britain and Portugal. It has always been important to have a global view of wine, but now more than ever as the wine world gets smaller and more tightly connected.

Silver Linings. This is a year with much good news for the wine industry, especially for winegrape growers as the shortage phase of the wine cycle unfolds and prices rise after years of structural surplus.

But as an economist, it is my responsibility to channel Alan Greenspan and to caution growers to avoid irrational exuberance. Silver linings don’t always come wrapped in dark clouds, but sometimes they do. There are dark clouds a plenty for the global economy and some of them will affect the wine industry.

A Dangerous Phase

A Dangerous Phase. The global economy has entered a “dangerous phase” according to the International Monetary Fund. It is a time of great uncertainty and risk because global growth is slowing, albeit unevenly, at a very inconvenient time.

The problem, of course, is the debt crisis. And while each country has built “mountains of debt” in its own way, there is only one route down from the summit: stop adding to the debt and then try to outgrow the debt burden.

Europe, the U.S. and Japan are all struggling to contain growing debt. Stopping the bleeding is the first priority, of course, but no one seriously expects the debt to be paid off. The only solution is for debtor countries to grow faster than their  compound interest bills and to slowly make the debt and its burden a smaller and smaller proportion of GDP.

Catch 22: Slowing growth (and the probability of recession in Europe) means that even more emphasis must be put on cutting budgets, which unfortunately makes it even more difficult to generate growth.

The Growth Squeeze. So everyone will be desperate for growth, but where will they find it? Consumer spending? Not likely with unemployment high and the housing crisis still unresolved. Business investment? Not with credit so tight and business confidence so low. Goverment spending? Please! The pressure is on to cut government outlays, not expand them.

This leaves only international trade and it seems likely that many countries will try to stimulate exports through currency depreciation to get the growth they so desperately need. This has worked for the U.S., which has had a secret “weak dollar” policy. Look for currency wars as many countries try to follow suit by depressing their exchange rates.

Wild Cards. There are many “wild cards” in the global economic scenario — factors that could change everything. The Euro is probably the biggest wild card, since a collapse of the single currency would be a financial earthquake with global repercussions. The U.S. economy is another wild card, especially in an election year.

A Tight Squeeze for Wine

A Tight Squeeze. The wine industry is connected to the global economy but not perfectly synchronized with it. The wine industry is in for a tight squeeze in the coming year. There will be increased competition on both ends of the market — for wine grapes (and bulk wine) and for wine drinking customers and retail accounts.

[The intensity of the squeeze, as detailed by the other speakers in this session, was probably the biggest news to come out of the State of the Industry panel. Vineyard plantings have been stagnant for several years, so there is not enough supply to meet rising demand in many market categories.]

The shortage of grapes and bulk wine will force wineries to search high and low for product to sell. The higher costs that result will put even more pressure on margins and this may be the biggest squeeze of all since buyers are now accustomed to discounts and, having reset once down to lower prices, will be not quickly reset back up again across the board.  The pressure on margins will increase because of rising competition for market share.

Currency Wars. Exchange rate shifts will make this situation more complex. The U.S. has enjoyed a weak dollar for several years — this stimulated wine exports and kept the price of import competition high. The dollar strengthened in 2011 and  is likely to continue to strengthen in 2012 and this will reverse some of those effects, making the U.S. wine market more attractive to foreign wine firms. These effects will loosen the big squeeze in some places and tighten it in others, creating both dark clouds and silver linings.

Wild Cards. There are lots of  wild cards, but the most interesting one for me is China. We expect China’s growth to slow in 2012  — perhaps to 8% or less — if Europe’s recession is more serious than projected and if U.S. growth stalls.

The “bicycle theory” of Chinese economic growth holds that China must grow by at least 8% in order to overcome structural weaknesses and social instability. If growth falls below 8%, the theory holds, a “tipping point” effect might cause rapid deceleration.

No one knows if the bicycle theory really holds for China, no one knows if 8% is the tipping point number. And no one wants to find out.

A Chinese slump would have some direct effect on wine sales there, but the biggest impact on global wine would be indirect, spread through trade flows and financial flows. The Chilean Peso, Australian dollar and South African rand would all likely fall in value dramatically altering the competitive structure of global wine trade.

All this could happen, but of course it might not. That’s the biggest squeeze this year — uncertainty.

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Thanks to the Unified Symposium’s organizers for inviting me to take part. Special thanks to my fellow panelists, who helped me so much, and to Jenny and Lisa for their guidance and support. Here are the details of the two sessions.

State of the Industry

The State of the Industry session will provide a comprehensive look at every aspect of the wine industry, from what’s being planted to what is selling. This 2½ hour session features highly regarded speakers and will offer incredible value for attendees who need to understand the market dynamics of the past year and are seeking insight into the market trends that will define the year ahead.

Moderator:
Mike Veseth, The Wine Economist Blog/University of Puget Sound

Speakers:
Nat DiBuduo, Allied Grape Growers, California
Steve Fredricks, Turrentine Brokerage, California
Jon Fredrikson, Gomberg, Fredrikson & Associates, California

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Leveraging the Supply Side of the Global Wine Market

This session will focus on supply to Brazil, Russia, India and China (BRIC) as well as to Chile and Argentina.

Moderator:
Mike Veseth, The Wine Economist Blog/University of Puget Sound

Speakers:
Steve Dorfman, The Ciatti Company, California
Liz Thach, Sonoma State University, California

Against the Tide: Globalization vs Italy’s Indigeneous Wines

The tide I’m talking about is the globalization of the wine market and I frequently hear that its ebb and flow bring in the main international wine grape varieties and the styles associated with them and wash out unique local wines. There is a grain of truth to this — one winemaker explained it to me this way. If I make poor but distinctive local wine and can’t sell it, I can blame international market forces (and not my own lax wine making) and just plant Merlot. Classic cop-out, he said.

This maybe true, but it isn’t the whole story. There is also the pipeline effect. Global markets create big pipelines that need to be filled and sometimes it is easier to fill them with a few standard wine varieties and styles than with hundreds of different small production wines. (The current movement to ship wines in bulk — in big 25,000 liter containers — and bottle in the consumer market reinforces this trend.)

And of course the demographic of wine consumption is changing, too (the who, what, where, when, how and why) with more new consumers who face a steep learning curve that sometimes works against wines that lie outside the mainstream. There are lots of pressures on winemakers today and globalization is certainly one of them.

Arguable Premise

But I’m not sure that the premise of the argument is correct. Although the wine market is much more global than in the past, it is still surprisingly local compared to many other industries, with most production sold in the country of origin. And although it is easy to spot increasing consolidation within the wine industry, it remains remarkably fragmented compared to most other international businesses.

And, to keep the momentum going, while it is easy to look at the wine wall and see acres of Cab and Chardonnay (and other “international” varieties) from all around the world, it is just as easy to note how very many distinctly local varieties are present.  It is sort of a macro-micro thing. If you look at the wine industry in terms of Rabobank’s very cool map (above) of international wine trade, it is easy to see the world defined by those big international flows, but if you look at it in terms of DeLong’s even cooler Wine Map of Italy (below), for example, the persistence of local wine markets becomes clear.

Like a Coat of Paint

We explored this global-local tension during our recent trip to Italy to attend the meetings of the American Association of Wine Economists in Bolzano. Italy is far and away the world’s largest wine exporting nation according to Global Wine Markets Statistical Compendium data, with average exports of 1,861 million liters during 2007-2009 period. France and Spain are second the third with 1,379 million liters and 1,292 million liters respectively. Australia is a distant fourth in the data set with an average of 782 million liters for the two year time period.

So, if the global tide argument holds, you would expect Italy to be covered like a layer of paint with endless hectares of international variety wine grapes. And, of course, there is a lot of Merlot, Cabernet and Chardonnay to be found in Italy along with other international standard varieties like Sauvignon, Riesling and Pinot Noir. But what stands out when you think about Italian wine is the success of indigenous wine  varieties and styles. Italy makes and sells international varieties, but the indigenous wines are what define it as a wine country.

Support Your Local Winemaker

Sometimes this success is driven by export markets (think about the popularity of Chianti and Sangiovese) but there are many successes that are really quite local in scope and stand as delicious counterexamples to the the incoming global tide theory. Let me give you three examples from our Italian fieldwork (Pignoletto, Lacrima di Morro and Ruché) saving a fourth case study (Kerner) for  a more detailed treatment in my next post.

Pignoletto is a dry white wine grown only in the hills outside of Bologna. “Lively, crisp, aromatic” is how Jancis Robinson describes it in her Guide to Wine Grapes. Pignoletto is distinctly Bolognese — grown there, made there and I think that every last drop of it is consumed there, too, since it goes so well with the rich local cuisine (almost as if they evolved together … which I guess they did).  It would be hard to beat the simple meal of salumi, cheese and bread that we had with a bottle of Pignoletto frizzante at Tamburini‘s wine bar in the Bologna central market.

Lacrima di Morro d’Alba is a distinctive red wine from the Marche region. Robinson describes is as “fast maturing, strangely scented.” Burton Anderson says that it is a “purple-crimson wine with … foxy berry-like odor and ripe plum flavor.” Apparently it fades very quickly, but it is distinctive and intense while it lasts.  It sure stood up to the very rich cuisine of Ferrara when we visited our friends in that city. We were fortunate that the restaurant owner guided us to this wine from the Mario Luchetti estate.

Ruché comes from the Piedmont and we stumbled upon it by accident (which I guess is how we usually stumble …). We were attending the annual regional culinary fair in Moncalvo, a hill town half an hour north of Asti. Thirteen “pro loco” civic groups from throughout the region set up food and wine booths in the central square and sold their distinctly local wares to a hungry luncheon crowd.

I had never heard of Ruché and honestly didn’t know what it might be until I happened upon the stand of the Castagnole Monferrato group. They were cooking with Ruché, marinating fruit in Ruché and selling it by the glass — they were obviously very proud of their local wine. I had to try it and it was great. Suddenly I saw Ruché everywhere (a common experience with a new discovery) and enjoyed a bottle at dinner in Asti that  night. “Like Nebbiolo,” Jancis Robinson writes, “the wine is headily scented and its tannins imbue it with an almost bitter aftertaste.” An interesting wine and a memorable discovery.

I think we all have these great “ah ha!” wine experiences when we travel so why am I making such a big deal about these three wines? Well, that’s the point really. Distinct, truly local wines are commonplace in Italy. What is in some ways the most global wine country is also perhaps the most local. Global and local exist side by side and if they don’t entirely support each other all the time, they aren’t necessarily constant, bitter enemies, either.

The key, I think, is local support of local wines and wine makers. That’s why these three wines have survived and sustained themselves.  I don’t think “me too” wines are capable of gathering local support.

Why does this come as such a surprise to us in the United States — why do we so easily swallow the idea of the unstoppable global tide. It is, I suppose, a legacy of prohibition, which destroyed many local wine cultures in the U.S. Wine today continues the difficult task of recovering from prohibition’s long lasting effects.

Are There Really Local American Wines?

So are there American wines that are local in the same sense of Pignoletto and Ruché? Sue asked that question as we drove out of the Asti Hills and headed north. I don’t know, I replied. Maybe. Petite Sirah is kind of a California cult wine, but it isn’t local in the same way as these Italian wines.

Here in Washington State we seem to have a thing for Lemberger, which sells out in the tasting rooms of the wineries that make it and seldom shows up outside the region. It’s an Austrian grape, but it has made its home here. Can you think of any other wines like this? Please leave a comment if you have a suggestion!

Perhaps we buy the global tide argument because it is so foreign to us? I think it would be interesting if we imported more than Italy’s wines — perhaps we could share their idea of really local wine, too.

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