Money, Music, War and Wine

I’ve just finished reading final papers from The Idea of Wine class I teach at the University of Puget Sound. These essays remind me that wine really  is a liberal art and a natural element of an enlightened education.

Jean-Robert Pitte is right (and the French government is wrong) — wine has a place in the college curriculum.

The Greeks realized this centuries ago. They defined a  symposium as a discussion over wine! What could be better?  Herewith thumbnail sketches of three student papers that suggest the many ways that wine and liberal arts education intersect.

Wine and the Hard Life

Since this is The Wine Economist I’ll start with a paper by an economics student. “The Postwar Decline of the Old World Consumer” addresses the question of why per capita wine consumption in “Old World” countries has fallen so rapidly over the last 50 years. This falling demand is a key factor in the continuing global wine glut and especially the EU’s notorious wine lake. David, the author, turned the question around: why, he wondered, was consumption so high in the first place?

The most intensive wine consumption in France, Spain and Italy in the early postwar years was among laborers and rural workers who expended great energy in their jobs and required high caloric intake. Rough local wine (of the sort that is in excess supply today) was a cheap source of this energy. As European economies modernized and living standards rose the demographics of wine consumption changed. Fewer people engaged in grueling hard physical labor. Life was easier, living standards higher and better nutritional options presented themselves.

Not surprisingly, as the need for wine’s cheap calories declined so did its consumption. Other factors were at work, too, but rising living standards explain an unexpectedly large proportion of the wine consumption decline.

Romantically, we Americans associate wine with the good life and wonder why Europeans would turn away from it. But for some Europeans, at least, wine was part of the hard life and they may be happy to have moved away from it. The wine world will just have to adjust.

Beethoven and Bordeaux?

Megan, a science major, wrote on “The Melody of Taste.” Her paper surveyed the literature on how your perception of wine may be affected by the music you listen to while tasting.  I found this paper very interesting in the way that it embraced both science and philoisophy. There is reason to think that wine and music might have some connection, she wrote, because “wine is an aesthetic object and drinking wine is an aesthetic experience.”  Wine and music evoke similar aesthetic responses and it is plausible that they would interact on that basis.  So far so good.

Science suggests that the link between wine and music might go deeper than this, according to Megan. Brain scan data indicate that sensory experiences from taste, odor and music “target the same areas of the brain, initiating cross-modal processing.”  One author  argues that because different types of music affect the taste of wine in particular ways, a science (or art?) of  music-wine matching (like pairing wine and cheese) might be a serious possibility.

If you want to experiment with wine and music yourself, Megan writes, try this. Buy a $5 bottle of Glenn Ellen Chardonnay. Taste it on its own and then while listening to the Beach Boys singing  “California Girls.”  I’ve provided the music here — you have to supply the wine. The Beach Boys tune apparently stimulates the right part of your brain to make this value-priced wine taste a lot better.

Megan also reports a study showing that polka-style music makes Sutter Home White Zin taste better, too. Well … of course. Anything would probably help and a polka seems just right to me.

Winemaker Clark Smith has developed a line of wines to be paired with specific musical pieces. Read more about this project at GrapeCraft Wines. I haven’t tried wine-music pairing, but I would be interested in comments from anyone who has.

Wine and War

Let me finish with politics student  Hally’s paper on “The Real Story of Unknown Lebanese Wine: A Reason to Survive,” which was provoked by a puzzle. Lebanon has a very long winemaking history and some of its wines (Chateau Musar, for example) have attracted worldwide attention. Why aren’t these excellent wines better known and more popular, Hally wanted to know?

Yes, yes, Lebanon is a long way away and not well known, but that doesn’t seem to stop other wines from unlikely places (think about New Zealand!) from reaching local markets.  The answer, Hally learned, is that sometimes wine is affected by war and peace even more than by soil and weather.

Making wine in war-torn Lebanon in recent years has presented far more than the unusual number of challenges. “For Lebanese wine makers, picking grapes and making wine is more an act of defiance against years of repressive wars and religious hatred than it is a business necessity,” Hally writes. “Wine is key to the survival of their spirit through seemingly endless years of conflict.”

Bitter Memories?

After finishing her paper, Hally reports, she was able to track down a bottle of Chateau Musar from a war-torn recent vintage when practically no wine was made or released due to the constraints of conflict.  I’m sure Hally wanted it to have a glorious taste — the triumph of wine over war, but she says it was awful. Corked, I think, from her description. Not what she wanted at all.

What makes a wine memorable? People always imagine that the great flavors and aromas are what make wines special to us, but I have my doubts. Wine is too complicated to be just about its direct sensory effects. Hard times, upbeat music and the determination to struggle through conflict — wine can reinforce these associations, too, and burn them into our memories.

Wine stimulates all our physical senses (taste, smell, touch, sight — even sound if we touch glasses in a toast).  But its real power comes from the fact that it also stimulates our minds, triggering memories and inspiring thoughts. Hmmm. I should organize a symposium on that theme!

Stags Leap Through the Looking Glass

This week I’m reporting on my research expedition to Napa Valley, where I attended the Stags Leap District Winegrowers Association Vineyard to Vintner’s (V2V) event and ventured “through the looking glass” to consider the past, present and future of wine.

My last post ended with a question: Stags Leap was still an emerging region when I visited in 1980, but it was already attracting a great deal of attention and international investment. Would the influx of big money into the Stags Leap District destroy its great wines or would the terroirists managed to save them? Here’s what I found out.

Follow the Money

The big money certainly arrived and you can see it today in the wonderful facilities that the wineries have created.

Stag’s Leap Wine Cellars was a tiny one-building operation when I visited there 30 years ago. Now that original structure with its oak doors is Building 1 on an expanded campus of facilities that includes a vast arched barrel room and a network of tunnels for barrel storage (I’ve heard these called wunnels — wine tunnels). Everything is sleek and custom made for entertaining clients and visitors as well as making wine.

The barrel room at Stag's Leap Wine Cellars is gently curved like a barrel stave. The barrels are stacked five deep.

Warren Winiarski is responsible for these changes, but he doesn’t own Stag’s Leap any more. He sold out in 2007 to Italy’s Antinori family. I’ve read that he figured he could trust the Antinori to uphold his vision of wine.

The Antinori partnered with Ste Michelle Wine Estates (SMWE) of Washington State, who they trusted because of their successful joint venture on Red Mountain, Col Solare. (SMWE is owned by Altria, a corporation that also owns Phillip Morris and U.S. Smokeless Tobacco.)

Changing Hands

Stag’s Leap is not the only winery in the district to be acquired big business. Chimney Rock is now owned by The Terlato Wine Group, a company that owns several notable U.S. wineries and is a major force in wine distribution (they represent Gaja and Santa Margherita wines from Italy, for example).

Pine Ridge Winery, which produced its first vintage in 1978,  was acquired by the Leucadia National Corporation in 1991, which also owns Archery Summit in Oregon but is is best understood as a diversified holding company investing in manufacturing, telecommunications, oil and gas drilling gaming, entertainment and real estate activities.

So the big money did in fact come to Stags Leap and the many of the wineries they created are rather grand – as far from the simple cellar that I visited 30 years ago as can be imagined.

The Economic Factor

Dinner at Stag's Leap Wine Cellars

Economics dictated the large scale and luxurious feel of many of today’s Stags Leap District wineries. Winemaking is capital intensive, so it is important to produce in volume. Stags Leap AVA Cabernet Sauvignon (necessarily limited in supply by the AVA’s tiny size) is often therefore produced alongside higher volume “Napa Valley” wines, for example, and Chardonnays from Carneros grapes in order to get volumes up to an economic level. Nothing wrong with that.

The plush feel of the wineries themselves, with plenty of space for entertaining, events and on-site culinary staff, is a product of the practicalities of distribution. Direct sales – to cellar visitors and wine club members – yield more revenue than restaurant and retail sales that must make their way through the tortuous and costly three-tier distribution system. So it is important to build and establish direct-sale personal relationships and to provide appropriate winery facilities.

One winery’s wine club manager told me that nearly 70% of sales came through this direct channel. Wow! That’s a lot of revenue and worth a substantial investment. So it is important to both make good wine and to create a memorable winery experience. Understandable.

But what happens to the wine in the process? Is there so much focus on image and marketing that the wines themselves are an afterthought?

The Mondovino hypothesis

My answer, based on an intense weekend in Stags Leap, is that it ain’t necessarily so. Sure, we tasted a couple of wines (I won’t name the makers) that seemed like they were made to catch the attention of critics more than to capture a sense of place, but for the most part the wines we sampled seemed to be authentic variations on a Stags Leap theme. And the winemakers we talked to spoke with conviction of wine made in the vineyard, not the advertising agency.

Can big multinational money coexist with an authentic idea of wine? Yes, at least in Stags Leap. (Robert Parker goes further — he seems to think that the Antinori/Ste Michelle money and technical attention might actually restore the  faded — according to him — glory of Stag’s Leap Wine Cellars.)

So the way I framed my question — money, business and globalization versus terroir — was plain wrong. Money, marketing and multinationals doesn’t guarantee great wine, but it doesn’t make it impossible, either. Wine is too complicated for that.

The pessimistic Mondovino hypothesis that the wine business inevitably destroys wine itself doesn’t always hold. I’m not saying this is true everywhere, but I am quite sure that the somewhereness of Stags Leap has survived these 30 years.

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Thanks to the Stags Leap District Growers Association for inviting us to attend the Vineyard to Vintner program. Thanks as well to Russell Weiss (Silverado), Mark Smith and Jim Duane (Stag’s Leap Wine Cellars), Elizabeth Vianna (Chimney Rock), Tim Dolven (Steltzner), Jeff Virnig (Robert Sinskey) and Michael Beaulac (Pine Ridge) conversations and help in various ways.

Wine Economist in Wonderland

Alice entered Wonderland by jumping down a rabbit hole. I got there by walking through this doorway.

It happened 30 years ago and inside the door I met a famous winemaker who was as interested in economics was I was in wine. The result of our chance conversation was my fascination with wine economics and, ultimately, this blog.

Through the Oak Door

This is not an ordinary door. It is made from the planks of a huge oak cask. I rediscovered it a few days ago when I visited Napa Valley to attend the annual Stags Leap District Winegrowers Vineyard to Vintner (V2V) seminar, tasting and celebration.

The Stags Leap AVA can understandably be viewed as Wonderland by wine lovers. It is famous for its distinctive Cabernet Sauvignon wines, including some of the ones that did so well in the famous 1976 Judgment of Paris commemorated in George Taber’s excellent book of that name and the more recent somewhat dubious but nearly always entertaining film, Bottle Shock.

I was in Stags Leap at the invitation of the growers association to attend the events and to consider how wine has changed in 30 years, using the terroir of this region as my test bed.

One Side Makes You Grow Larger …

It was hard to know how Stags Leap and its wines would develop when I first opened the door thirty years ago.  There were a lot of indications that the area might turn into what some critics say the whole of Napa Valley has become — the over-commercialized Disneyland of wine.

Although it was only really “discovered” as a winegrowing area in the early 1970s, a lot of money was already focused on Stags Leap when I made my first visit. Clos du Val (first vintage in 1972) was the result of a collaboration between American businessman and wine industry investor John Goelet and Bordeaux winemaker Bernard Porter. It was just the sort of thing that gives Mondovino fans screaming nightmares.

Chimney Rock Winery (1980) looks like a South African Cape Dutch estate because its founder Sheldon “Hack” Wilson made his money selling Pepsi Cola in South Africa. He was the largest volume Pepsi bottler in the world at one point, according to my copy of James Halliday’s Wine Atlas of California.

Silverado Vineyards (1981) — a beautiful winery with a beautiful view — unintentionally reinforces the Disneyland theme because the family of Walt Disney built it, starting with a vineyard purchase in 1976 and continuing today.

It was easy to imagine in 1980 that this trend would continue — and the wines would suffer — as more money flooded into the tiny Stags Leap area.

… And the Other Makes You Grow Smaller

But capital is not always blind (to paraphrase Walter Bagehot). Some of the early Stags Leap investors were the sort of people I have labeled terroirists who value wine for its somewhereness.

I suppose that Dick Steltzner would fit into this group. An experienced viticulturalist, he planted what might have been the first vineyard at the base of the Stags Leap palisade in 1965, finally making his own wine at Steltzner Vineyards in 1977.

Warren Winiarski, the guy who won the red wine competition in the 1976 Paris tasting with his Stag’s Leap Wine Cellars Cabernet Sauvignon, strikes me as a terroirist, too, although perhaps he was just a stubborn, philosophical wine perfectionist. So all the pieces were in place for a battle for the soul of Stags Leap wine.

And Now Which is Which?

Looking back to 1980, it seems like it could have gone either way. Globalization money and media creating Coca Cola wine … or the revenge of the terroirists, preserving the distinctive quality of Stags Leap.

How did the story turn out? Check back in a few days to find out what I think I learned from my fieldwork.

Desperately Seeking Somewhere

I gave the after dinner talk for a group of 36 visiting college counselors on Sunday. Since I didn’t want to give them indigestion, I spoke about wine instead of the economy. We tasted an after dinner wine made by one of our alumni winemakers (see below) and wrote a collective tasting note to commemorate the experience.  It was a lot of fun and very serious at the same time. Here’s the short “45 rpm” version of what I had to say.

Nowhere Man

It seems to me that the world is increasingly stretched and fragmented, processed and globalized.  Many elements of our everyday lives are efficient, impersonal and shallow. The things we buy and use could come from anywhere and end up anywhere. Anywhereness is the same as nowhereness in my book, the lack of real personality or a distinctive sense of time and place.

Given the prevalence of nowhere, it is not a surprise we desperately seek somewhere to fill the empty places in our lives. This is what makes wine especially appealing to so many people today. Wine has the ability to express somewhereness, the intangible quality we often call terroir. More than most products, we know (or can find out) who made a particular wine and how, in what place at what time. Wine somehow manages to hold all these messages together and to show us through its variations the influence of personality, the impact of nature, time and place.

Fixing a Hole

Wine is more likely than most products to be a shared experience, too, consumed in a social setting, the subject of conversation and perhaps some conversational introspection (like our collective tasting note). Music once filled these gaps (and still does to some extent) because we typically listened to it in the company of others. Now the iPod has made music an efficient but more solitary experience. Thank God there is no equivalent iWine (at least not yet).

I told the counselors all this because I think the search for somewhereness that draws people to wine is also what leads students and their families to seek out the intimacy and somewhereness of liberal arts colleges like the University of Puget Sound. Students can efficiently acquire a pretty good education at universities constructed on an industrial model (do you see the similarity with wine here?), but something is sacrificed in the process, something that makes the experience complete and the person whole.

Desperately seeking somewhere — that’s who and what we are. My talk covered more than this, of course, but you get the idea.

Somewhere, Man

The wine we tasted together was a somewhere wine: Hedges Family Estates Red Mountain Fortified Wine. It is a wine made using traditional Port wine grape varietals and methods but it isn’t Port because Port can only come from Portugal. It’s a non-vintage blend of wines from several harvests of Hedges estate fruit, bottled in 2004 and drinking pretty well right now.  Here’s a recent tasting note:

The wine is so dark and rich it is nearly a blue-black color. The nose is full of dark fruits, orange zest, tobacco, herbs, and violets. The flavors of the sweet brandy hit your tongue first, followed by orange, chocolate, and cherries. At 21.6% alcohol, and 5.6% residual sugar, this is pretty smooth stuff.

This wine captured the essence of my talk quite well, I think.  It’s a personal wine (just 206 cases produced) that uses the style of Port wine to express the particular terroir of Washington’s Red Mountain AVA. It’s a somewhere wine if I ever tasted one and a good reminder of the power of wine to bring people together and remind us of life’s deeper purposes.

Beaujolais Nouveau: A Black Friday Wine

I’m putting together wine recommendations for the upcoming Thanksgiving holiday feast. Bubbles (for celebration), Riesling and Pinot Gris (great food wines), Zinfandel (the most American of wines) and Pinot Noir (just because).

Missing from my list is perhaps the most appropriate wine of all: Beaujolais Nouveau. Here’s why.

A Wine for Today’s Thanksgiving?

Although the United States is not the only country to set aside a day for giving thanks, we like to think of Thanksgiving as our distinctive holiday. It was conceived as a day for deep reflection, but Thanksgiving has evolved into a long weekend of over-consumption and discount shopping. Some of my friends really prefer to celebrate Black Friday, the day after Thanksgiving, when the holiday shopping season formally begins and retailers find out if they will be “in the black” for the year based upon early sales data.

If you plan an Old Time giving-thanks Thanksgiving, then Nouveau is not for you. It is not an especially thoughtful wine. It is a sorta soda pop wine; if wine were literature, my friend Patrick points out, Nouveau would be the  trashy paperback novel you read at the beach. Nothing wrong in that — everyone needs an escape once in a while.

The grapes for Nouveau are picked in late September or thereabouts and the only thing that prevents instant sale is the necessity of fermentation and the mechanics of distribution.  It’s still a bit sweet when it’s bottled and sometimes a bit fizzy, too, when it arrives with great fanfare on the third Thursday in November (a week before Turkey Day). Best served cold (like revenge!) it is the ultimate cash flow wine.

Black Friday Wine?

Nouveau is not very sophisticated, so why do the French, who otherwise are known to guard their terroirist image, bother with it? The Beaujolias producers make very nice ordinary (non-nouveau) wines; character complexity, you can have it all and for a surprisingly low price.

Ah, but that’s the problem. Sitting close to prestigious Burgundy, the Beaujolais cannot command high prices for their wines, good as they are, so they must try to make money through turnover more than markup. They churn out millions of bottles of Nouveau to pay the bills.

At the peak of the bubble in 1992 about half of all wines made in Beaujolais were Nouveau. The proportion remains high even today. Ironically, Nouveau often sells at prices as high as Beaujolais’ more serious wines because it is marketed so well. So it is hard to see why you’d want to buy it instead of the region’s other wines. It’s easy, on the other hand, to see why you’d want to sell it.

Beaujolais Nouveau, it seems, is France’s Black Friday wine! If the makers can sell their Nouveau, then maybe the bottom line for the year will be in the black. If the Nouveau market fails, well that red stain on the floor won’t be just spilled wine.

More than the Usual Urgency

Nouveau is therefore generally marketed around the world with more than the usual urgency (just as those Black Friday sales seem a little desperate at times) — and not just because young wines hit their “best by” date pretty quickly. This year things are even more stressful than usual, as you might imagine, with the economic crisis still on everyone’s minds and 10+ percent unemployment here in the United States.

I saw Georges Duboeuf Beaujolais Nouveau selling for $8.99 a bottle on Saturday, about $4 less than last year. Given typical retail margins and the high cost of shipping this product by air, it is hard to see much profit. It will be a Red Thursday this year, I think, not a Black Friday, for Beaujolais.

Nouveau is usually distributed around the world via expensive air freight rather than more economic sea transport in part because the short time between harvest and final sale makes speed a factor. This year Nouveau was bottled in plastic for the Japanese market in part to lower shipping cost — a controversial move that may not be repeated because of its negative product image potential.

Intentionally choosing to adopt a more casual image (see photo), Boisset put all its US-bound Nouveau in screw-cap PET bottles, with a resulting 40% reduction in shipping cost.

An American Wine?

Sweet, fizzy and packed in PET bottles — Beaujolais Nouveau sounds like the perfect wine for the American consumers brought up on 2-liter jugs of fizzy-sweet Mountain Dew and Diet Coke. If you were kinda cynical, you would think Nouveau was an American wine … made in USA.

And it is, in a way. Although the wine obviously comes from France (and there is actually a long tradition of simply and fun early-release new wines in France and elsewhere), I think it is fair to say that the Nouveau phenomenon is an American invention.

W.J. Deutsch & Sons, the American distributors, really put Beaujolias in general and Nouveau in particular on the U.S. wine market map when they became exclusive distributors for Georges Duboeuf some years ago. They took this simple wine and made it a marketing event. To paraphrase an old Vulcan proverb, only Nixon could go to China and only the brilliant Deutsch family could sell Nouveau!

In fact they were so successful that they partnered with another family firm — the Casella family from Australia — and created a second wine phenomenon tailored to American tastes: Yellow Tail!

So although Nouveau is an American wine of sorts and might be perfectly crafted for this American holiday as we actually celebrate it on Friday, I’m going to pass this year (on Thursday, at least) and see if I can nurse some thoughtful reflection from my holiday glass instead. Cheers, everyone! And thanks.

Money, Power, Memory, Taste and Wine

A review of Liquid Memory: Why Wine Matters by Jonathan Nossiter (FSG, 2009). Original French edition published in 2007 as Le Goût et le Pouvoir (Taste and Power).

Jonathan Nossiter is famous for his 2004 film Mondovino. Love it or hate it (or love to hate it), Mondovino has given Nossiter standing in the world of wine and he takes advantage of this fact in Liquid Memory: Why Wine Matters.

Remembrance of Terroir Past

Although it is not intended to be a supplement to or continuation of Mondovino, I certainly learned quite a bit about the making of the film and its characters and about Nossiter, too. Indeed, the book is really about Nossiter and how wine inspires his memories and provokes his emotions just as a small cake, a madeleine, famously provoked Marcel Proust. It’s not my favorite book because I guess I’m not that interested in Nossiter’s memories, or at least not as interested as he is, but I did find things to like in it.

In one of my favorite scenes from the book, Nossiter and a film-making colleague are driving back from a day of Mondovino pre-shoot research in Burgundy and they talk about why they are so attracted to terroir. Members of a somewhat rootless transnational artistic class, they recognize that perhaps terroir is so precious to them because it is something they feel they have lost. Nossiter, the American raised in Paris, now lives in Brazil, well you can see how he would feel nostalgic for the authentic home terroir he maybe never had. That’s an emotion many of us can appreciate.

The Bland Taste of Peace?

Another passage subtly probes this same feeling in a different context. Why is terroir and regional identity so important now? Because sharp divisions have caused so much pain and hardship in the past (think Europe and the two World Wars).  Suppressing differences and rounding off sharp corners to create a more peaceful whole has been the agenda of the last 50 years.

Now we find that universalism has gone pretty far, creating the terroir-free transnational world of the European Union and we start to value what we have lost. Sharp edges seem pretty desirable now that we’ve lost them, even if they  sometimes bruise or cut.

I tasted both sides of this problem when we visited Friuli in the Italian Northeast a few years ago. We stayed outside of Cormons with the Venica family at their winery estate and the Sirk family at La Subida.

The land and people of this area where brutalized by the two Great Wars and so, when postwar peace appeared, they gathered grape varieties from around the world and planted them all together in one serene vineyard. The wine from these grapes, Vino della Pace (wine of peace) isn’t especially distinctive on the palate as I recall, but is memorable nonetheless for its optimistic symbolism.

We longed for the taste of peace when we didn’t have it. Now that we do, we find it a little bland. So we seek out terroir, even if it threatens to divide us once again.  Interesting, isn’t it?  Even in Friuli it is the intensely distinctive local wine of long memory – Pignolo, Schioppettino, Ribolla Gialla – that attracts our attention today, not the wine of peace.

Wine and Money

Although this is a book about cultural politics (if you believe the French title) and social philosophy (if you consider the American one), it seems to me that a great deal of space is actually given over to wine economics. The business of wine with its commercial pressures, and especially the ethics of wine pricing get a great deal of space.

“It occurs to me,” Nossiter writes, “that it is impossible to talk about wine without talking about money” and I think he is right. “Wine is inextricably linked to money like all objects of desire in a capital-driven world.”

Though a given bottle’s price varies even more peculiarly than the price of fine arts, a given bottle’s price is supposed to be a reflection of its intrinsic values. Whether it is the producer who sets the initial price, or the importer, distributor, or end seller, each time the price of the wine is set an ethical decision has been made in relation to the wine’s origins and contents.

Nossiter is disgusted by the religion of money, but in this passage he seems instead to be seduced by it, to accept the premise that market prices are moral judgments even as he protests their verdict. I think the premise is wrong and that intrinsic worth is measured by a different scale.

But that’s just the economist in me talking, I suppose.

A review of

Anatomy of Australia’s Wine Crisis

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

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

This Time is Different

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

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

The Twenty Year Wine Boom

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

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

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

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

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

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

Not So Different: Australia’s Wine Bubble History

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

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

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

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

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

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

Past as Prologue

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

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

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

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

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

Australia at the Tipping Point

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

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

Cold Hard Facts

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

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

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

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

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

Mountains of Wine

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

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

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

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

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

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

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

Grubbing Up

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

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

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

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

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

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

Chicken Little Talk

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

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

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.

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