Wines from Spain: Challenges and Opportunities

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

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

Don’t Know Much

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

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

Uncorking the Potential of Wines from Spain

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

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

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

In Search of “Brand Spain”

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

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

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

Catch-22

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

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

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

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

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

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

Decanter’s Wine Power List

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

The Power List

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

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

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

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

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

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

The Story

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

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

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

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

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

Supply and Demand in New Zealand

My copy of the second edition of Michael Cooper’s Wine Atlas of New Zealand arrived this week and I am having trouble putting it down. Cooper’s coverage of the wines, the wineries, the people, the industry and the market is exceptional. And it is stunningly beautiful, too, with excellent maps and spectacular photos. A coffee table book in terms of size and weight, but with real substance. One of the two best regional wine atlases I own (the other is Burton Anderson’s Wine Atlas of Italy, which is still a valuable reference 20 years after its publication).

(Note: Cooper’s NZ Wine Atlas hasn’t been released yet in the US, but it is easy buy from UK online sellers like Amazon.co.uk.)

The Amazing NZ Wine Story

I’ve always been fascinated by the New Zealand wine story — how a tiny (0.5 percent of global output) wine producer at the far corner of the earth could become a leading global brand (a NZ wine is the #1 Sauvignon Blanc in the US) and earn the highest average export price of any country in the world.

I couldn’t wait to get Cooper’s second edition because a lot has changed for New Zealand wine since the first edition was published in 2002 and my last research trip there in 2004.  A lot has changed, but a lot has stayed the same, too.

The biggest threat to New Zealand’s success has stayed the same: the problem of balancing supply and demand. New Zealand was plagued by boom and bust cycles for many years. Overproduction of low quality wines created a crisis in the 1980s. Many winemaking businesses collapsed and were snapped up by NZ or foreign buyers, leading to the internationalization and consolidation of the industry. The NZ government initiated a grubbing up scheme in 1986 to reduce vineyard plantings, especially of low quality wines, setting the stage for the current boom.

New Zealand has been extremely successful in this era of global wine, which has been characterized by high quality, a strong global brand (Marlborough Sauvignon Blanc and now Pinot Noir as well), and a liberal trade regime that accepts high import levels of inexpensive wine as the price to be paid for high levels of higher-priced exports.

The Spectre of Surplus

Despite this success — or more precisely because of it, fear of wine and grape surpluses, price wars and market collapse continue to haunt New Zealand producers — at least those who are old enough to remember the crisis of the 1980s. In agriculture we know that nothing generates a surplus tomorrow faster than high prices today.

Cooper’s data make this boom-bust concern easy to understand. New Zealand’s industry has grown rapidly — can it be sustained? Producing vineyard area in New Zealand tripled from 10,000 hectares in 2000 to more than 31,000 hecrates (projected) in 2010. Wine production rose from 60 million liters in 2000 to 200 million in 2008. The number of wineries risen, too, if not quite so quickly: about 600 today, up from 334 ten years ago.

NZ domestic wine sales and wine imports have been relatively flat over the last ten years, so essentially all of the increased production has been targeted for export: 87.8 million liters in 2008 compared with just 15.2 million liters in 1998.

So far the world market has been wiling to absorb this rising production (and without diluting the NZ brand and the price premium it commands).  Can this continue into the future or does Stein’s Law (see note below) apply?

A recent Rabobank report on “New Zealand Wine Supply — Testing Limits” provides mixed indicators. Rabobank acknowledges the importance of balancing supply and demand, especially given the world economic crisis, and notes that nature may limit runaway growth. Marlborough is running out of land suitable for vineyards, according to the report.

The day will come when the quantities of Marlborough Sauvignon Blanc available … will reach its physical limit and the long term supply and demand outlook looks very favorable for growers and producers in the region. It is vital that in the next 10 years the reputation and bargaining power of producers in this region be maintained in order for the region to enjoy higher returns in the future.

In other words, things look good in the long run, it’s the short run that NZ needs to worry about. Persistent short term surpluses could devalue NZ wines from premium products to commodities. That would be enormously damaging to the industry.

There are some indicators that the damage is happening now. I have heard of deep discounts on some New Zealand wines in Britain, for example, and I even saw iconic Cloudy Bay on sale at Costco this week for just $20, about $10 less than its price last year.  More to the point, however, today’s Gisborne Herald reports that Pernod Ricard, which owns a number of important NZ brands, is terminating many or most grower contracts in the Gisborne region (North of Hawkes Bay on the North Island). The president of the Gisborne Winegrowers group is quoted

I have fielded a lot of calls from very concerned and distressed growers — my advice to them is to certainly not spend any more money on any of those blocks … Meantime, they should talk to their accountants and bankers.

Gisborne is a major producing area, but it doesn’t have the name recognition abroad of Marlborough, Martinborough, Hawkes Bay and Central Otago. It is Chardonnay country with 52.8% of producing vineyard area in that varietal compared to 8.2% planted to Pinot Gris and less than 4% each to Sauvignon Blanc and Pinot Noir. Chardonnay has become unfashionable — it is not where the market growth is these days. It makes sense therefore that Gisborne might be the first area to feel the combined effects of an overall surplus and shifting demand.

The Next Big Thing?

What is to be done? The Rabobank study looks to Pinot Gris, arguing that it could join Sauvignon Blanc and Pinot Noir as a leading NZ export wine thereby expanding and diversifying the NZ export market. The expected growth of wine consumption in Asia is one factor in this optimistic scenario, since Pinot Gris is said to pair well with Asian foods. Food friendly and premium price — these are attractive qualities it is said in the growing Chinese wine market, according to Rabobank.

Pinot Gris is also thought to be a style that younger wine drinkers will find fun, friendly and easy to like (but also flavorful, unlike certain Pinot Grigio  you may have been served …). Michael Cooper is optimistic, too, in his Wine Atlas discussion of the varietal., citing “high potential” and “impressive weights and flavour richness” on both North Island and South wines.

Pinot Gris is profitable, too. Made in stainless steel tanks with no oak aging, Pinot Gris is a good cash flow wine.  I can’t remember seeing NZ PG on store shelves here in the U.S., however. Perhaps I’ve just missed them or maybe NZ producers are focusing on different markets — Britain, Australia or Asia? — to avoid undercutting Sauvignon Blanc sales here.

“Demand for Pinot Gris,” the Rabobank report asserts, “should underpin even greater returns for growers in the medium to long-term.” A good thing, I think, if things hold together until the medium- and long-term arrive (there’s a famous Keynes quote about this, although I don’t think he was talking about wine). There is still the old problem of the short-term supply-demand balance to be worked out.

Note: Stein’s Law (named for Presidential economic advisor Herbert Stein, is that if something cannot go on forever it will stop. Stein’s point was not that all bubbles burst but rather that market forces tend eventually to rein in unsustainable trends (although not always in a gentle way) and you don’t necessarily need government to do the job for you.

Wines of Spain: Not Lost in Translation

Spain has the largest area devoted to vineyards of any country in the world and has achieved considerable international success, both critical and commercial. But it also confronts the many challenges typical of Old World producers. As I write The Wine Economist blog and work on my new book* I am increasingly convinced that much rides on the ability of Old World wine producing countries like France, Italy and Spain to adjust to and succeed in changing market conditions.

Spain is an especially interesting case study in this regard. On one hand Spain faces  many of the problems we associate with Old World wine. Although overall production has fallen in recent years it is still well above consumption (which has fallen, too). The surplus — poor quality wines with no market — have been sent to the distillery in recent years, but this is about to end as the new EU reforms kick in. These reforms will benefit wine regions and producers that increase quality and are able to adapt to the new more competitive global market environment.

Map of Spain’s Wine Regions

The Spanish wine industry is well positioned in some ways to take advantage of this situation. Consumers are looking for good value in wines today and I have found a number of interesting and distinctive wines from Spain in the competitive sub-$14 price range, where demand is still relatively strong as buyers trade down from more expensive products. White wines from Spain are attractive options for the growing number of consumers who have lost interest in Chardonnay and the reds would be a good choice for those who’ve grown tied of Australian Shiraz. Jaded ABC (Anything But Chardonnay) and ABS (Anything But Shiraz) buyers are up for grabs and Spanish producers are making their case.

Today’s market, for all its economic discontents, is a good opportunity for Spanish wines to move deeper into the American market, but there are problems that must be addressed. American wine buyers have learned to speak Italian, French and, well, Californian when it comes to wine in terms of varietals and appellations. They have trouble, both literally and figuratively, translating Spanish wine.

Spain has an unusually rich heritage of native grape varieties, which is both an advantage and an obstacle to be overcome. Unfamiliar varietal names are not an insurmountable barrier, although you won’t know if you like Tempranillo, Albariño and Garnacha and other native grape wines until you try them, so getting consumers to take that first taste or make the first purchase is very important. Appelations are a bigger hurdle. Spain has more than 50 regional appellations – Denominaciones de Origen or DOs – and mastering this system and understanding the differences is a challenge – an educational challenge.

The Spanish wine industry has wisely decided to confront this problem directly this summer by organizing a series of 3-day educational seminars around the country organized by The Wine Academy of Spain in association with Catavino. Wine professionals and enthusiasts will meet in Denver, Houston, Chicago, Boston, New Haven, Atlanta, Seattle, Portland, San Francisco, San Diego, Cleveland, Washington and New York (click here to see dates and registration information) and learn about the wines of Spain. Three days? Well, yes. Looking at the schedule it seems to me that it will take at least three days to learn the basic of Spain’s regions and their wines, appellations, terroirs, varietals, history and production and market structures.

Mario Battali once said that there is no such thing as Italian food, there are only the regional cuisines of Italy, which is why Italian food is endlessly interesting. I suspect that the same can be said about Spain and its wine. There is no Spanish wine, only the wines of Spain – and American wine enthusiasts have a lot to learn about them.

Mastering the Spanish wine vocabulary will take work, but it should be pleasant work. I am hoping to be invited to participate in the Seattle workshop (Chateau Ste Michelle and Dr. Loosen invited me to the Riesling Rendezvous last year and I found that experience very valuable) so that I can report on it here and write about the Spanish industry with more authority in my book. I hope to gain a better understanding of the wines of Spain and where they fit into the future of wine.

* The working title of my new book is The Future of Wine: Globalization, Two Buck Chuck and the Revenge of the Terroiristes.

Special thanks to Steve De Long of delongwine.com for alerting me to this interesting and ambitious program.

The #1 Sauvignon Blanc

Decanter.com reports that Nobilo Marlborough Sauvignon Blanc has overtaken Kendall Jackson as the best selling Sauvignon Blanc in the United States. The ranking is based upon sales volume, but the wines retail for about the same $10 to $12 price,  so Nobilo probably ranks first by value as well. An amazing achievement, given the many obvious challenges the New Zealand wine industry faces in terms of size, production cost, shipping distances, access to US distribution and so on.

A Matter of Style

It is interesting to consider how Nobilo and the New Zealand industry have  managed to achieve this success. The first reason is the distinctive quality of Marlborough Sauvignon Blanc itself. Even wine critics who don’t think very highly of Sauvignon Blanc in general (I’m talking about you, Jancis Robinson) acknowledge that the Marlborough wines are distinctive and that the best of them are truly exceptional. In my house they set the standard for Sauvignon Blanc.

Why are these wines so good (and so popular)? Winemakers always start with the vineyard and it is certainly true that Marlborough seems ideally suited to produce Sauvignon Blanc grapes. (Ironically, no grapes at all were grown there before the mid-1970s). The skills of the winemakers are also important. The distinctive style of the wines is another factor. The June 2009 Wine Business Monthly includes a fine article by Curtis Phillips on Sauvignon Blanc yeasts that nicely explains the NZ style. NZ SB, he writes, emphasizes a varietal style, letting the fruit speak forcefully. The French SB style is “anti-varietal,” he says, emphasizing texture and minerality over fruit aromas and flavors.

Finally there is the oak-influenced style, which originated in France but was made famous by Mondavi as Fumé Blanc. This barrel-fermented SB style remains very popular in the U.S., but has obviously been eclipsed in the marketplace by the fruit-forward Marlborough product.

The New Zealand varietal style is a hot commodity. New Zealand producers should hope that it stays hot and doesn’t fade as some popular regional styles have done (I’m thinking about how quickly Australian Shiraz has fallen from favor).

The International Influence

Nobilo’s rise to #1 in the US market is not an accident, according to the Decanter.com article. Nobilo is a Constellation Brands product — one of five New Zealand export brands of ConstellationNZ (see logos above).  Joe Stanton, the ConstellationNZ CEO, explains that his company’s strategy was to make Nobilo the top US SB by focusing on “traditional” wine buyers and giving them what they expect in the way of packaging for premium wine: cork instead of screw-cap, for example, and flint-colored glass bottles instead of traditional French green. Plus, of course, the intense Marlborough aromas and flavors. New wine in old bottles (and closures), I guess, and it worked.

ConstellationNZ accounts for 40% of all NZ wine sold in the US — an astonishing figure, but understandable given the strong brands that it has acquired (Nobilo, Kim Crawford, Drylands, Selaks) or built (Monkey Bay)and the efficient distribution system that has evolved to get these wines and all the other Constellation products on store shelves and restaurant wine lists.

In fact, the New Zealand industry is dominated by foreign-owned wineries, as wine writer Michael Cooper points out in the new edition of his fine Wine Atlas of New Zealand. Of the top wine producers only two (Delegat’s and Villa Maria) are Kiwi-owned. The largest producer is Pernod Ricard NZ (formerly Montana wines), part of the big French drinks group. Pernod manages 25 NZ brands according to their website, including of course Montana (sold as Brancott Estate in the US), Corbans, Church Road and others.

The most famous NZ wine — Cloudy Bay — is owned by LVMH Möet Hennesy-Louis Vuitton, the French luxury goods conglomerate.  Matua Valley, another leading NZ producer, is part of the Australian Foster’s Group. The list goes on.

It is tempting to consider the pluses and minuses of international ownership as Michael Cooper does briefly in the article linked above. This is a topic that I plan to analyze in more detail my next book. In the meantime, however, it is perhaps best to consider how the combination of the local (New Zealand’s wonderful terroir) and the global (big multinationals like Constellation and Pernod Ricard) have combined to both produce New Zealand’s tasty wines and to deliver them to our doorsteps.

New Zealand has done specutacularly well in the global wine market so far. What lies ahead? Watch this space!

Wine Recession Reports

Economists joke that data usually come in one of three forms: the incomplete, the inaccurate and the forthcoming. No wonder we are such unreliable oracles!

Wine economics data generally takes one of three forms, too: highly processed  statistics, persuasive but unscientific anecdotes (bloggers are a big source of these) and public reports, such as newspaper and magazine stories.  Each type of data has its uses and each has its weaknesses.

The wine economist’s job is to try to piece them together to get a reasonably accurate picture of what’s going on.  This post tries to do  just that — I use a recent statistical release, a personal anecdote and a magazine report to reveal an outline of some of the ways the economic crisis is affecting the wine market.

Lies, Damned Lies and Statistics

There are three kinds of lies, Mark Twain said, and statistics are the worst of them. They can be pretty useful, however, if you know how to handle them. The Global Drinks Market: Impact Databank Review and Forecast has just released data about worldwide wine consumption and the news is a bit grim.  Global per capita consumption of wine was down in 2008. At 3.5 liters per capita, the global average is a full liter per person per year than in 1990.

A close look at the data indicates that the falling average is the net effect of two opposing trends.  Wine consumption in the New World continues to grow in volume terms (the increase in terms of value is somewhat less due to the on-going trading down effect).  At the same time wine consumption in the Old World, where both production and consumption are still the highest, has fallen off the table (also continuing a trend).

New World consumption is rising, but not enough to compensate for falling Old World demand. The falling per capita average is real, but it masks somewhat an even more important trend — a fundamental global restructuring of the wine world.

A Wine Spectator’s article reports that

Until recently, overall wine consumption was growing, thanks to emerging markets. But the recession has depressed total consumption as well. The United States still represents tremendous potential for the world wine market—Americans consumed an average of only 9 liters per-capita last year, compared to 51 liters and 44 liters, respectively, for the French and Italians. Canada, Chile, South Africa and Australia have all enjoyed steady consumption growth also, as have the emerging markets of India, Taiwan, South Korea and Norway. But China will probably account for much of the future growth in global wine consumption, as the Chinese drink less than a bottle of wine per person annually. The financial crisis has slowed down this growth momentum somewhat, but huge opportunities still abound, especially for large multinational wine companies doing business in China.

I remain suspicious of the potential of the Chinese market, especially in the short run, but I agree with the gist of this. When examined closely, the data tell an interesting story.

Listening to the Wine Wall

Anecdotes are a second source of wine market information. Anecdotes are dangerous because, while they are usually more casual observations rather than rigorous studies, people find them incredibly persuasive.  It is their personal nature that is so appealing, I guess, and the fact that you can dine out for weeks on a really good story. A good statistic or table of econometric results (sigh) just can’t compare.

My anecdote is about a particular wine, Leonetti Cellars Merlot.  Leonetti is an iconic Washington State wine producer.  The conventional wisdom is that you cannot buy it — they sell out every year to insiders, people say. The Leonetti Cellars website hints at this without saying it.  The “mailing list,” it says, is full.  There is a waiting list to get on the waiting list, but it will probably take 5-8 years to get to top of the wait list.

My friends who are on the mailing list (or the wait list for the mailing list) vouch for Leonetti’s scarcity.  They snatch up their allocated 3 (or however many) bottles quickly, knowing that people like me, lacking insider status, will never get a taste. (Note: Leonetti doesn’t say that their wine is impossible to buy, only that their waiting list is limited. And I think that limiting the wait list is a good business decision.)

Many people tell me that iconic wines like Leonetti are recession -proof because they are so hard to get that there will always be a market for them. So (here is the anecdote) I was a bit surprised to see Leonetti Merlot advertised a few weeks ago in a Wednesday supermarket ad for a local upscale farm store.  Yup, we’ve got it, the wine buyer told me — want some?  We’re even doing a tasting later in the week, she said.  Further conversations with my wine business friends suggest that Leonetti (and some other “impossible to buy” wines) have often been available, although they are a bit easier to come by now. You just have to ask.

I suspect that some wine distributors find themselves with more high priced wine that they would like to carry in stock right now, especially with restaurant sales slumping in many areas, and the surplus is filtering down the distribution chain, even showing up on farm store shelves.  It’s only a story, but it suggests that the economic crisis is hitting wine producers even at the top of the ladder.

And the grocery store ads that arrived today (anecdotally) back this up — they feature more hard-to-get wines and, unlike the Leonetti case, they are being sold below their release price!

RH Phillips, RIP

The Sacramento Bee reports today that Constellation Brands is closing the RH Phillips winery. Here is an excerpt from the report

R.H. Phillips Winery is being shut down by its parent company, Constellation Brands Inc. The Victor, N.Y.-based company, which also owns the Robert Mondavi Corp., is the world’s largest wine company with annual sales of 95 million cases of wine.

R.H. Phillips Winery’s 1,700 acres of vineyards, in the Dunnigan Hills area of Yolo County, will remain under the ownership of Constellation Brands.

“(The closure) is part of an ongoing strategic initiative for efficiency,” said Nora Feeley, a Constellation spokeswoman. “We could produce the wines and keep the grapes, but produce them with no damage (to quality) to the wine at Woodbridge.

RH Phillips and Toasted head wine will still be made, but production is being shifted to the big Mondavi plant in Woodbridge, which apparently has some excess capacity.  A big loss for the local community, apparently, and an opportunity to save cost through consolidation for Constellation.

What does this article tell us? Well, it is more like an anecdote that a statistic in that it reports just one story that may or may not be representative of the broader population. It tells us, I think, that the weak wine economy is putting pressure on even the largest players to cut costs and increase efficiency.  The wine recession is affecting the entire market, not excluding Toasted Head and RH Phillips, wines that sell in the intensely competitive $8-$12 range.

Surrounded by Data

It is pretty hard to prove anything with wine economics data but sometimes you can use a combination of statistics, anecdotes and news reports to sort of surround a question.  The three stories I’ve reported here don’t prove anything, but taken together they suggest that the wine recession is being felt globally, nationally and at the local level and at every shelf on the wine wall.

The wine recession is real. Restructuring is already under way.  Or is that just a rumor, too?

Wine, Recession and Argentina

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

Bad News and Good

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

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

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

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

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

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

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

Molto Malbec

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

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

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

American Exceptionalism

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

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

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

Opportunities and Threats

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

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

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

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

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

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

Argentine wine harvest down 25%

May 1, 2009  / Jimmy Langman

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

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

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

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

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

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

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

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

The Future of Wine & Globalization

My life is about to get a lot more complicated, but  in a good way. And that’s not Globaloney.

Readers of this blog know that I’m working on a book that I call The Future of Wine: Globalization, Two Buck Chuck and the Revenge of the Terroiristes.The argument is that the future of wine will be different from its past and that difference will be shaped by three powerful forces, globalization (new producers, new consumers, new values, new opportunities, new pressures), Two Buck Chuck (mass market commercialization and changing wine distribution channels) and the Revenge of the Terroiristes (the inevitable reaction to these radical forces of change).

It is not a completely original idea (have you seen Mondovino?), but I think it is a very useful one.  It’s a framework that will let me tell an important story in a way that a lot of people will find interesting.

But my work on the wine book was recently interrupted by a call from my publisher. Would I be interested in revising my last book (Globaloney: Unraveling the Myths of Globalization) to take into account the continuing financial and economic crisis?  Wow, what an opportunity.  I had to jump at it.  The impact of the economic crisis on global relations is so obviously interesting and important. The chance to rethink globalization in this context is too tempting to refuse.  So tomorrow I start work on Globaloney 2: The World Economic Crisis and the Future of Globalization.

You can read all about the new book at Globaloney2.com.

You’ll notice that “The Future of ” features in the titles of both the wine book and the new Globaloney edition and that’s not an accident. Thinking about the future of wine has affected the way I think about the economy. The conventional wisdom is to consider the wine world and the global economy as fundamentally stable, suffering inevitable booms and busts (globalization) or vintage variations (wine) within a relatively stable and predictable overall environment.

But we know that this isn’t always true with wine.  Wine’s history is full of structural shocks that have transformed established relations. Phylloxera, the rise of Australia, and  prospect of global climate change are just three examples that come to mind.

And we know that the global economy doesn’t always bounce back to the old path, either.  There is no reason to think that globalization after the crash will take the same form as globalization before it. Ask anyone at Lehman Brothers or General Motors if they think the road ahead and the one in the rearview mirror are the same and see what they have to say.

There are times when the “givens” give way and fundamental change occurs.  My working hypothesis for both books is that these are such times and that both wine and globalization are being deeply transformed. I may be wrong about this, but I know from experience that you never see the the big changes unless you look for them. I’m willing to risk seeing change that isn’t there in order to avoid missing it if it is.

So that’s how I’ll be spending the next few months — hoping that my understanding of wine will help me think clearly about globalization and that what I learn about the global economy will help me write more effectively about the future of wine.  It should be a wild ride. Watch this space for frequent updates.

Note: Ken Bernsohn reports that in Canada it is illegal to predict the future on a fraudulent basis.  He recommends that I add a disclaimer to this post and my “future of” work just in case.  Good idea.  Here is Ken’s suggested general purpose disclaimer:

Disclaimer: Some songs may contain a lyrical advisory. Parental discretion is advised. Enter at your own risk. This product is meant for educational purposes only. Any resemblance to real persons, living or dead is purely coincidental unless identified in this section of the book. Void where prohibited. Some assembly required. Batteries not included. Contents may settle during shipment. Use only as directed. No other warranty expressed or implied. Do not use while operating a motor vehicle or heavy equipment. Postage will be paid by addressee. Apply only to affected area. May be too intense for some viewers. Do not stamp. For recreational use only. Do not disturb. All models over 18 years of age. If condition persists, consult your physician. No user-serviceable parts inside. Freshest if eaten before date on carton. Subject to change without notice. Times approximate. Simulated picture. No postage necessary if mailed in the United States. Breaking seal constitutes acceptance of agreement. For off-road use only. As seen on TV. One size fits all. Many suitcases look alike. Contains a substantial amount of non-tobacco ingredients. Colors may, in time, fade. Slippery when wet. For office use only. Edited for television. Post office will not deliver without postage. List was current at time of printing. Not responsible for direct, indirect, incidental or consequential damages resulting from any defect, error or failure to perform. At participating locations only. Not the Beatles.

Penalty for private use. See label for sequence. Substantial penalty for early withdrawal. Do not write below this line. Falling rock. Lost ticket pays maximum rate. Place stamp here. Avoid contact with skin. Sanitized for your protection. Employees and their families are not eligible. Beware of dog. Contestants have been briefed on some questions before the show. Limited time offer, call now to insure prompt delivery. You must be present to win. No passes accepted for this engagement. No purchase necessary. Processed at location stamped in code at top of carton. Shading within a garment may occur. Use only in well-ventilated area. Keep away from fire or flame. Replace with same type. Approved for veterans. Some equipment shown is optional. Price does not include taxes. Not recommended for children. Prerecorded for this time zone. Reproduction strictly prohibited. No solicitors. No alcohol, dogs, or horses. List at least two alternate dates. First pull up, then pull down. Call toll free before digging. Driver does not carry cash. Some of the trademarks mentioned in this product appear for identification purposes only.  This supersedes all previous notices.

The Center Does Not Hold

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

The Age of Uncertainty

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

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

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

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

Nothing is reliable. Even our money betrays us.

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

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

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

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

Drying Up

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

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

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

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

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

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

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

More to follow.

Crisis and Change in the Wine World

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

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

Cycle or Shift?

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

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

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

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

The Market Center Shifts

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

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

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

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

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

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

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

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

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