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

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

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

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

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

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

Decline and Fall of Down-market Wine

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

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

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

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

Up the Down Staircase?

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

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

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

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

Bronco Busting

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

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

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

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

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

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

Buckle Up!

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

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

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

Biodynamics: The DooDoo VooDoo Yoga Effect

Katherine Cole, Voodoo Vintners: Oregon’s Astonishing Biodynamic Winegrowers. Oregon State University Press, 2011.

You can’t come to Oregon and speak about “green wine” as I did a couple of weeks ago without talking about biodynamic viticulture. The Willamette Valley is a hotbed of biodynamic activity; Demeter USA, the national biodynamic certification organization, is even based here. And now Katherine Cole, a writer for The Oregonian newspaper and several wine publications, has chronicled the movement in her nifty new book Voodoo Vintners.

Black Magic Burgundy

Biodynamic viticulture is controversial – do a simple Google search for the phrase “biodynamic viticulture debate” and you’ll see what I mean. Organic viticulture sort of adopts Google’s motto: Don’t Be Evil. Eliminate chemical fertilizters, sprays and so forth. Biodynamics takes a different and more proactive approach that considers vineyards the way the Gaia Hypothesis thinks of the earth, as a living organism. Just avoiding harm is not enough! If you want healthy grapes you need the entire environment to be healthy and growing, from the dirt and its microrganisms on up.

This sounds good enough, but then there are the cow horns and other unexpected elements of the system. Rudolf Steiner, biodynamic agriculture’s Austrian founder, prescribed certain treatments, sprays and practices that strike many as more black magic than agricultural science. Any recipe that begins with burying a cow horn filled with manure (that’s DooDoo) in the vineyard and involves special stirring instructions for the resulting organic tea to harness cosmic energy before it is sprayed on the vines (VooDoo?) is bound to have skeptics.

Walking the Talk with Alois

Some wine people declare that biodynamics is bogus, a hoax. Others approach the concept with almost religious reverence. We spent an hour walking the vineyard rows with Italian biodynamic guru Alois Lageder earlier this summer and the depth of his faith was hard to miss … or to resist. He’s a true evangelical biodynamic fundamentalist and there are many who share his faith.

Alois Lageder Mesmerizes Mike

So I approached Cole’s book with great interest. Would she argue for the fundamentalists like Lageder or side with the skeptics? The answer is neither – the book is organized around a set of profiles of Oregon wine people rather than a strong central argument.

As you read the book you learn about the history of biodynamics and Rudolf Steiner, its charismatic originator. And you meet some Oregon wine growers who embrace biodynamics, some who reject it, some who’ve tried it and given up and others who like the idea, but will only go part way, It’s an interesting journey because these are interesting people and Cole is a fine writer who takes us into their lives as they weigh the costs and benefits.

Biodynamics and Yoga

All very interesting … but so what? What’s the point? I kept looking for Cole’s argument and I couldn’t find it.  Then, going back through the book I discovered that I had missed the thesis, which was stated in the introduction.

For my part, I like to compare BD [biodynamics] to yoga,. It’s a way to strengthen and fortify the whole body, to ward off illness and to maintain health.  …

OK, but what about the voodoo stuff? Well, Cole writes, yoga has its mystical side, too.

Yoga is self-contained, holistic. … There is another, metaphysical, aspect to yoga that isn’t much discussed.  … It is possible to be a practitioner of yoga without buying into the spiritual side.

That’s true. I used to do yoga exercises but I was only interested in the physical (flexibility) and mental (calm) benefits. I wasn’t looking for enlightenment.

Biodynamic viticulture in Oregon is similar to yoga at your neighborhood studio. Although it’s still a fringe phenomenon, it’s becoming increasing popular and voguish. Many winegrowers are dabbling it it. A small number are devout practitioners.

Having read the book I think Cole’s yoga analogy is a good way to describe how wine growers in Oregon relate to biodynamics — most are pragmatists and do what they think works, although a few also embrace its more mystical elements. This is a book about the people as much as (and maybe more than) the biodynamics they practice [or not]. For all its black magic, in Cole’s telling of the story, it’s still the human element that matters most.

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I enjoyed Katherine Cole’s book and I recommend it, but I still have doubts. Is biodynamics really like yoga, a healthy activity but ultimately matter of personal choice? Isn’t there any scientific evidence one way or another that can serve as a guide?

Well, there is a new book that examines biodynamics (and other green wine approaches) systematically and makes a strong argument that goes beyond bending and stretching. It’s called Authentic Wine and I’ll tell you all about it in my next post.

In the meantime, here are some Yoga exercises for wine drinkers (hint: don’t try this at home)!

What’s Red, White & Green? Wine Packaging Greens Up

What’s red and white and green all over? Wine, naturally. And naturally Oregon wineries are in the green forefront — a fact that was reinforced at a recent Wine Wars book talk.

The Difference Between Water and Wine

Forty-eight  alumni came out on a beautiful August evening to attend an event at the Boedecker Cellars winery near downtown Portland.  That’s a testament to the old saying “Water keeps people apart, wine brings them together.” Urban wineries are a growing trend and Steward Boedecker and Athena Pappas have located theirs in a cool 1950s building across the street from the Pyramid Ales brewery. (Stewart is a Puget Sound alumnus, so Boedecker is on my growing list of  alumni wineries.)

Because I was asked to talk about Wine Wars with particular attention to Chapter 14’s topic, wine and the environment, I titled my presentation “What’s Red and White and Green All Over.” Portland is a good place to give a talk like this because it is so close to the wine country and its citizens are so environmentally minded. Green wine is big in these parts.

Green wine is made in the vineyard, of course (the organic or biodynamic viticulture choice), and part of it is made in the cellar (especially regarding water use and re-use, which is a significant issue almost everywhere). I’ve seen estimates that it can take as much as 120 liters of water to produce a single glass of wine if you follow the product chain from start to finish. Wow! That’s a big environmental factor.

And finally there’s green wine packaging.

Weighing the packaging options: Jen, Allison, Mike and Brad.

The Weigh In

With the help of two volunteers, Jen and Brad, I demonstrated some green and no-so-green wine packaging options.  The differences in size, weight and perceived quality were astonishing. Here is the tale of the scale.

  • Standard 750ml bottle filled 1320 grams
  • Standard bottle empty 578 grams
  • Prestige bottle empty 844 grams (46% heavier than standard bottle)
  • Eco bottle empty 476 grams (82% of the weight of standard bottle)
  • Ultra-eco bottle empty 444 grams (the blue bottle in the photo — 77% of standard bottle weight)
  • PET bottle empty 56 grams (the yellow bottle in the photo — less than 10% of the standard bottle weight)
  • Tetra-Pak 1 liter container empty 40 grams (less than 8% of standard bottle weight)

The Tetra-Pak is more efficiently produced and recycled and saves over 90 percent of shipping weight compared with the standard bottle, an amazing saving of resources all along the product chain.

I predict that much of the wine we drink every day will eventually be delivered in eco-containers. Just as many consumers seem to have gotten over their prejudice against screw caps, I think we’ll come to accept eco-packaging as an appropriate delivery system for the ordinary everyday wines that make up more than half of all wine sales.

Animated winemakers: Athena Pappas and Stewart Boedecker

Fine Wine versus Vin du Jour

But what about fine wine? Well before my visit to Boedecker my answer was that the eco packaging choices were pretty limited – lightweight glass was about all I could recommend since the most extreme eco choices (Tetra-Pak, for example), are not appropriate for medium- or long-term storage. They are for vins du jour – the wines you buy at 3pm and open at 5pm (which make up the bulk of total wine sales, of course).

But Stewart surprised me by explaining that he had found some innovative ways to cut Boedecker’s environmental footprint without sacrificing the quality of the delivered product.

How about re-using wine bottles the way we used to collect and reuse soda bottles? The idea of recycled wine bottles is very appealing, but the practical problems of collecting used bottles, cleaning, sorting and distributing them are hard to overcome. But Stewart told me about a California firm (I think he was talking about Wine Bottle Renew) that has tackled this project with success, using high tech scanners to sort the bottles (a key and previously prohibitively labor intensive process).

The money and resources saved by not having to melt down and recast the glass are considerable, Stewart said, and the delivered glass is both cheaper than new, it is also actually cleaner (an obvious concern).  He’s sold on recycled bottles and it is easy to see why – a trend to follow for sure.

Riding the Keg Wine Wave

Boedecker is also riding the keg wine wave, which is another eco-packaging movement. Wineries deliver 20-25-liter kegs to restaurants and other “on-premises” establishments to fill “wine by the glass” orders with no waste. It makes a lot of sense to eliminate as much of the packaging as possible for wine that will move so quickly from barrel to glass.

But keg wine is currently mostly a local phenomenon because of the logistics of recycling and reusing the kegs, which is the key to the whole enterprise. So I was surprised to learn that Stewart was selling Boedecker wine kegs in New York City.  They ship the wine in bulk to New York where a local partner handles the keg operation.

What a great idea! It opens up a distant market, is good for the environment and is good for the wine, too.  Kym Anderson recently explained to me that shipping in bulk versus shipping in bottles can actually result in better wine because the liquid mass of the wine (up to 25,000 liters in the case of ocean container shipments) is more temperature stable than cases of wine in bottles. Cheaper, greener, better quality — a winemaking trifecta!

Bulk shipping and local “bottling” into kegs is kind of a return to U.S. wine market practices in the 1930s, where California winemakers would ship bulk wine across the country in railroad tank cars. Local bottlers would market the wine, usually under their own brands rather than the name of the wine producer. This practice ended in World War II when the Army commandeered the tank cars and wineries were forced to bottle (and brand) themselves and ship cases of wine in box cars.

Will keg wine take off and take us back to the future of wine? Stay tuned.

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Thanks to Stewart and Athena for hosting the alumni event at their winery. Thanks as well to Brad Boyl, Rainier Aliment, Renee Kurdzos and Allison Cannady-Smith for all they did to make this event a success.

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