Tight, Fat, and Uncorked: Three Wine Scenarios

This is the final post in my series on Tight, Fat and Uncorked, the three trends I see shaping the wine industry. This week I want to think about how the future of wine might unfold depending upon which of these three forces is most powerful.

Wine markets are getting “tight” as demand for many grape and wine types outstrips supply, “fat” because of the growing demand for middle class, middle market, middlebrow wines and “uncorked” as more and more international wine trade shifts from bottle to bulk. Each of these forces is important, but it will untimately be the ways they interact that will determine the path of wine’s future development.

For your consideration, here are three possible histories of the future of wine. As always, I invite readers to share their own scenarios in the Comments section below.

Scenario 1: Wine as a Global Commodity

The first scenario sees the three forces fitting together neatly in a way that leads to the increasing commodification of wine.  Tight markets force wine producers to scour the world for juice to maintain their “fat” market wine brands. Bulk wine shipments help solve this problem in a cost-effective way but sacrifice regional identity and local “terroir” to a certain degree.

This scenario is so neat and clean that it is tempting to stop right here. But that’s a mistake because this “future” is really more about the present  and or recent past misses some of the more interesting dynamic elements. Things change when we tweak this scenario a little.
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Scenario 2: The Center Does Not Hold

The second scenario looks more closely at the implications of tight markets. Grape and bulk wine prices are already rising (alarmingly so, in a few specific cases) and this trend is likely to persist for several years.

Many have observed that the demand for wine has become more “elastic” or price sensitive. The recession is one cause: consumers have learned to trade down. Many new “fat” wine buyers think of wine as just one of many possible beverage choices and are more willing to substitute beer, spirits, juice, soda,  and even water as relative prices change. Not all wine drinkers are equally sensitive to price, of course.

So what will happen as wine drinkers are faced with higher prices? One possibility is that the “fat” wine segment will be particularly affected as competition focuses on this price-sensitive market. It isn’t hard to imagine that margins could shrink or disappear as price-sensitive demand meets rising costs. Maybe today’s “fat” market will go on a diet, as grapes and wine are pushed upmarket in search of higher margins and consumers go down market in search of cheaper (or different) ways to fill their glass.

Scenario 3: The Center Shifts [on the margin]

The final scenario focuses on income and demand. The middle class, middle market, middle-brow “fat” wine demand is thought to have a high income elasticity — it is relatively sensitive to changing income. A 10% increase/decrease in income produces more than a 10% rise/fall in wine demand. This property is important as the wine market demand expands (the rising global middle class) in a multi-speed world.

If Europe’s recession continues and even deepens (as seems likely) and the U.S. recover slows or even stalls (as seems possible), then the center of gravity in the wine world will necessarily a bit shift towards those areas where middle class incomes are growing, including parts of Asia, South America and even Africa.

Is this a serious concern? Well, don’t forget that the United States is now the world’s largest wine market and this didn’t happen over night but it did occur because of just the sort of persistent marginal movements I’m talking about here. Certainly all eyes are on Brazil right now because it seems like a country where a substantial “fat” wine market might develop if solid economic growth can be sustained.

Not Nairobi [yet]

I’m not saying that suddenly Nairobi (or Säo Paulo or Shanghai) is going to be the center of the wine world, but supply tends to follow demand and, with markets tight and bulk wine shipments increasingly efficient, new directions are very possible, particularly if margins in these new middle markets are attractive.

Some of these scenarios are more likely than others, but all three embody valid points. So the future of wine (as shaped by these trends) is likely to encompass all three factors plus some unexpected “wild cards.” It is going to be interesting to see how this complex interaction plays out.

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Wine Uncorked: The Rise of Big [Really Big] Box Wine

This is the fourth in a series of articles on Tight, Fat and Uncorked, the three trends I see shaping the wine industry. This week’s topic is how wine is becoming increasing “uncorked” and what this implies.

If you take the “uncorked” metaphor and add it to the “box wine” reference in the title, you might reasonably assume that I’m going to talk about alternative wine packaging — boxes, bags, 1-liter tetrapak containers and so on. That would sure make sense.

But you’re wrong. The box I’m talking about is big [really big] as in 20 foot ocean shipping containers holding maybe 25,000 liters of bulk wine in a “flexitank” bag.

Welcome to the New World of international wine trade — the ultimate ‘uncorked’ experience!

The Incredible Bulk

I’ve known about Big Box wine for a while — my 2009 post on “Wine’s Future: It’s in the Bag [in the Box]“ is one of the most-read articles in Wine Economist history. But I didn’t realize how big the big box wine trade had become until I received a Rabobank  report titled “The Incredible Bulk: The Rise in Global Bulk Wine Trade” earlier this year.

Rabobank’s report focuses on New World wine trade since 2001 and the change in the composition of wine shipments (in terms of bottled versus bulk) is dramatic. Bulk wine (the big box stuff) accounted for about 22% of New World wine exports in 2001 (the remaining 78% was shipped in bottle). By 2010 the bulk share increased to over 40% while the bottle share fell to less than 60%. That’s a near doubling of the bulk wine share of New World wine trade in less than a decade, an amazing shift that is all but invisible to consumers.

Big Green Wine

What drives the shift from bottle to bulk in New World wine trade? The short answer is Big Green, but green in two ways. Green, first, in the environmental sense. Bottled wine is both heavier and bulkier than bulk wine (glass accounts for more than 40% of a standard bottle’s total filled  weight). All else being equal (a big assumption in wine economics) shipping wine in bulk and bottling closer to the final consumer should lower the wine’s carbon footprint.

Tesco, the world’s largest wine retailer,  is reported to be particularly aggressive on this front with bulk wine imports being bottled in screw cap-topped lightweight glass for its high volume private label brands. (Click here to read about their very green “furnace glass” wine bottles!)

Cost is another green (as in greenback) factor and there are savings here as well. Rabobank estimates that bulk shipping yields an average cost savings of $2.25 per standard 9-liter case (they estimate total annual savings of $142,300,000 in 2010 compared with the 2001 level of bulk shipments).  This is a very substantial saving for commodity wines of the type that often appear in private label brand portfolios.

The movement towards increased bulk wine exports started in the Age of Abundance, when surplus wine flooded the markets and it was important to move it as cheaply and efficiently as possible. Those days are now in the past; rising costs and tight margins are likely to make that $2.25 per case saving even more attractive to producers now, especially as they scour the world for supplies of wine (did someone say “Moscato?”) to supplement scarce domestic juice.

Subtracting Value Added

For vertically integrated international wine producers, the decision to ship in bulk and bottle in the domestic market is mainly about these cost savings.  They pay less to ship the wine and pay lower import excise, too, since the wine enters the country at the lower bulk value rather than a higher bottled value.

But more is at stake, as the Rabobank report notes, for wine makers who sell to third party importers. In this case bulk shipping results in a new division of value added in the supply chain, with less in the producing country and more further down the line. The impact is thus complicated: bulk wine shipment subtracts some value added in the producing country, although the lower overall cost encourages exports.

There are also relative price effects to consider. Bulk shipping increases the relative price of traditional bottled wine imports relative to bulk products, a difference that may be magnified as wholesale costs differentials are passed along through the supply chain.

Economic Impact: The Box

The standard 20-foot shipping container (a.k.a. “The Box”) revolutionized international trade when it became widely adopted. It changed everything (OK, maybe not everything) because it was so much more secure and efficient than the previuosly standard “break bulk” shipping system. One of the things it changed was the scale of international transactions because the greatest economies were realized by those who could reliably fill ocean containers.

I don’t think the rise of “uncorked” big box bulk wine shipments is going to change everything in the same way the ocean container did, but I do think the effects will be significant. I’ll talk about this more in my next post where I consider how the world of tight, fat and uncoked wine is likely to unfold.

Fat Wine: Middle Class, Middle Market, Middlebrow

The world is becoming Hot, Flat, and Crowded according to New York Times columnist Thomas Friedman’s bestselling 2008 book. Hot and crowded are easy to understand, but flat?

Yes, Friedman, said, flat as  “a metaphor for the rise of middle-class citizens, from China to India to Brazil to Russia to Eastern Europe, who are beginning to consume like Americans. That’s a blessing in so many ways–it’s a blessing for global stability and for global growth. But it has enormous resource complications ….”

Fat Not Flat

Friedman is counting on the world’s growing middle class to shake things up and he is probably right. Here in Wine World, however, I think the trend is fat more than flat, although it might amount to the same thing in the end.

“Flat” suggests to me that the gap between the top and bottom — 1% elites and 99% masses — is closing. Wine certainly isn’t getting flat in this sense, although the recent softness of Bordeaux en primeur prices argues against this a bit.

No, the floor and the ceiling aren’t getting any closer when it comes to wine — so  I think the best way to describe this trend is Fat — fat in the sense of “thick in the middle:” middle class, middle market, middlebrow.

Thick in the Middle

Wine’s recently-concluded long slack cycle (see previous post) flooded many  markets with good, reasonably priced wine. The impact of the economic crisis encouraged consumers to trade down (to cheaper wines), to trade over (to different types of wines), and trained wine drinkers to look for bargains. Many new consumers entered the wine market at the same time, bringing with them new tastes, new attitudes, and a refreshing willingness to experiment.

There are several key indicators of the degree to which wine markets have been open to new ideas. The great success of New Zealand and Argentina as wine exporters reflects both the quality and value of the products from these countries but also, I believe, their good fortune in entering the global market at this time.

Marlborough Sauvignon Blanc and Argentinean Malbec are easy to understand, easy to drink and even easy to pronounce. They are the hottest import categories in the U.S. market. Significantly, neither of these wines is especially cheap. They are generally priced in the middle market, well above Two Buck Chuck and even higher than popular brands like Barefoot. They fit my “thick in the middle” model to a “T.”

The Moscato boom is another indicator, although I won’t press this too far since there is not yet a consensus about where it came from, what it means or how long it will last (readers should feel free to correct me about this in the comments section — I’d really like to know the answers).  Moscato/Muscat sales have surged in the U.S. — up by 65% in the last year alone according to Nielsen data published in this month’s Wine Business Monthly. Moscato wines had higher dollar sales than Riesling, Syrah/Shiraz, Zinfandel or Malbec in the last year in the retail vectors that Nielsen monitors . Wow!

Now For Something Completely Different

The one thing I am sure about is that Moscato’s unexpected popularity indicates that consumers are willing to try something new. And while they look for bargains and value, they don’t seem to be focusing on the bottom shelf.  Nielsen reports that sales of wines below $6 have been essentially flat in the past year in revenue terms and spending on wines in the $6 to $8.99 range declined. Spending on wines in the $9.00 to $11.99 range, however, has actually increased by about 10%.

We’ve also seen the emergence of hot new brands in this middle market middlebrow segment. The rapid rise of brands like Gallo’s Apothic Red Blend and Ste Michelle Wine Estate’s 14 Hands suggests that consumers are focusing on this market category.

It’s not quite true that these particular wines came out of nowhere to achieve great success in the off-premises trade, but it’s not entirely wrong either. They are another sign of the thickening of the middle segment of the wine market of consumers ready and willing to try new things and not entirely constrained by old attitudes and allegiances.

The Supply Side of the Story

So far I’ve focused on the demand side of the story but supply plays an important role, too. As grape and bulk wine markets tighten up (see previous post) it is only natural that scarce wine resources will go where the margins are and where substitution is easiest. The “middle” wines I’ve just discussed are often priced at the “fat” part of the market where better margins may be found. (I say “may” because this market segment is quite competitive and competition has a way of squeezing margins.)

Some of these “middle” wines are blends, not single varietal wines, and come from broad appellations (Washington State, California). A few are non-vintage. These properties allow winemakers to more easily substitute among supplies of grapes and bulk wines to make or complete their products — the ability to substitute is important when supplies are tight and costs are rising.

Middle market wine for middle class, middlebrow consumers — is this a good thing? I guess it depends upon whether you are a Martian or a Wagnerian. I’m a Wagnerian myself, so I see this as a healthy development, even if wine loses a little of its mystery and becomes just a bit more like other everyday products. Making wine a part of everyday life is a worthy goal here in the U.S. and I don’t think the 1% wines (or even the 25% wines) have much to fear.

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There’s one more trend on the horizon that completes this theme. Come back next week to learn about how wine has become even more “uncorked.” And I’m not just talking about screw caps!

[This is the third in a series of articles on Tight, Fat and Uncorked, the three trends I see shaping the wine industry in the near future.]

Wine’s Future: Tighten Up

“Tighten Up” was a big hit for a Archie Bell and the Drells back in 1968. If you aren’t familiar with this R&B tune and its trademark dance you might want to take a moment to learn it because Tighten Up is where the U.S. wine market is headed.

[This is the second in a series of articles on Tight, Fat and Uncorked, the three trends I see shaping the wine industry in the near future.]

Up and Down Economics

There is nothing new about tight wine markets (where shortages pull prices higher) or slack markets either. Wine is an agricultural product subject to the sort of persistent cycles that economists have long studied. Today’s high price encourages farmers to plant more even as it discourages growth in demand. Result: future surplus and falling price when the new crops hit the market. Low prices discourage production but encourage consumption growth, resulting in shortages and future price hikes.

Up and down — that’s happens in wine markets. The Turrentine Brokerage’s “Wine Business Wheel of Fortune” illustrates the U.S. wine cycle — click here to view a detailed pdf version that will be helpful in understanding what follows.

This Time Really Is Different

If tight and slack wine markets are not uncommon, what’s the big deal? The answer is that we are coming off an unusually long period of low prices and most likely headed into a long period of tight supply. It is the length of the cycle, not the fact of it, that is striking and important.

The current Turrentine Wine Wheel shows the most recent cycles. The figure shows that prices started falling in 1982, for example, hitting bottom in 1986. By 1989 prices were at their peak again, setting up the next cycle, which ran from 1990 until 1999.  It took seven years for the first cycle to work itself out and nine years for the second cycle.

Now let’s look at the current wine cycle, which Turrentine says began in 2000 and that they project will last an incredible 18 years!  The slack side of the cycle was exceptionally long — 2000 to 2011 — because it combined several factors. First was the typical domestic surplus that results as vineyards planted at the previous cycle’s peak begin to bear fruit. The second factor was increased global wine production, which served to keep prices low even as some domestic producers cut back. This extended the period of falling price.

The Great Recession is the final factor, depressing prices and further extending the slack side of the cycle past 2010. As you can see from the figure, Turrentine originally expected the down side to last only through 2006, but a “perfect storm” kept prices low through 2010 as demand and supply slowly moved into balance.

Ebb Tide

Now we have finally entered the tight market phase where demand exceeds available supply at the current price  and this part of the cycle is likely to be extended as well.  Vineyard capacity did not expand sufficiently during the long down cycle and in fact it contracted dramatically in particular places. The EU wine market reforms removed some capacity in Europe and the collapse of part of the Australian industry has done the same there. In the U.S. some Central Valley producers, tired of low or negative margins, switched from wine grapes to more consistently profitable crops like tree nuts.

In theory it should take only a few years to rebuild vineyard capacity but in practice it will take longer for several reasons. First, the length and severity of the slack part of the cycle will naturally make some who have left the market in the U.S. and elsewhere hesitate to reenter it. The supply response in the U.S. will be delayed for this reason and also because of what I am told is a shortage of nursery stock needed to establish new vineyards and renew old ones.  It will take a few years to rebuild stocks needed to rebuild vineyard capacity.

Prices for grape contracts and bulk wine have already risen (dramatically in some specific cases) as they must do to eventually bring the market back into balance, but this will be a slow adjustment process. Domestic wines must compete with imports, which act to limit price increases in some segments of the market. And of course consumers have become accustomed to lower prices and are not generally expected to “trade up” (except in response to bargain pricing) as much as they may have previously traded down.

Hysteresis: Winding and Unwinding

Rising grape costs are good news for growers, who have borne the brunt of adjustment costs during the long slack cycle. Now the big squeeze will move up the supply chain in the form of tighter margins and the effects are expected to be substantial precisely because the length of the tight market cycle will be so long.

What will the wine industry look like when we get back to the top of the cycle? One thing we can be sure about is that it won’t look the same as it did back in 2000. Economic adjustments are not necessarily symmetrical — they don’t wind up the way they unwound. (Economists have a name for this property: hysteresis.) The history that unfolds in the intervening years matters a lot and there has been a lot of time for things to change since the last market cycle began.

In particular, the long slack tide brought new products, new consumers and new consumer behavior into the market. This doesn’t change everything, but it changes a lot — as I’ll explain in next week’s post.

Wine’s Future: Tight, Fat, and Uncorked

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

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

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

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

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

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

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

Tight [Markets]

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

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

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

Thick Around the Middle

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

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

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

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

Now Lose the Cork

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

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

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

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

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