Economic Effects of Washington Liquor Initiatives

This is the third in a series on initiatives to liberalize Washington’s alcoholic beverage laws  (click here to read the first and second segments). How would Washington Initiatives I-1100 and I-1105 affect wine makers and wine consumers? Let’s look at wine makers first.

Wine producers in Washington are not united either in support of or opposition to the initiatives. One industry group, The Washington Wine Institute, publicly opposes both initiatives, for example, while the Family Wineries of Washington State supports I-1100 but opposes I-1105.

Winners & Losers

Both initiatives would create more avenues of competition for wineries by removing state restrictions that prevented discounted prices, negotiated payment schedules and so forth. Based on my conversations it seems that some wineries would welcome the opportunity to compete  using a fuller range of business strategies. They would like to be able to go after the business they want and to reward retailers and restaurants that carry the full range of their products or who make long term commitments.

Other wine makers are concerned that they may be disadvantaged in this new environment because they lack the resources or expertise to compete effectively. Interestingly, it is not just small wineries who want to avoid competition and not just large ones who embrace it. Obviously it is a complicated matter.

One wine maker candidly told me that it is hard to know if the gains will outweigh the losses.  This person saw obvious areas for new business expansion but realized there would be negative effects on margins and the need for more capital to accommodate extended payments. I sensed a very pragmatic attitude:  wine is a business and business people have to cope with whatever is thrown at them whether it is Mother Nature (a late harvest) or a change in state liquor laws.

My conversations reminded me of Olivier Torres’ discussion of the difference between French and American business strategy in his book The Wine Wars. American entrepreneurs, Torres says, look for new opportunities, taking risks, while the French business strategy is more about fending off threats. This is an oversimplified stereotype, of course, but it does seem to capture a bit of the wine war raging today in Washington state, where those with “French” attitudes are not necessarily from France.

Will Small Wineries Get Squeezed?

Television ads like the one I have inserted above suggest that small wineries would be especially hard hit by the new laws. A local news analysis of this ad raises some doubts about this claim (see  this King5 report). Will small local wineries get crowded off the shelf? Here’s my brief analysis.

I do think that large wine companies will have an advantage if the law is changed, but they have obvious economic advantages now, so this is nothing new. I would not be surprised to see big companies (Constellation Brands, Gallo, etc) increase their relative share of retail shelf space since they have the resources to offer discounts and incentives.

It is also possible that spirits companies and distributors will bring associated wine brands with them as they rush to fill their newly opened retail market niche if the initiatives pass, adding to the “crowding out” effect.  Retailers are trying to streamline their operations and reduced the number of suppliers they deal with, giving “drinks” companies that can supply wine, beer and spirits an advantage.

This effect will differ by type of retail account, of course, and be different for fine dining versus casual dining restaurant sales. In the supermarket segment, for example, you can already see differences in the relative incidence of the big producer portfolios in Fred Meyer (Kroger) and Safeway stores compared with regional chains like Metropolitan Market.

Although small wineries might get somewhat less shelf space, they certainly will not disappear from wine shelves and restaurant lists. Wine enthusiasts value diversity and smart sellers fill their shelves accordingly. That’s why a typical upscale supermarket offers 1500-2500 wine choices, at least ten times the number of options in any other product category. Retail wine margins are high and sellers profit by catering to their customers’ desire for a wide range of choices.

I think the competition among smaller winemakers will be more of a factor than between the big corporations and the small family wineries. There are hundreds of small wineries in Washington state all seeking a place at the retail table. Right now it is pretty difficult for the maker of a $40 Walla Walla Syrah to get shelf space (or distributor representation) and many producers are sensibly reconfiguring their business plans to focus more on direct sales. This will remain a good strategy if the initiatives pass, but makers who want to compete for shelf space will have more tools at their disposal.

And That’s A Good Thing?

Bottom line: small wineries will get squeezed by the big boys, but other small wineries are the real competition (hence the lack of a consensus among wine makers) and the initiatives will make this competition much more intense.

Is this a good thing? Well, it will probably be good for many consumers who will benefit from lower wine prices. They will likely have more (but different) wines to choose from too. Whether the new choices will be better is bound to be a matter of taste. If, as some have suggested, big box drinks retailers Bevmo and Total Wine open outlets in Washington it will change in significant ways the market terrain.

At the Ballot Box

How am I going to vote? The issue is complicated enough that I honestly haven’t decided yet. I am unlikely to vote for I-1105, however, since it seems like a stumbling half-step towards market liberalization.

I find the wine market aspects of I-1100 appealing and, as an economist, I am programmed to believe in the benefits of competition, but I am still concerned about the liquor law changes. I don’t know how making spirits cheaper and more readily  available will help solve the public health and safety problems associated with liquor consumption. Many will disagree with this view and I respect their opinions.

I guess I’m going to have to weigh the pros and cons before I cast my ballot just like everyone else.

Anatomy of the Costco Initiative

Second in a series on initiatives to liberalize Washington’s alcoholic beverage laws (click here to read the first segment).

A recent article on the Wine Spectator website does an excellent job of detailing the specific elements of Initiative 1100 (which I call The Costco Initiative) and I-1105 (a.k.a. The Distributor Initiative) as they pertain to wine. It is required reading for anyone interested in this issue.

For my part, let me approach the question in a different way: how would the initiatives affect Costco (and other wine retailers), wine distributors, wine consumers and wine makers in Washington state?  This post looks at retailers and distributors. I’ll address consumers and winemakers next time.

Costco’s [Big] Dog in the Fight

Let’s start with Costco, which is appropriate since it is a major backer of I-1100.  How would I-1100 affect Costco? Well, the most important factor is that it would allow Costco and other retailers to sell hard liquor, which is currently a state monopoly in Washington.  Other changes are important, but that’s the big one in terms of economic impact in my view.

What about wine? Not surprisingly, Initiative 1100 would allow Costco to be a much more efficient wine retailer.

First, Costco would be able to purchase wine directly from producers and could take advantage of more efficient central warehousing of alcoholic beverages. Costco would be able to negotiate volume discounts from producers and could benefit from other promotions (wholesalers must maintain uniform prices under the current law and are forbidden from providing retailer incentives). Costco could also negotiate payment schedules — current law requires that retailers pay for wine and beer at the time of purchase.

These changes would make the process of selling wine pretty much the same as other products by removing current restrictions. Costco would also be permitted to sell space on its wine shelves to producers (much as supermarkets routinely sell shelf space for grocery items), although it is unlikely this would actually happen. Costco does not sell space now in states where this is legal. Rather, like Wal-Mart I think, it simply asks for a lower wholesale price.

Taken together these market reforms would lower the cost that Costco pays for wine, savings that would be passed on to consumers. Costco’s normal mark-up on wine is 15% (17% for own-brand Kirkland Signature bottlings), so Costco’s existing absolute price advantage for the wines it carries would likely grow.

Don’t expect Costco to use these advantages to monopolize state wine sales, however. Costco has great wine prices, but it carries a surprisingly small number of wines at any time — about 100-150 different wine SKUs compared to the 1500-2500 that you can find at an upscale supermarket.

So while Costco wine sales will rise, there will be lots of room for other retailers, too. In fact, there is speculation that the market reforms will draw big box wine/beer/liquor retailers Bevmo and Total Wine into the Washington state market.

It is easy to see why retailers are backing I-1100. Their costs will fall and they should be able to sell more wine, which is a high margin item compared to most other supermarket categories.

 

The three-tier distribution system for beer (and wine).

 

The Impact on Distributors

It is also easy to see why distributors oppose I-1100 and why they back I-1105. Initiative 1100 privatizes liquor sales, liberalizes the alcoholic beverages market and allows retailers to cut out middlemen and purchase directly from wine, beer and spirits manufacturers. I-1105 is similar to I-1100 in most respects, but requires that the distribution step in the three-tier process be retained.

Distributors recognize that the ability of large retailers to bypass them and buy directly from producers and to demand discounts and other incentives is a threat to their business and it is understandable that they would oppose this.

Don’t expect distributors to disappear if I-1100 passes, however. Distributors play a vital role in connecting producers and retailers and, although they might lose some “rents” from their previous legal status, I can see where their role will change and might even expand in some specific areas as the overall wine market grows.

Larger distributors, who already have some economic advantages, might get an added edge if they are better able to offer retailers payment terms. Competition in general will increase, so there may be a shake out in this sector if I-1100 passes.

Fundamentally, I-1100 shifts market from distributors to retailers and will redistribute profits within each group, too. What about the people who make wine and those who drink it? Check back in a couple of days for analysis.

This Changes Everything? The Washington Costco Initiative

Everyone knows that the wine business is highly regulated. In France, for example, very restrictive appellation regulations govern how wine can be made and even more restrictive laws limit how it can be advertised and promoted.

French winemakers sometimes must feel they are fighting a battle with one arm tied behind their backs.

America’s Long Hangover

But they have an advantage over many American producers, who could be excused for thinking that both their arms are immobilized. The American appellation system is not as restrictive as Europe’s, but the complicated web of federal, state and local regulations makes selling wine, especially across state borders, costly and cumbersome. (HR 5034, which would impose additional barriers to interstate wine shipments, would make this problem even worse.)

In my forthcoming book I call this mess the American Hangover. The U.S. wine market has a hangover, but it isn’t from too much wine. It is still recovering from Prohibition. Most of today’s regulations can be traced back to the repeal of Prohibition, when the federal government retained some regulatory powers, but turned others over the states (and in some cases, to local jurisdictions, too) thus creating a mess that is difficult to untangle.

The Swedish Solution

Here in Washington state, the end of Prohibition coincided with two important initiatives. First, the state government seized control of liquor sales under a modified version of the Swedish system.

Sweden instituted a state liquor monopoly in the 19th century (which lives on today in the form of Systembologet) based on the logic that people want alcoholic beverages (and will find a way to get them if they are banned outright), so Prohibition isn’t really feasible. But if liquor sale is in private hands it will be actively promoted because of the money it spins off, leading to increased alcoholism and public health and safety concerns.

A state alcohol monopoly can provide wine, beer and spirits as a sort of public utility – people get the product at a high price  and at some inconvenient to simultaneously discourage but facilitate consumption. No profit incentive encourages marketing and promotion of alcohol. The state has a monopoly on off-premises spirit sales in Washington; beer and wine are sold both in state stores and by private retailers.

At the same time the Washington state spirits monopoly was put in place, so were laws meant to protect state wine producers from out-of-state (read “California”) competition.  Incredibly, the number of wineries in the protected market actually fell as the industry collapsed. Without outside competition to discipline local producers, Washington wine became a least-common denominator product. The typical wine was sweet and fortified (Thunderbird-class wine, if you know what I mean) and early attempts to produce quality wines were hampered by the lack of an active fine wine culture.

This Changes Everything

The bad old days of Washington wine.

Much changed in 1969 with the passage of House Bill 100, otherwise known as the California Wine Bill. This law allowed out-of-state wines more or less equal access to the local market. Cheaper California wines flooded in and people naturally bought them.  Unable to compete in the low end wine market because of their higher production costs, Washington wine makers were forced to turn up market.

The California Wine Bill didn’t destroy Washington’s wine industry, as many expected it would. It redefined it. The result (to skip a few steps) is the industry you see today, where even large scale wine producers (think Columbia Crest) make wines to a high standard and the best wines compete successfully with the finest wines in the world.

The California Wine Bill changed everything … or nearly everything. This market liberalization remade the competitive landscape in Washington and set up the growth we have seen in recent years.

Now Washington voters are being asked to consider another set of potential market changes in the form of two initiatives on the November ballot. You might call them The Costco Initiative (I-1100) and The Distributor Initiative (I-1105). Costco is the largest backer of I- 1100 ($1 million according to a Seattle Times article). Liquor distributors Young’s Market and Odom Southern Holdings are reported to have contributed $2.2 million to back I-1105 (and oppose I-1100).

Pros and Cons

Are these proposed laws a step in the right direction in terms of the wine industry in Washington state? Will they “change everything” like the California Wine Bill and in a positive way? Since so many people have asked me this question I thought I would devote some space here to considering the issues.

Both proposals would eliminate the state monopoly on spirit sales. State liquor stores would close and private retailers would be permitted to sell spirits along with beer and wine. Costco has an obvious interest in this as do Safeway (which has contributed $325,000 to support the initiative campaign) and even Wal-Mart (a $40,000 contribution).

The move from public liquor utility to private market is a big change, since it substitutes American capitalism for Swedish socialism. Many people will understandably decide how to vote based on this factor alone. There really are public health and safety concerns associated with potential increased consumption of spirits and it is a fair question to ask if more active promotion of these products and more convenient access to them is in the public interest.

Even wine enthusiasts like me who consume alcoholic beverages every day may oppose these reforms, since we often claim somewhat self-righteously that wine is a temperance beverage – different from hard liquor. I’ll admit it: if this was just about letting Safeway and Costco sell vodka and tequila, I would vote against both the initiatives.

But there is more to the proposals than privatizing liquor sales.  How would they change the wine (as opposed to spirits) market? Who would win and lose? Look for answers to these questions in the next Wine Economist post.

The Democratization of Wine

As a known “Wagnerian” sympathizer,  I am naturally in favor of the “democratization” of wine. Power to the People is good, Wine to the People is even better (and sometimes equally difficult to manage). Recently I’ve run into a couple of stories that suggest that good wine may be trickling down to the masses in interesting ways.

Le Froglet Wine

The first story comes from Britain, where “wine by the glass” now has a new meaning. I’m talking about Le Froglet wine, which comes in ready-to-drink stemmed plastic cups. The special “glass” is sealed by a patent-applied-for process that replaces oxygen with inert gas before a peel-away airtight foil seal is applied, thus keeping the wine fresh (in the short term) in its unlikely container

The 187 ml serving of French Shiraz (really?), Chardonnay or Rose wine sells for £2.25 at Marks & Spencer stores.  This is wine that you can take anywhere and consume as you please, even if you only want a single glass. It is sort of a wine juice box in functional terms, if you know what I mean, but classier, with a stemmed plastic glass in place of the cardboard box and sippy-straw. I have seen Le Froglet here in the U.S. selling in the $3.50-$4 range.

Expert Opinion?

Le Froglet is noteworthy for several reasons, First, it seems to be very popular in Britain, where it has created a new market category. That doesn’t happen very often.

It has succeeded despite highly publicized expert opinion that the idea of takeaway “cuppa wine” is totally lame. James Nash, the inventor of the packaging and process, appeared on the popular BBC television show Dragons’ Den where supersmart investors took his product and business plan apart brick by brick, leaving him standing in a pile of rubble. Fuggetaboutit, they told him in no uncertain terms.

Interestingly, the people at retailer Marks & Spencer saw the same idea and came to a different conclusion.  They viewed the single-serving glass as a perfect place to put their line of Le Froglet French wines. I suppose with a name like Le Froglet they weren’t taking themselves too seriously. Why not wine by the glass to go? Why not indeed? And so they gave it a try. They seem to be pleased with the results.

An M&S spokesman said: ‘The glasses are merchandised in our ‘Food on the Move’ section, which is obviously the aisle people on the go head to – particularly office workers. ‘We think that they are proving popular with people who want to perhaps enjoy the summer with a glass of wine in the park as part of an impromptu picnic – either after work or for a relaxing lunch.

‘They are also popular with commuters who want to enjoy a drink on the train home from work to wind down. We have found that they are very popular in locations popular with tourists.’  The M&S winemaker, Belinda Kleinig, said:  ‘This is a really exciting step for M&S – our research has shown that our customers really like the greater convenience of lighter weight bottles so we thought we’d take it one step further with great quality wine ready to drink from a glass.’

The Benefit of Low Expectations

I think one key to Le Froglet’s success is that it exceeds everyone’s expectations (except perhaps the grumpy Dragons’ Den gurus). You don’t really expect the packaging to work, for example. You expect the seal to leak or the plastic glass to break. But apparently it works pretty well. Surprise!

And then there’s the wine itself. You logically expect it to be crap since it comes in such a goofy container. Who’d put good wine in something like this? But apparently the wine is surprisingly good. In fact, Decanter magazine recently announced that Le Froglet Shiraz has won a hard-to-get  Gold Medal in its 2010 global wine competition.  The award is actually for the bottled version of the wine, which sells for £5.49.   Decanter’s editor reported that

‘The bottle is a great value find. It’s fragrant and complex, with lots of dark fruit and savoury chocolate. The plastic glass version is a great idea, but given that the bottled version has a screwcap, won a gold medal and works out cheaper per serve, I’d probably buy a bottle and find my own glasses.’

One element of the democratization of wine is making it more convenient and Le Froglet certainly does that. Of course this convenience comes at a price. One £5.49 bottle of Le Froglet holds four £2.25 single-serving glasses, making the bottled product the  better buy. But that glass-bottle price ratio is about what you find in most restaurants, where the rule of thumb is that the retail price of a glass of wine is equal to the wholesale cost of the whole bottle.

Good, cheap and convenient seem to form a trilemma with wine — difficult to get all three at once.  Cheers to Le Froglet for making decent wine more convenient, even if it isn’t really cheap.

Burger, Fries and Syrah?

What could be more democratic than fast food wine? Sounds perfect, but it is hard to imagine a fast food restaurant that could find a way to serve wine here in the U.S. with our Byzantine regulatory system.

So you can appreciate my pleasant surprise when I was able to order wine with my dine-in meal at the Burgerville fast food outlet near Vancouver, Washington. Burgerville is a popular Oregon-based fast food chain that specializes in fresh, local and sustainable products.

Burgerville is designed to exceed your expectations about what a fast food meal can be and if you pay a bit more for the food you probably get more, too. The restaurants have always been very busy when I have visited, so people must think they are a good value. I certainly do.

Here is the sales receipt from our meal at the Salmon Creek Burgerville (the only store in the chain to offer wine by the glass so far). I passed on the upscale burger / fries / shake part of the menu this time to take advantage of seasonal offerings: a mound of Walla Walla Sweet Onion Rings (yum!) and two Full Sail Amber Ale Battered Albacore fillets with a side of Oregon cranberry-studded summer slaw. My beverage of choice, a $5.95 glass of flavorful and refreshing A to Z Wine Works Oregon Pinot Gris. Heaven! Fast food taken to a new level.

Burgerville offers three red wines and three white wines by the glass at this location priced at $5.95 and $6.95. I think I’ll have a glass of the Syrah with a bacon cheeseburger on my next visit!

Small Steps [in the Right Direction]

The wines sell pretty well, I was told, which is of course what I hoped to hear. The Salmon Creek store is testing the concept of what you might call premium fast food wine. This store was apparently chosen because it has a large and well organized dine-in area that made it possible to meet regulatory requirements.  (Don’t look for wine at the drive through window just yet, although with Le Froglet I suppose it isn’t completely out of the question!).

The democratization of wine?  We’re not there yet — wine is still more difficult to buy, sell and consume than it needs to be — but Le Froglet and Burgerville show what we are headed in the right direction. Wagnerians, rejoice!

Vinonomics: The Mouton Cadet Index

Richard Hemming, whose writing appears on the  Jancis Robinson website, has invented the Mouton Cadet index to measure international differentials in wine prices. It is an interesting project that is worth following.

Hemming’s price index, which he is calling Vinonomics (in homage to the Freakonomics craze), works like this. First he selected a high-volume wine that is in very wide international circulation to serve as the one-item “market basket” for his international comparisons. Mouton Cadet, the ubiquitous Bordeaux wine, is a great choice since it is so widely distributed (a “15-million-bottle, 150-country brand distributed from Andorra to Zimbabwe,” according to Hemming).

Mouton Cadet may not be the wine sold in the most different countries — Moët & Chandon Champagne would be my pick for that honor — but using Mouton Cadet keeps the Big Mac spirit of tracking the price of an everyday product, not a luxury good.

Sky High in Seoul

Hemming then searched the internet and other sources for prices of Mouton Cadet in as many countries as he could. He converted these prices to Euro, USD and GBP at market exchange rates and published them on the website. (He is hoping that readers will send in additional price data to help complete the table.)

The price differentials that Hemming finds are quite large.  The French ‘home country” price for Mouton Cadet is given as EUR 9.55, which is incredibly more than the reported price of the same wine in the United States (USD 7.99 or about EUR 6). Within the Eurozone, where trade is allegedly free, Cadet’s price runs as high as EUR 19 in Austria and EUR 21 in Italy. So much for the “Law of One Price!”

What’s the cheapest place in the world to purchase Mouton Cadet? So far Hemming’s low price leader is the U.S., where French wines struggle to sell in a crowded and very competitive market, followed by Hong Kong (EUR 8.56).

The most expensive? South Korea (EUR 26), Brazil (EUR 21.5) and Italy (EUR 21). The difference between the high and low price is stunning. It is easy to explain South Korea’s high price in terms of transportation costs, regulatory expenses and multiple middleman markups, but the high price given for Italy is difficult to understand. Hard to know who would pay so much for Cadet in Italy.

Bordeaux with your Big Mac?

Hemming’s research project is based on  the Economist’s famous Big Mac Index (BMI), which tries to measure the relative purchasing power of different currencies by comparing the local prices of McDonald’s ubiquitous hamburger.  Here is a table showing the index as of July 2010.

The table shows that Japan and Australia are very close to Purchasing Power Parity — the condition where a U.S. dollar has the same purchasing power abroad (when exchanged at market rates) as at home.  The dollar cost of a Big Mac is approximately the same in all three countries.

Norway’s currency is very over-valued according to the BMI.  A Big Mac that sells for USD 3.73 in the U.S. costs a whopping USD 7.20 (converting at market exchange rates) in Oslo. The high cost of buying a Norwegian Krone contributes to the hamburger’s high dollar price there.  The Swiss Franc is almost as over-valued — a Big Mac costs the equivalent of USD 6.19 in Geneva.

Hong Kong and China have undervalued currencies by this measure. A Big Mac costs less than the equivalent of USD 2.00 there. The harburger is cheap in part because the currency is so cheap in these countries.

Wine vs Burgers

The Big Mac index is far from a perfect measure of relative purchasing power, but it is not a bad guestimate because Big Macs are standard products with easily discoverable prices and most of the cost of producing a Big Mac takes place within the country in question. I’ve found that if the BMI says a country’s currency is over-valued then it probably is, although not necessarily by as much or little as the index suggests.

The Mouton Cadet index is very interesting for what it tells us about wine prices, but it is probably less useful as a measure of PPP. The wine, of course, comes from France unlike the locally-produced burger ingredients and the local price in South Korea, for example, is influenced by that cost basis (adjusted for exchange rate effects) plus transportation costs. The biggest “local content” factors are the local taxes and  wholesale and retail markups within South Korea, which are probably quite high.

Mind the Gap

At this point the Mouton Cadet index is most interesting to me for the questions it inspires (I’ve always said that questions are more interesting than answers). Who’s buying that EUR 21 Cadet in Rome (and are they interested in buying a bridge I happen to have for sale?)

What accounts for the high price in South Korea? The exchange rate is certainly  part of it. The South Korea Won is undervalued relative to the EUR according to the BMI. A Big Mac costs USD 2.82 in Seoul and USD 4.33 in Paris — a 50% price differential. The exchange rate therefore might explain 50% of the price gap between the Mouton Cadet price in France and South Korea. What accounts for the rest? (And does that fact that South Korea has no substantial domestic wine industry that I am aware of affect the mark ups on foreign wines?)

And what about Brazil? The Euro is actually  undervalued relative to the Brazilian Real according to the Big Mac index, and so the exchange rate is not necessarily a factor in Mouton Cadet’s high price in Rio. What other factors account for the big price gap?

I hope Richard Hemming continues with this project. It would be interesting to have data for additional countries (Japan? Russia? India?) and to see how the rankings change over time and relative to Big Macs.

>>><<<

I’d like to encourage interested readers around the world to send Hemming local store prices for Mouton Cadet so that he has better data both for international comparisons and to get a sense of intra-country price dispersion.

Fair Trade Wine’s Long Journey

In this global age we are accustomed to having the world’s assorted products (including wine) wash up conveniently on our local supermarket shores. We seldom give much thought to how they got there or why, but wines don’t make, move or sell themselves so there is always a story to tell.

Case in point: this bottle of 2008 Fairhills Mendoza Vineyards Carbernet Sauvignon purchased last week at a Cost Plus World Market store in Tacoma, Washington. It is the product of a rather complex process of globalization.

Uncorking a Bottle’s Biography

The Fairhills brand is South African, but the wine is from Argentina. Must be a story there. The logo at the bottom proclaims that it is Fair Trade certified – wine with an ethical intent. You don’t see Fair Trade wines every day. The red tag up on the bottle’s shoulder indicates market reality: marked down from $9.99 to $8.88.

(Some studies suggest that wine buyers are not willing to pay more for “ethical” organic or biodynamic wines. In fact, one study found that wines labeled “organic” sold for less than identical wines without the ethical indicator. I wonder if this inverse price/ethics relationship holds for Fair Trade wine as well?)

Fair Trade products, like this wine, ask us to think about supply chains more seriously because they promise to return a bit more to the original producers to help build sustainable communities. I’m interested in the Fair Trade wine movement (I wrote about Fair Trade wines here, here and here), so I thought I’d try to learn a bit about this particular bottle’s long journey.

Twists and Turns

The story begins, unexpectedly, at the Du Toitskloof Winey in South Africa, founded in 1962 as a cooperative by six wine families. Originally a bulk wine producer in the bad old days of South African wine, DTK as it is known has moved upmarket in the post-apartheid export-driven era and Fair Trade wines are part of its strategy.

Since 2005 DTK has worked with the Fairhills Association to produce Fair Trade wine. Fairhills brings together a group of South African vineyard owners and their workers, with the workers having a majority of votes. Fairhills wine farmers supply the grapes, DTK makes the wine and Origin Wine, the third partner, provides logistical and market support. The growers receive a premium for their Fair Trade grapes and funds are returned to the Fairhills Association for community investments, a typical Fair Trade practice.

The initial market for Fairhills wines seems to have been Great Britain, since they worked closely with the UK-based Fair Trade certification group there. Susy Atkins,  the Telegraph’s wine critic, reports that Fair Trade wines have good penetration in London through supermarket chains including Co-op and Sainsbury’s and are featured in annual Fairtrade Fortnight programs. Click here to view a list of Fair Trade wines available in the UK. Fairhills has the largest listing (44 wines).

Fair Trade Pipeline

The South Africa-UK wine pipeline proved very robust (South African wines are now the fastest growing segment of the British market) and helped to expand the market both in terms of supply (drawing Chile and Argentina into the mix) and demand (introducing Fair Trade wines to the U.S. and other markets). Argentina is the biggest supplier of Fair Trade wines to the U.S. and the Fairhills Mendoza Vineyards Cab that I purchased at Cost Plus is part of that pattern. Organic Wine Trade Company distributes Fairhills here along with their other “ethical” wine products.

Whole Foods Market is one of the most important retailers of Fair Trade wine in the U.S., which makes sense since they sell so many other Fair Trade products (coffee, tea, chocolate, sugar, energy bars, body care products, flowers and rice according to one list). Other national retailers that stock Fair Trade wine include Sam’s Club, Target and of course Cost Plus World Market where I bought this bottle.

TransFair USA reports that over 120,000 cases of Fair Trade wine were sold in the U.S. in 2009, up from about 20,000 cases in 2008. The growth rate is a source of optimism, but the absolute quantity is relatively modest  – about the production of a single medium-sized domestic winery. TransFair says that the 2008-2009 sales produced a “premium” of over $130,000 that was returned to the grower cooperatives — quite a lot relative to the low wages they receive as farm workers. The distributor website reports that:

Fairhills Cabernet Sauvignon benefits the local farmers of Bodegas y Viñedos de Marañon and three small producers along with their farm worker community in Mendoza, Argentina.  The Fair Trade initiative is dedicated to ten farms to improve the quality of life for 210 members and 300+ children. The initiative is one of the first in Argentina and has used their sales to upgrade various schools in the region, purchasing new toys, establish a soup kitchen, and purchase an ambulance for the local health care center.  Future plans are to convert from conventional farming to all organic, building a sports club, and continue improving health care clinics and schools.

The journey that brought this bottle to my cellar is thus quite complicated. The wine comes from Argentina, but it wouldn’t have got here without help from people in faraway London and South Africa. The fact that this complex web can return community benefits to Mendoza farm workers is heartening, even if the amounts are quite modest at present.

The Future of Fair Trade Wine

Fair Trade coffee is easy to find these days — in fact it is impossible to buy anything other than Fair Trade coffee on my university campus. Fair Trade chocolate is everywhere, too. But Fair Trade wine remains a tiny (but growing) market niche. I wonder if this will change and what barriers Fair Trade wine must overcome to achieve the success of Fair Trade coffee? With this question in mind I’m starting a small research project to learn more about Fair Trade wine’s present market condition and future prospects. Watch this space for occasional related posts in the coming months.

>>><<<

Thanks to Kazuko Golden at TransFair USA for helping me with statistics about the Fair Trade wine movement. Thanks to Leigh Barrick for sharing her research on Fair Trade wine with me.

Wanted: Retail [Wine] Therapy

I know that it is not easy to make good wine. And wine can be difficult to sell, too. But apparently buying wine is even harder.

That ’70s Wine

At least that’s the word from some top wine critics. Lettie Teague’s column in this weekend’s Wall Street Journal was ostensibly about that 1970s favorite, Pouilly-Fuissé, but much of it was actually a gentle rant about the difficulty she experienced in trying to buy a few bottles for a tasting. Seems the specialist wine merchants she contacted just didn’t have much in stock. She had to work pretty hard to put together a reasonable sample.

Is it just a Pouilly-Fuissé problem? Maybe, but Teague reported much the same experience a couple of weeks ago when she tried to put together a tasting of wines  from Washington state. Teague’s merchants carried just a bottle or two of Washington wine, same as that 70’s wine. That’s all we need, they told her. No one cares, they said.

What do Washington wines have in common with the French? I used to think it was latitude but now I know — you can’t buy them in New York! (BTW word of mouth evidence suggests that Washington wines might be easier to find in New York than Teague’s article indicates.)

Mind the Gap

I know there are many factors at work here including New York’s peculiar retail wine regulations, the dollar-euro exchange rate and especially the recent “flight to safety” among wine sellers who seek to minimize inventory in a very uncertain market.

America’s byzantine interstate wine trade regulations are part of the problem, too. I’ve often looked across the pond to Britain and imagined how great it would be to have a unified wine market (without dozens of state and even local regulatory regimes). Wine is easier to sell in Britain because of this and so I’ve always thought that it was easier to buy, too. I guess I forgot my own frustrated wine buying experiences living in London a few years ago, when I tried to find interesting U.S. wines to share with British friends;  pretty much all I could find in my local drinks shop was bottom shelf generics.

I was reminded of this by one of Jancis Robinson’s recent Financial Times columns where she vented her frustration about trying to buy just a bottle or two of very good wine for dinner. You can buy vast quantities of cheap and cheerful wine as Tesco, she said, and of course you can purchase many of the finest wines on earth by the case and have it delivered to your door the next day. But what if you just want one bottle of something a notch or two above the supermarket category?

Yes, you can do it, she said, but it isn’t easy. And then she listed the five British merchants that she thinks fill the bill. Five! Ouch. “… this list is just about it – in a country of 33.4m wine drinkers,” she moaned. The gap between BOGOF Tesco and a case of Chateau Lafite is bigger than I thought! Robinson cites the increasing dominance of the big supermarket chains as a critical factor driving the specialist wine merchant out of business. Tesco, of course, is now the world’s largest wine merchant and 70% of British wine comes from a supermarket shelf.

Decanter published an article last year (in the 2009 California supplement) bemoaning the fact that so few American wines are available in the UK. Bottom and top are easy enough to find, but nothing much in the vast middle. They cited a number of factors including American winemakers’ resistance to the deep discounts needed to make export sales, high British retail margins and the incompatibility of American wine styles and British palates. Whatever the reason, it seems that British wine buyers are surprisingly under-served when it comes to America’s diverse wine array.

Why Can’t a Wine Be More Like a Book?

It occurs to me that the situation facing wine buyers today is a lot like book buying was twenty years ago. It was easy to find best sellers and trashy paperbacks. And specialist shops catered to particular interests at a price. But much of the vast book supply was very difficult for buyers to access.

And then came Amazon.com, of course. And now the world of new and used books is only a click away.

Wouldn’t it be great if there were an Amazon.com for wine? That would be one “killer app,” as they say. But I don’t think it is going to happen, at least not soon. Amazon.com announced plans to start selling wines online a couple of years ago, but nothing seems to have come of it and it is easy to see why.

Although bottled wine does share many of the attributes that made books Amazon.com’s initial target market, there are a number of discouraging negatives to consider. Wine is heavy and costly to ship compared to books.  A books doesn’t care if the weather is hot or cold while it is in transit, but your half-case of Chianti surely does. And of course there are the legal barriers that restrict interstate shipping at every turn.

I’m hoping that someone will come along with that Killer Wine App that makes fine wine buying as efficient as shopping for books, but until then I think that retail [wine] therapy will remain a source of frustration, not relief, for at least some of us.

>>><<<

Jancis Robinson’s column in Saturday’s Financial Times suggests that wine books share some of the same distribution frustrations as wine. She reports a trend towards self-publication of specialist wine books.

Follow

Get every new post delivered to your Inbox.

Join 1,803 other followers