Category Archives: wine investment

Naked Naked Naked Naked Wine

September 5, 2012 By in wine distibution, wine investment, wine markets 4 Comments

Maybe it’s just me. I’m kind of a modest guy but it seems like everywhere I look in the world of wine someone or something is getting undressed. I wonder where it will lead?

Naked Wine

It started with Alice Feiring’s 2011 book Naked Wine: Letting Grapes Do What Comes Naturally, which is an account of her attempt to make wine in the most natural way, with the smallest possible amount of intervention. The description on Amazon.com explains that

Naked wine is wine stripped down to its basics—wine as it was meant to be: wholesome, exciting, provocative, living, sensual, and pure. Naked, or natural, wine is the opposite of most New World wines today; Alice Feiring calls them “overripe, over-manipulated, and overblown” and makes her case that good (and possibly great) wine can still be made, if only winemakers would listen more to nature and less to marketers, and stop using additives and chemicals. But letting wine make itself is harder than it seems.

Three years ago, Feiring answered a dare to try her hand at natural winemaking. In Naked Wine,she details her adventure—sometimes calm, sometimes wild, always revealing—and peers into the nooks and crannies of today’s exciting, new (but centuries-old) world of natural wine.

The book is a contribution to the “natural wine” movement, which is both particularly active and controversial these days, especially in France where some wine bars specialize in the natural product while some critics argue that it is just an excuse for making bad wine. I love a good controversy, so the whole natural wine debate appeals to me.

But why not call the book “Natural Wine?” I guess publishers must think that “natural” doesn’t sell books (perhaps book buyers think — with some justification —  that all wines are natural). I noticed that when Jamie Goode and Sam Harrop published their excellent book on this topic then ended up calling it Authentic Wine not Natural Wine. Naked (or authentic) sells better than natural I guess.

Naked Naked Wine

More and more wines are made using organic and biodynamic practices, but they seldom advertise it prominently on the label. I think winemakers see the “natural wine” category as unnecessarily limiting and so choose not to position their products that way.

One that does is the range of Naked wines made by Snoqualmie Vineyards, one of the Ste Michelle Wines Estate wineries. There is a Naked Riesling as well as Naked Merlot, Cabernet Sauvignon, Chardonnay and Gewurztraminer.

“Although all of our wines are made with minimal intervention,” the website declares, ” grapes used in the Naked wine series are farmed as “au naturel” as possible. “Naked” is made with certified organically grown grapes in a certified organic facility. Very true to the varietal, these wines fit in perfectly with [winemaker Joy Anderson’s] philosophy that it is best to leave Mother Nature alone – let nature take her course and then try to capture the natural essence of the vineyard in the bottle.”

Naked Naked Naked Wine

A six-pack of naked wines arrived at our door last week and they weren’t from Snoqualmie or from Alice Feiring. They came from an online retailer called NakedWines.com Inc. NakedWines originated in Great Britain and is now online for the U.S. market.

The idea behind NakedWines is to go beyond just buying and re-selling wine (although the UK site does this, too, including some “flash” sales). NakedWines encourages its customers to become “angels” and invest $40 per month (£20 in the UK) in the particular small wineries that are associated with the company. Angels are repaid in the form of deeply discounted prices on the wines that their angel dust has made possible.

This is an interesting business model, sort of a cross between Wines.com and Kiva.org, the online micro-lending website. Here is an explanation from the UK website:

Good winemakers want to invest in quality and NOT waste funds on slick marketing campaigns. Your £20 a month makes it possible for them to do just that. They know their wine is sold before they’ve even grown the grapes, so they can invest all their time, money and energy in the vineyard crafting delicious wines, and pass the savings on to you.

NakedWines was founded by a former colleague of Virgin’s Richard Branson according to the Wikipedia page and is credited with being a pioneer in the use of social media marketing. I poked around the websites and failed to find an explanation for the “naked” part of the name. Perhaps it has something to do with stripping away the middleman’s profit or maybe it is just marketing meant to attract attention by introducing a risqué element. If so, they are not the only ones to think of this.

OMG: Naked Naked Naked Naked Wine

We visited the beautiful Columbia Gorge AVA during the recent Wine Bloggers’ Conference in Portland and I found myself sitting at a table with representatives of the Naked Winery & Orgasmic Wine Company of Hood River, Oregon. Their wines include Naked Merlot, Foreplay Chardonnay, Missionary Cabernet Sauvignon and Climax Red Table Wine. There is also a Virgin Chardonnay which presumably is not to be confused with their Penetration Cabernet.  (I’ll stop listing the wine names here to avoid getting a PG rating.) Customers are invited to “Get Naked” by sampling wines at the tasting room.

At Naked Winery, we aim to tease!  A family owned winery based out of Hood River Oregon, we are on a mission to produce premium class Washington and Oregon wines, with exotic brands and provocative back labels that are just a bit risqué. We aim to please the palate, change the conversation and enhance the romantic experience of wine.

We believe that the entire experience around wine should be fun. Read our back labels or have your mother-in-law read the back label aloud at your next family function. As we say, drink what you like and who wouldn’t like to get a little Naughty now and then? You can taste all three of our brands, Naked Wine, Orgasmic wine and coming soon, Outdoor Wino at our Hood River tasting room. Enjoy live music four nights a week and good company all year round. Come get Naked!

Clearly this wine is “naked” in a different sense than the others. Naked is a way to get people to let down their hair and be more relaxed about wine. To have a little fun. I understand that that the tasting room is a popular destination.

Whether it is serious or only a bit of a tease, this naked thing seems to be a very popular. I wonder what is next? Naked Naked Naked Naked Naked!

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Speaking of a tease, here’s the final video from The Naked Wine Show series. It is (apparently) the only show in the series where the reviewer was clothed.

Sniff & Swirl Meets Bits & Bytes

March 6, 2012 By in ordinary business, wine investment, wine research, wine science 3 Comments

Alfred Marshall defined economics as the study of people as they go about the ordinary business of life. People who love wine believe that it is special and they are right to a certain extent, but it is also ordinary at least in terms of some of the business functions. Herewith the first of two posts about how ordinary and extraordinary intersect in the wine business.

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Information technology (the bits and bytes of the title) has insinuated itself into almost every aspect of our daily lives — why should wine (the sniff and swirl) be any different? And indeed it is not, although most of us probably romantically wish it were otherwise.

The most obvious place where IT comes into play is in the marketing of wine. Most winemakers today try to use social media vectors such as FaceBook and Twitter to establish and nurture relationships with customers. I’ve read that the hard sell approach isn’t generally effective (readers: use the comments section below to share your experiences with this), so the focus is on soft sell.

But is it worth it? That’s the business question. Yes, it is probably a mistake to ignore social media entirely  (just as you would be crazy not to have a winery website or a website for your barber shop if that’s your business), but what’s the smart level of investment? After all, social media doesn’t create and manage itself. Someone’s got to represent the winery as host, posting content and responding to friends and followers. How much investment makes sense?

One big time winemaker friend put it this way. Which is better for the winery — a full time employee to manage social media or three full page advertisements in Wine Spectator? Wow, that’s a tough one, especially since the audiences and the nature of the impact are so different. But, from a business standpoint, that’s the sort of trade-off that must be evaluated.

 

It’s the same thing for QR codes. Wineries can use QR codes to enrich their story-telling to smart phone-enabled customers, which is surely an advantage, but not without some investment. The old marginal cost versus marginal revenue questions will always be there, even in the wine game.

Cloud Data Systems

Trend Micro sent me information about their SafeSync for Business cloud data system. It provides a safe, secure data storage system. What got my attention is that they featured a winery case study: Good Harbor Vineyards on Michigan’s Leelanau Pennisula.

 “As a wine maker, we are highly monitored and regularly audited by numerous government agencies. We have to keep track of everything—every bottle and every ounce has to be accounted for—from purchase through production, bottling, sale, and shipment. We were worried that someone could gain access to these records. Losing our files would be crippling in any type of audit — and these take place frequently.

This made me realize that wineries have all the business IT needs that other types of firms do, and a few more as well. I think it is interesting that a big firm like Trend Micro would make a point to feature winery applications. I wonder if small and medium sized wineries (like similar businesses generally) have lagged behind the IT cutting edge and are therefore a ripe market for upgrades. Or maybe wine is just the sort of example that makes everyone realize how important data can be.

Extraordinary Business Needs

While some parts of the wine business are not so different from any other business (with a couple of special wrinkles in the cloth just to keep things interesting), some business needs really are fairly specific to wine. Every business needs to be able to track shipments and inventory, for example, but wine’s needs often go beyond the norm.

A London to Hong Kong shipment record.

The wine business is large enough to spawn IT applicantions to meet its particular specialized needs. For example, a company called eProvenance has been formed to provide reliable detailed information about wine shipping conditions. Wine buyers, especially those at the high end of the market, now seek assurance of the quality and authenticity of their investments and their concerns extend all the way through the supply chain.

A Bordeaux to Beijing shipment record.

Your bottle of Chateau Margaux (lucky you!) won’t be the same if it has been “cooked” in an improperly handled shipping container, for example.  But how can you be sure it hasn’t been? Enter the NFC temperature sensor!

Boston, Massachusetts – December 6, 2011 – eProvenance, a Franco‐American company applying advanced technology to monitor the temperature of fine wines as they travel from wine producer to customer, has developed temperature sensors that are compatible with the Near Field Communication (NFC) protocol and can be read through wooden cases of wine. Using the NFC protocol, which makes it easy to communicate data via smartphones (like the Google Nexus S), the new eProvenance sensors can transfer the temperature history for the case of wine through a reader or smartphone to the secure eProvenance online database. Using their NFC mobile phones, consumers will be able to access the eProvenance temperature history, and thus verify the provenance of the wines they purchase.

As you can see from the two temperature tracks above, not all wine shipments are treated with the care they deserve (and their buyers probably expect), so the tracking data can be very important. And now data can be collected in the warehouse as well as the shipping container for longer time periods, another way to ascertain quality.

With a 15‐year battery life, the new 2G (second generation) eProvenance sensors can be embedded in the wooden wine case to provide continuous, long‐term temperature monitoring, which creates a record of provenance over time that adds to the value of the wine. eProvenance customers can choose either to convert the temperature data into a provenance rating or simply share the data, allowing the importer or customer to make their own judgment about the temperature conditions.

The Opus One Story

Opus One is taking the logical next step in the use of IT, according to the press release from eProvenance — combining story-telling and temperature tracking at the single-bottle level.

Presenting at WineFuture Hong Kong 2011, David Pearson of Opus One said, “Starting with our 2008 vintage, we have an NFC tag on each bottle under the back label, which connects consumers to a video of our winemaker. Now we envision adding an eProvenance sensor inside each case to monitor the temperature for 15 years, allowing consumers with an NFC phone to read the entire temperature history with one click. The potential to connect with our consumers and to safeguard their wine is tremendous.”

I’m not sure if Alfred Marshall liked wine, but I’m pretty sure he would like the wine business today for its combination of ordinary and exceptional business practices.

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Thanks to eProvenance for giving me permission to use the temperature charts above. Thanks to Ken B. for the suggestion that provoked the “ordinary business” blog posts.

Boom Boom! On Money and Wine

October 25, 2011 By in wine investment, wine research 2 Comments

I’m just back from the San Francisco Treasury Symposium where I gave the luncheon keynote speech on “Wine Boom and Bust — With Lessons for Finance in the 21st Century.” You might well ask what business a wine economist has speaking to a group of treasury executives (I asked that question myself!), and the answer has two parts.

First,  I actually know a little bit about global finance from my day job as a university professor. I’ve written frequently about global financial flows and especially the periodic crises that seem to plague them.

The other reason is that the conference organizers thought it would be interesting and different to hear someone talk wine, but in a way that would still be relevant to their treasury executive audience. So that was my challenge.

Money into Wine? Easy! Wine into Money … Not So Much

Money and wine are closely tied, although it is an asymmetrical relationship. It is pretty easy to convert money into wine, for example. In fact, it may be a little too easy to do this. Some of my friends report that the whole “money into wine” thing has gotten way out of hand for them. You probably know the problem from personal experience if your cellar has grown bigger than your bank account.

It is harder to convert wine into money, especially if you are in the wine business. The best way to make a small fortune in wine, people tell me, is to start with a large one.  I focused on three aspects of wine economics for my talk: globalization’s opportunities and threats, the “new rules of the game” and the need to embrace (or at least accept) volatility. All these points apply to both wine and 21st Century finance.

Globalization: Opportunity and Threat

Globalization offers a world of opportunity to winemakers and financial managers alike, but it is a complex world and a very competitive one. New markets open their doors … but your market doors are open wide, too. Optimists will see the wine glass more than half full and seize the opportunities that present themselves, hopefully taking the associated costs and risks into account.

One problem with globalization is that the risks are so difficult to fully evaluate. The Australian wine industry, for example, is currently suffering from a bad case of globalization gone bad and part of the problem has nothing directly to do with wine.

Although the Crash of 2008 slowed down the global economy, China continues to surge ahead, its demand for natural resources (one of Australia’s strong sectors) growing year after year. Australian has come down with a bad case of the “Dutch Disease” where success in one sector causes chaos elsewhere. As mineral sales have increased, the strong Australian dollar has depressed the already weakened wine industry by discouraging exports. Click on the “Dutch Disease” link to see my report on this problem.

The [New] Rules of the Game

Global finance is dominated by a number of key financial centers that set the “rules of the game” for money. Wine works the same way, but the centers have shifted and the rules of the game have changed.

Producing nations (think France and Italy) once determined the rules of the game with their AOC designations.  The center shifted to Great Britain, Germanyand the United States in the last 20 years and now the rules are written by those who sell wine (think Tesco, Costco and Aldi) more than by those who produce it. The most successful wine sectors so far are those that have best adjusted to the new rules.

The rules will change again soon, I suspect, as the BRIC and new BRIC nations make their wine market influence felt. I think finance will also experience shifting centers with new rules and have to adjust accordingly.

Volatility was my final point and wine markets have plenty of it. Boom and bust cycles seem to be “baked in the cake” in both money and wine. I talked about Australia’s five big wine booms and busts in the past 150 years and characterized them in terms of Hyman Minsky’s famous “seven stages” description of financial crises.

Beyond Boom and Bust

Booms and busts are bad enough, but wine markets also suffer from medium-term cycles of surplus and scarcity as illustrated by the Turrentine Brokerage “Wine Business Wheel of Fortune.”  High prices today sow the seeds of low prices a few years down the road, according this analysis, which is based on the well-known “cob-web” model of lagged adjustment in agricultural markets.

Anyone who has tried to guide their 401k portfolio (much less manage corporate financial affairs) knows how volatile financial markets can be – the wine world’s bubbles and cycles must seem pretty peaceful by comparison.

Wine and money may be very different, but the problems they face bear a certain resemblance, don’t you think? What can wine teach money in these uncertain times?

One lesson, I proposed, is to “think global but drink local.” This sounds pretty simplistic, but it captures trends that I see in wine today. Economic imperatives have made both global and local markets more important than in the past. Developing direct sales vectors and developing and maintaining personal relationships is high priority today. Wine (like money) is a relationship business that needs constant attention.

Boulding’s Law

But it’s useful (and often necessary) to keep a global mindset even as you cultivate local markets. The world is getting bigger and smaller at the same time and the rules of the game continue to change.

The second lesson is what I call “Boulding’s Law” after Kenneth Boulding, the famous economist. Boulding once made a study of the history of the future. He looked at what people thought about the future at various points in time and then did a “fast forward” though the history books to see if they were right.

His conclusion? When the future came around people were usually surprised. It wasn’t what they expected at all (even if it was exactly what they predicted years before!).

Hence Boulding’s Law: The best way to prepare for the future … is to prepare to be surprised. That holds for wine, I think, and for money, too.

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Thanks to the San Francisco Treasury Management Association for inviting me to speak at their symposium. Special thanks to Jim Lindsay and Larry Goldman.

Liquid Assets: Fine Wine versus Crude Oil

January 11, 2011 By in Supply and Demand, wine investment, wine markets, wine price 2 Comments

So … which do you prefer? Great Bordeaux or bulk crude oil?

The answer depends on your perspective, I think. For drinking there is no choice — red wine trumps black gold. No doubt about it.

Demand and Supply Always Apply

But how about if you look at the choice from an investment perspective? The surprising answer is that it makes little difference. The prices of fine wine and crude oil have been highly correlated in recent years.  Or at least that is the conclusion of two economists at the International Monetary Fund, Serhan Cevik and Tahsin Saadi Sedik, as reported in their recently published paper “A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Markets?” (click on the link to download a pdf of their working paper).

The graph shown above indicates that price indices for crude oil and investment-grade wine are highly correlated. Wine follows the twists and turns of oil prices, although it is somewhat less volatile in terms of peaks and troughs. The conclusions are more or less the same if real data are used instead of nominal measures. Who would have guessed?

How is Oil Like Wine?

What do oil and fine wine have in common? Darn little, from the drinking standpoint, but quite a lot in terms of supply and demand. Both commodities have relatively inelastic supplies, according to the study authors (although for very different reasons, as you may imagine), so that changes in demand account for the majority of price movement effects.

The authors find that the same macroeconomic factors that push up the global demand for oil are associated with rising auction prices for the fine wines in the Liv-Ex index. Certainly in recent years it must be true that China’s fast growth has impacted the relatively narrow investment wine market and the much broader global commodities markets in the same way, albeit for different specific reasons.

Shifting Center of Gravity

So what?  Well, the study tells us a number of interesting things. First, it indicates that economists at the IMF have not entirely lost their sense of humor– a good thing, I suppose, since they are part of the glue that holds the global financial system together (hey Mr. Euro, I’m talkin’ ’bout you!). It is comforting to know that they think about the real world and are not limited by the formal constraints of their charts, graphs and equations.

Second, as the Financial Times points out, it shows that adding wine to an investment portfolio does not necessarily usefully diversify it if oil is also in the mix. You might not have guessed this correlation, but there it is. Always good to do research and not rely upon common sense or intuition.

Finally (and here you need to actually read the paper by following the link above), the authors note an important shift in the global economic center of gravity. Whereas only a few years ago the changes in both oil and wine prices would have been explained by U.S. and Western European economic variable, now it is the emerging markets that have the most clout. The driving forces of world commodity markets have new postal codes. You don’t need to read tea leaves to get the new address — wine and oil both point the way!

Restaurant Wine: A Double-Sided Puzzle

September 19, 2010 By in Fielding Hills, restaurant wine, Supply and Demand, wine investment, wine markets, wine price 2 Comments

If there is one thing that wine enthusiasts have in common (maybe the only thing?) it is their frustration with wine in restaurants. I was reminded of this fact as I read through the weekend newspaper wine columns. Lettie Teague’s Wall Street Journal piece is an extended rant (or maybe she’s venting and not ranting) about wine-by-the glass in restaurants.

The Confidence Game

Teague can’t decide which is worse in restaurant wine-by-the glass programs — the price or the quality. The rule of thumb is that restaurants charge as much per glass of wine as they actually paid for the whole bottle (and sometimes even more). This makes her feel ripped off. At the same time, the wine has been sitting around open for who knows how long, losing some or all of its freshness.  Fancy wine storage systems can help with this, but still it’s difficult to order a glass of wine (sometimes for $25 or more) with much confidence.

Over at the Financial Times Nicholas Lander approaches the issue from the business side and  looks for a solution in cooperative arrangements between wine collectors (who are willing to sell off some of their stash at market prices) and restaurants who offer these wines to their customers at reduced mark-ups.  The collectors get a fair price on their investment, the restaurants get a middle man return without big up-front costs and customers get access to special wines at lower prices. A great idea, but perhaps hard to scale-up.

Restaurant wine is like a double-sided jigsaw puzzle. The same pieces have to fit together to form two different appealing pictures — one for the customers and another for the business. If any of the pieces are upside down or missing, the whole experience is ruined.

Putting the Pieces Together

Not that it is impossible to put it all together. One of my most completely satisfying wine experiences of recent years was a dinner at The Black Rabbit Restaurant at Edgefield, a funky old  hotel in Troutdale, just outside of Portland, Oregon. A bottle of  the stellar 2006 Fielding Hills Cabernet Sauvignon sold for the same price that the winery was charging at that time — what a deal! It wasn’t the only good value on the menu, either. (The current wine list on the Black Rabbit website lists a 2007 Ken Wright Cellars McCrone Vineyard Pinot Noir for $60. I saw the same wine on another wine list for about $200. Where are my car keys?)

How can they do it? Well, Edgefield is an unusual operation.  It is an affordable destination hotel housed in a former Depression-era poor farm (really!) with its own movie theater, winery, brewery and distillery.  The owners can afford to sell their own wine at good prices and the rest of the list falls into place around those wines. Edgefield is part of a regional chain of restaurants and hotels, so some scale economies may exist, too.

Constantly Disappointed?

Edgefield shows that it is possible to put the pieces together to everyone’s satisfaction. But is it the model for restaurant wine programs generally?  Obviously not. Like Lander’s proposal it is too much of a special case, but it shows that there is hope for constantly disappointed wine enthusiasts. Unlike a real jigsaw puzzle, which has just one solution, I think there are probably many different ways to put the pieces together to improve the restaurant wine experience.

Flemming’s Steak House offers 100 wines by the glass at its restaurants, for example. Although Lettie Teague is appalled by this for the price and quality reasons noted above, the broad choice may please many customers.  After all, we are accustomed to choosing from a huge wine selection at competitive prices at supermarkets and wine shops. Even a very large restaurant wine list (say, 300 choices) is tiny compared with your local upscale supermarket, which may have 2000 or more wines on the shelves.

The fact that the restaurant charges a semi-monopoly price (hard to get a competitive bid once you’ve been seated) makes the situation more frustrating.

One solution is to loosen the monopoly hold on price, which some restaurants are doing right now by reducing or eliminating corkage fees. Bring your own wine (purchased at normal retail prices) and enjoy dinner and a wine experience. Since wine is typically the highest priced item on a restaurant bill (more expensive than the entree, for example), reducing the wine cost removes a disincentive to dine out.

I don’t think many customers take up the “no corkage fee”  offer, but some do and if treated well they are likely to return to dine again. If there are conditions on free corkage (the wine cannot be on our list, for example, or free corkage on one bottle if you purchase a bottle from us) they need to be clearly stated to avoid misunderstanding and hard feelings.

Wine-by-the Keg?

The continuing recession is putting more strain on restaurant wine programs, which is unfortunate for everyone involved. But perhaps it will also spur the search for creative solutions to the double-sided puzzle problem.

One interesting approach to the wine-by-the-glass problem, for example, is keg wine — wine packaged in reusable steel containers. Cheaper per unit than bottled wine (assuming that the keg can be returned and refilled efficiently) with a reasonably long quality shelf life if properly tapped, keg wine may be the rosy  future of restaurant wine-by-the-glass.

Someone should tell Lettie Teague the good news.

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Thanks to Michael and Nancy Morrell for their assistance with this report.

Good News & Bad News from Oz

July 6, 2010 By in Australian wine, China wine, economic crisis, Economic impact, exchange rates, Foster's, speculation, wine exports, wine investment, wine markets 6 Comments

Sometimes the good news is that the bad news could be much worse. At least that’s how it seemed to me when the wine economists met at UC Davis last week to discuss the continuing Australian wine crisis.

Kym Anderson, a leading expert, spoke about the problems in Oz at the symposium on “Outlook and Issues for the World Wine Market” and I thought his assessment of the “challenges” Australia faces was pretty grim.  Big oversupply. Falling grape prices. More and more quality grapes sold off at fire-sale prices in the bulk market (40% this year compared to 15% in the past).

The best selling white wine type in Australia isn’t from Australia any more — it’s Marlborough Sauvignon Blanc. Even the Australians are tired of “Brand Australia” Chardonnay!

Maybe, Baby

Professor Anderson looked for a light at the end of the tunnel and was able to point to some potential sources of relief. Maybe water reforms could be implemented. Maybe R&D to help the industry deal with climate change would produce results. Maybe the new export strategy to promote Australia’s regional diversity and wine families would catch on. Maybe the China market will open wider and drink up the surplus.

Since the bad news was so compellingly concrete and the hopeful notes so speculative, I took the overall forecast to be very dark indeed. Imagine my surprise, then, when I attended a talk by another Australian expert the next day who described  Anderson’s presentation as optimistic! When the good news is this bad, the bad news must be really bad.

Bad News, Bad News

Sure enough more bad news arrived shortly thereafter in the form of a Wine Spectator article, “Aussie Wine Company Faces Angry Creditor,” concerning the financial problems of The Grateful Palate group, which exports many hot brands to the U.S. market including the unlikely-named Luchador Shiraz shown here.

Trouble is brewing in Australia. The Grateful Palate’s Australian affiliates, which produce wine under labels such as Bitch Grenache, Evil Cabernet Sauvignon and Marquis Philips for American importer Dan Philips, are in receivership and face the danger of possible bankruptcy. Growers and other creditors for the South Australia-based affiliates of the company received notice on June 18. Many growers, already facing tough times, worry that they’ll never get paid for fruit they sold Philips.

Philips, the company’s founder and owner, confirmed that he is in negotiations with his top creditor, Dutch lender Rabobank, but declined further comment. The bank initiated the action to put Grateful Palate International Pty Ltd and several related Australian companies into receivership. The most prominent is R Wines, a partnership with winemaker Chris Ringland, but 3 Rings, a joint venture involving Philips, Ringland and grower David Hickinbotham, is also part of it.

This is bad news, of course, but bad news is no longer a surprise to those of us who are following the Australian wine scene. Perhaps it is really good news of a sort — an indication that the necessary industry shake out is gaining speed. Hard to tell good news from bad.

Darker or Brighter?

The same situation applies to the Foster’s de-merger situation. Foster’s, the Australian beer giant, bought into the wine business at the top of the market, paying an estimated $7 billion for an international portfolio of about 50 top brands including Penfolds, Wolf Blass and  Beringer. The investment may be worth as little as $1.5 billion in today’s market.

Foster’s beer business is an attractive target for global giants like SABMiller, but not with the wine portfolio attached. So Foster’s announced a de-merger to allow the beer group to move ahead independently of the wine group. What will happen to the wine business?  Who will buy these assets in today’s depressed environment?

When I posed this question to an Australian winemaker several weeks ago the answer came back quickly: China! Everyone in Australia is paranoid about the Chinese buying up our natural resources, and so we are convinced that they will buy up Foster’s wine business, too.

Interesting idea, I thought at the time. No multinational wine firm (Constellation Brands? Gallo?) would want to go bigger right now. But maybe a Chinese firm that wants to break into the global markets would take the bait. Might make sense. Maybe.

Bright Idea

Sure enough, the Bright Food Group. (Mission: “To build the company into a leading enterprises group in the national food industry, with famous brands, advanced technology, strong competitive power and deep influence in the world by the end of 2015.”)  recently signed a three-way memorandum of understanding with the New South Wales government and the China Development Bank to explore opportunities for the Bright Group to invest in the sugar, dairy and wine industries.

A Financial Times article reports that  the company is interested in “global top ten players in wine, sugar, food packaging, commodities and healthcare sectors.” Bright Food is currently studying both wine and beer assets in Australia, but has not decided to buy either yet according to the FT.

Many Australians no doubt consider the potential sale of yet another natural resource business to Chinese buyers bad news in terms of their economic sovereignty, but that bad news might actually be the best news they can expect given the sorry condition of the global wine market today.

Secrets of Argentina’s Export Success

June 14, 2010 By in Argentina, decanter, economic crisis, Economic impact, emerging wine regions, Supply and Demand, wine exports, wine investment, wine markets, wine price 4 Comments

#1 Wine

Argentina’s wines are hot here in the United States. Recent Nielsen Scantrak off-premises  data show a 38.7 percent dollar value rise in sales of Argentinian wines for the 52 weeks ending April 3, 2010. That’s an enormous percentage increase, much greater than the total market (up 3.5 percent) and a good deal above the next biggest gainer (New Zealand with a 17.2 percent rise).

What’s Argentina’s secret?

The secret? As usual, there is no one simple answer. There are important factors on both the supply side and the demand side: good products, the right products at the right time and favorable economic policies.

Argentina produces excellent wines. Decanter magazine recently (June 2010 issue)  published a report on Argentinian Malbec that featured the largest tasting in their history — a record 255 wines. Four of them received  five stars, the highest designation. The Achaval Ferrer Mendoza 2008, which often sells for less than $20 here in the U.S., led the pack with 19/20 points.

Argentina is fortunate to be producing wines for the times. Many Argentinian wines are good values at a time when consumers are careful with their money and they represent good choices for ABC (anything but Chardonnay) and ABS (anything but Shiraz) buyers.

International Influences

#1 Export Brand

Argentina’s economic policies are another consideration. The favorable dollar/peso exchange rate contributes to Argentina’s competitiveness on the export market. And although I don’t know very much about them, I think that barriers to foreign investment in the wine industry must not be very high because so many important producers have international connections.

Bodega Colome is owned by Donald Hess of Switzerland, for example, who also owns The Hess Collection in the United States. Achaval Ferrer is a joint venture with a Montalcino winemaking family. Bordeaux wine investors are players in Diamandes and Clos de los Siete. O Fournier’s owner is Spanish. Cheval des Andes is a joint venture of Moët Hennessy’s Terrazas de los Andes and St-Emilion’s Cheval Blanc. Bodega Norton is owned by the Swarovski family of Austria (famous for their crystal.) Dig deeper and you’ll find even more international money and talent at work.

Top Export Brands

These are good reasons for Argentina’s recent success, but a recent article on WineSur.com titled “The Top 5 Export Brands” got me thinking that there might be other factors at work. I was particularly intrigued by the table showing the top bottled wine export brands to different markets. I’ve pasted the table below so that you can analyze it along with me. Click on the table to read the full article and view a larger image of the data.The first thing I noticed is how heavily weighted Argentina’s recent exports are toward the North American market. Britain, still the most important wine market in the world, has much lower export volumes as shown here. I suspect that one reason for this, however, is that these data are for exports of bottled wines (including bag-in-box and Tetra-Paks) and I’ll bet that Tesco and some of the big supermarket chains import their Argentinian value wines in bulk and bottle them in the U.K as house brands. Those export sales don’t show up here.

The second thing that caught my eye was the wide range of export prices. Alamos, the U.S. leader, sells for $30.57 per case export price, about the same as #2 Don Miguel Gascon. Marcus James, the top export wine in volume but only #3 in value, sells for just $12.54 per case.  Catena, the #4 brand, exported just 39,000 cases in the time period under consideration, but received an average of $64.97 for each one. Argentina’s exports to the U.S. (and the other markets shown here) span the price spectrum — another advantage.

Location, Location, Location?

Finally, I became interested in the particular brands that topped the export market tables and I think I discovered another secret weapon: distribution. It’s a cliche that in business the three most important things are location, location, location. Location is important in wine, too (ask any terroirist), but efficient distribution sure makes a difference and Argentinian producers have been wise in making good use of the most efficient distribution networks in each country.

Alamos has the highest export earnings by a good margin — why? Well Alamos is made by big gun Bodega Catena Zapata. It is a value line and is imported and distributed by the Gallo company. I suspect that Gallo’s large and efficient distribution network and its marketing prowess are reasons for Alamos’s great success. Significantly, Gallo also handles Don Miguel Gascon, the #2 export brand.

Marcus James, the #3 export brand, is a Constellation Brands product and is also backed by substantial marketing and distribution power. I was actually surprised to see Marcus James on this list because I didn’t realize they sold Argentinian wine. Guess I need to pay closer attention.  They used to source their wine from … Brazil!

Fuzion (a Shiraz-Malbec blend, I understand) is the best seller in Canada. It is made by Familia Zuccardi and distribution is one of its advantages, too. In Canada government wine and liquor shops are key sales vectors. The support of Ontario’s Liquor Control Board (in addition to successful viral marketing) seems to have made Fuzion a hit in a market that is otherwise very difficult to penetrate.  (At one time the Ontario Liquor Control Board was the world’s largest retailer of wine. I think Tesco is #1 today.) Distribution is key and both Alamos and Fuzion seem to have it.

Myth of the Level (Vineyard) Playing Field

April 11, 2010 By in Economic impact, EU wine market reforms, speculation, Supply and Demand, trade policy, wine investment, wine markets 4 Comments

Terrain matters, both in wine and in markets.  Many of the world’s best vineyards  cling to hillsides or follow natural contours (like the famous Pewsey Vale vineyard shown here).

While wine people seem to appreciate the challenges and opportunities that complicated terrain presents, economists are drawn (at least metaphorically) to tabletops. We think of the world in competitive terms and seek out “level playing fields” where our favorite theories are most applicable.

The Difference Between Vineyards and Soccer Fields

As a wine economist, I can appreciate the flat and the steep of the wine world and I have come to upon a particular irony.  Wine market reforms in the European Union are intended to create a level playing field and to encourage, induce and sometimes force winegrowers to compete. The days of big subsidies and routine “emergency” distillation are gone, or will be soon, we are told.

But wine markets are as complicated as the vineyard shown above and establishing a flat competitive arena is not a simple matter.  Wine markets are more like vineyards than we like to think.  Tariffs, quotas, subsidies and selling regulations can be brought into line, of course, but that is just the beginning. The uneven contours of the market run very deep.

Whither/Wither the Vines?

I was reminded of this by a recent post on the Tablas Creek Vineyard Blog titled “Whither inexpensive, artisanal California wine?” (Tablas Creek is a well regarded maker of Rhone-inspired wines in California’s Paso Robles area.)

The question that the article posed was whether it made economic sense for the winery to develop a new vineyard property to produce high quality reasonably priced wine (the $20 price point plus or minus a few bucks). The answer? Probably not, but with a rather thorough cost analysis provided so you can see how the various factors (land cost, debt service, planting cost, operating cost, even opportunity cost) factor in.

It’s a really good article for anyone who thinks that the decision to start of vineyard or a winery is an easy one.  (The sommelier  in the video above would do well to read it!)

At the end of the day, the single most important factor was the cost of the land. Even in a depressed market, land costs create a hurdle too high to overcome in Paso Robles.

(Note: I was also struck by planting and operative cost differences associated with dry farming the vines. Much lower cost, somewhat lower yields — worth serious consideration where feasible given the growing water shortage.)

Why are vineyard land prices so high that they make the vineyards themselves uneconomic?  Well, the land has many uses aside from the obvious one of growing wine grapes. Speculators might want to buy it to hold and resell, not operate for the long run. Lifestyle investors push up the price because they consider the amenity value of a vineyard home more than the economic value of its grape crop. These alternative demands can push the price above the level growers can afford.

Tilting the Playing Field

This distorts the playing field on which international wine markets operate. Land costs are a big factor for many expanding New World wineries because those costs are so recent that it is difficult to ignore them.

Land costs are often ignored for Old World producers, I am told — especially the thousands of small winegrowers who have owned their land for several generations. Ignoring the cost of capital allows them to sell for less, depressing prices (and therefore, ironically, the value of their land, too).  Poor economic choices in the Languedoc tilt the playing field against Paso Robles.

But the loudest cries I have heard in this regard are from Australia, not California, where vineyards that produce grapes for bulk wine find themselves more directly in competition with those economically untutored Languedoc vignerons. The low prices that result when French winegrowers ignore the cost of vineyard capital are not the only or even the biggest source of Australia’s current crisis, but they are certainly a contributing factor.

Luxury Fever Cools Off

July 8, 2009 By in book reviews, economic crisis, Economic impact, wine investment, wine markets, wine price 7 Comments

An article in today’s Wall Street Journal about the collapsing market for expensive wine provokes an essay on luxury goods. (Click here to read previous posts on wine and the economic crisis.)

Conspicuous Consumption

In his 1999 book Luxury Fever: Money and Happiness in an Era of Excess, Cornell economist Robert H. Frank analyzed the economic consequences of  the status-driven arms race that has raged for some years among the group that I call the affluenza. I guess affluenza is both the social class and the disease that afflicts them rolled into one.

The affluenza don’t simply consume goods and services, they use them to construct identities much as the singer in the video above (see note). Identity building is a complex process (ask the parent of a teenager) and sometimes an expensive one, too. You need to send status signals to others, of course, and you’ve also got to convince yourself. The acquisition and display of consumer goods (including but not limited to luxury products) is one aspect of identity building. Thorstein Veblen coined the term “conspicuous consumption” to describe it.

Private Choice, Social Consequence

Affluent consumers purchase increasingly expensive and scarce commodities as a way of telling others (and convincing themselves) of their status and taste. Robert Frank was concerned about the rise of luxury fever because of its boundless ability to soak up resources that might be better used somewhere else.

If you are just buying a car for transportation, for example, you can get pretty much what you might need for less than $30,000 (much less, in fact). But if you are building a self-image or staking out a place in the social pecking order, then the sky is the limit, both in terms of the car itself and the gadgets, accessories and so forth. Pretty soon you’ve got enough automotive wealth parked in your garage to feed and clothe a small Africa village for several years.

Luxury fever isn’t a new phenomenon. Affluent citizens of renaissance Venice engaged in competitive conspicuous consumption that threatened to bankrupt the city and its great families. In desperation, sumptuary laws were enacted to protect the citizens from their own excessive zeal. Such conspicuous displays as the number of rings that women could wear in public were strictly regulated.

To this day the gondolas that ply the waters of Venetian canals must by law be painted plain black — a regulation that dates back to the era when elaborate and expensive decorations threatened to sink both the boats and their owners “under water.” I think about sumptuary laws whenever a Hummer fills my rearview mirror.

Positional Goods

Robert Frank isn’t the first economist to express concern about luxury fever. John Maynard Keynes wrote his famous essay “The Economic Possibilities of our Grandchildren” in 1930, in the depths of the Great Depression. Keynes’s main point in the essay was that the temporary problem of the Depression would eventually disappear leaving a bigger problem, which Keynes called the Permanent Problem: how to live a rewarding, fulfilling life.

Keynes meant the essay to both calm panicked citizens and to inspire them to think beyond their wallets and purses to bigger issues that matter more in the long run. I have been thinking a lot about this essay recently, since 2009 bears a family resemblance to 1930.

Keynes thought that we would be getting to that point where the economic problem was fading and the permanent problem being solved right about now. He thought we would be rich enough, most of us in the developed world, to have enough stuff to satisfy our needs and be ready to think about more important matters than material goods. He put a number of conditions on this forecast, however, and one of them was that we would get over our interest in positional or status goods — that we would get over luxury fever. But I guess he was wrong.

Luxury Fever Cools

Or maybe I am being too hasty. “Luxury Wine Market Reels from Downturn” is the story in today’s Wall Street Journal. It reports a collapsing market for high end wines in the United States with lower sales, discounted prices and the prospect of industry consolidation as the wine market shakes out. Some of these wines are the sort of rare, expensive luxury products that have an irresistible appeal to the affluenza. Their value goes beyond what’s in the bottle to the people who long to own them.

The collapsing luxury wine market is bad news for the wineries, distributors, retailers and restaurants that earn a living on luxury wines. Good news for bargain hunters and collectors, I guess.

And possibly good news for our grandchildren. The decline in luxury wine sales is probably simply an exaggerated reaction to the economic crisis and this market will likely bounce right back when the economy starts looking up. But maybe, just maybe what we are seeing here is a reassessment of the economic and social role of fine wines, designer clothes, and other luxury goods.

I’m not saying that luxury goods will disappear, but if they become a mere end in themselves, not a means to a more complicated  psychological goal, then they will lose a little of their toxic social effect. Perhaps the economic crisis will change public perception of conspicuous consumption and encourage individuals to define identities in the ways that Keynes imagined. It’s a long shot, I know. Or maybe it is just a beginning.

Video note: Elton John and Tim Rice wrote this song for their Disney musical Aida. The cartoon characters are from the Disney series Kim Possible. Enjoy!

Time to Invest in Wine?

May 21, 2009 By in economic crisis, speculation, Supply and Demand, wine auctions, wine investment, wine markets, wine price, wine research 1 Comment

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” — Mark Twain, Pudd’nhead Wilson (1894)

I wonder what Mark Twain would say about speculating in wine in October, May or any other month? I expect he would be suspicious of the idea. Mark Twain was a great author but a lousy investor. His cautious attitude toward investment was based upon his own disastrous financial experiences.

I was reminded of this quote this morning when I opened the New York Times “Special Section on Wealth & Personal Finance.”  The cover features a half-page color image of an exploding cherry pie (or maybe it’s strawberry — what do you think?). I am not really sure what it means.

What Time Is It?

But the theme of the special section is pretty clear — time to consider alternative investments and investment strategies.  And on page 4 I found the article that got me thinking about Mr. Twain’s investment advice: Investing in Wine: Now May Be the Time by William L. Hamilton. It’s an interesting article — click on the link to read it.

The idea, of course, is that wine prices have been falling, so this is an opportunity to buy in at the market bottom.

“It’s a great time to buy wine, the best time in a decade,” said Charles Curtis, who is in charge of Christie’s North American wine department. “People we’ve never heard of are jumping into the market, taking advantage of the lull to get into collecting, now that they have access.”

I am naturally a bit suspicious of buying advice given by people with an interest in the sales.  They always seem to think that now is the time to buy.  Rising prices? Buy now because they can only go higher.  Falling prices? But now before they rise again.  Mr. Curtis may be right, and I’m sure his recommendation is honestly given, but he might be wrong, too.

Uncommon Times

These are uncommon economic times and market changes are unusually hard to predict, which makes investing even in fine wines feel a bit speculative. Alfred Marshall, the great Cambridge economist, argued that markets are generally as stable and predictable as an apple in a bow. Prices fall when there is a surplus until the excess supply is gone. Prices rise when there is a shortage until the shortage disappears.  The movement towards stable equilibrium is quite strong and predictable.

But wine markets today look a bit more unstable — more like that exploding pie now that I think of it.  Here’s another quote from the New York Times article.

Though falling prices kept many collectors from selling, reducing the amount of wine on the market, returning prices in the last four months have produced an uncomfortable volume of wine to sell, said Charles Curtis of Christie’s.

The first part of the sentence describes how a market responds to surplus  — falling price causes sellers to pull some goods out of the market.  The second part describes a market in shortage — the opposite condition — where rising price brings sellers into the market. This is not a combination of forces that you expect to see in the same paragraph much less the same sentence.

There are a number of supply-demand changes that could account for this (Econ 101 students — do your stuff), but one distinct possibility is what economists call over-shooting, which is a characteristic of some financial markets and especially foreign exchange markets and maybe now wine markets.  When over-shooting occurs, prices don’t drop smoothly to equilibrium like an apple in a bowl. Rather they over-shoot the equilibrium and then shoot back up. Back and forth, sometimes in increasingly unstable cycles. Market equilibrium and the “true market price” are hard to determine.

It is difficult to know where prices will go next in a market like this and the difference between “investing” and “speculating,” at least in the short run, is not completely clear. I don’t give investment advice (or rate wines, either, which makes this an unusual wine blog), but I’m not planning to rush into high end wine markets just yet. Too risky for me.

Investors vs Collectors

But then I’m not really a wine investor.  In my reading I find the terms wine investor and wine collector often used as synonyms, but I’m not sure they should be.  A wine collector buys what he or she wants to own (and, presumably, drink). It’s a personal thing. A wine investor should buy what other people will want to own, which might have nothing to do with personal taste.  I have known only a few real wine investors but lots of wine collectors who  justify at least some of their purchases as investments, but don’t manage them as they would a real investment.

In today’s market, however, both groups need to realize that there is a significant speculative element to their wine purchases and keep Mark Twain’s 115 year-old warning in mind!

Note:  Stephen Bachmann at Vinfolio posted an interesting reponse to this article. Click here to read it.