Why Haven’t Corporations Crushed the Family Wine Business?

The featured essay in the current issue of The Economist newspaper focuses on family businesses and makes the case that they are a surprisingly robust feature of post-industrial capitalism.

This struck a note with me because the next two scheduled Wine Economist columns deal with different aspects of family wine businesses.  The Economist survey, which is written by Adrian Wooldridge, would make great background reading to what’s coming up here.

All in the [Wine] Family

The conventional wisdom, as The Economist explains, is that family businesses were a natural fit with early capitalism, when trust was at a premium and finance mainly came from within the family or the firm itself. The principal-agent problem can be mitigated somewhat if principal and agent are part of the same family unit. And family members can be more reliable (and patient) sources of finance than others.

There are problems with family firms, however, which are said to limit their scale, scope and longevity. One problem is generational transitions, which are often difficult (in business as is other aspects of life). The British have a saying that it is “clogs to clogs in three generations” as the dynamism that built the family firm is dissipated and the business eventually shrinks, fails, or falls into the hands of outsiders. You can probably think of examples of this from your own experience. I have heard it said that it is “shirtsleeves to shirtsleeves in three generations” here in the U.S. and it amounts to the same thing.

The conventional wisdom, descended from management guru Alfred Chandler and others, is that the modern company is increasingly rationalized and best run by highly-trained hired professional managers not hereditary top dogs. The irrational, unprofessional family necessarily plays a smaller and smaller role.

Talkin’ ‘Bout My Generations

The Economist makes the point that successful family companies have adapted in many ways. In some regions (Asia is highlighted) and some sectors, they have achieved conventional wisdom-busting dominance.  Under the right circumstances, it seems, family companies more than hold their own again publicly-traded competition.

Would it surprise you if I said that several of The Economist‘s examples of successful family firms come from the wine industry? I hope not, because that’s one of the themes I aim to explore in the next two columns. What wine companies get spotlighted? The first is very old indeed. The family behind Marchesi Antinori has been in the wine business for 26 generations. Giovanni di Piero Antinori entered the Florentine winemakers’s guild in 1385. That’s a lot of family wine history!

The second example is very different. The Economist cites Bernaud Arnault’s family ownership of Möet Hennessy Louis Vuitton. LVMH is a world class luxury goods conglomerate with substantial investment in wine and spirits brands, but I’m not sure if it is as much a multi-generation family company as a closely-held company (especially compared to the Antinori). But the success is still important and, as you will see, privately-held firms play a role in my analysis, too, and stand in general opposition to Chandler’s orthodoxy.

Another informative example of this type is the Rupert family of South Africa. The Ruperts have built a considerable luxury goods empire through their Richemont holding company. Richemont controls many familiar brands including Cartier and Alfred Dunhill. Anton Rupert was an important force in the development of the contemporary South African wine industry and the family is today well-known for its South African fine wine projects including Rupert & Rothschild, Antonij Rupert and La Motte.

Beyond the South Sea Bubble

The last example given is Berry Bros. & Rudd, the London fine wine merchant that has been in business since 1698. The discussion of BB&R focuses on the ability of families to ride out short term crises while keeping an eye on the horizon. Once your business has lived through the South Sea Bubble, seventh generation company chief Simon Berry quips, you are ready for whatever the modern economy throws at you.

Berry’s comment actually understates the situation because all business have to deal with the disruptive consequences of financial crises and macroeconomic cycles. The situation for wine businesses is even worse because wine is fundamentally an agricultural product and so is subject to natural harvest variations as well as boom-bust “cob-web” cycles of high prices, over-planting and decline or collapse. Any wine business — public, private or family — must navigate an unusually treacherous sea.

What’s the key to the success of family wine businesses? And what happens when family firms turn corporate? It’s impossible to generalize because there are so many diverse factors, but I think we can learn something from case studies. Come back next week for the family boom to corporate bust story of the Taylor Wine Company. Cheers!


This week’s Economist also includes a very short article about investing in wine.


Creative destruction? The Who ta-ta-ta-talk about their genereation.

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

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

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

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

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

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

Decline and Fall of Down-market Wine

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

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

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

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

Up the Down Staircase?

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

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

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

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

Bronco Busting

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

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

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

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

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

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

Buckle Up!

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

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


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

Trading Up? The New Conventional Wisdom About the U.S. Wine Market

Last week I wrote about the unexpected state of the U.S. wine market today, where sales of wines above about $9 are strong and growing while the below $9 segments are stagnant or in decline. Thinking back to the dismal state of the wine market a few years ago, with trading down and heavy discounting, the current situation comes as a big surprise.

What accounts for the transformation of the U.S. wine market? And is this the “new normal” that we should expect for future years? Let’s look at the emerging conventional wisdom on these questions.

Trading Up?

I don’t know many people who think that the shift toward more expensive wines is a simple reversal of the recession years’ trading down, although that doesn’t mean that it doesn’t happen. Consumers seem as price sensitive as ever, which is why store shelves are still papered with “shelf talkers” like the one shown here that beckon buyers with discounted prices.

Yes, discounting is still going on, although perhaps not quite at the same level as during the Great Recession. The best argument for trading up is that consumers who had an opportunity to sample better wines during the deep discount days and  liked them now are feeling more economically secure and are continuing to buy them at higher prices. I’m sure that this is happening to a certain extent, but I don’t think it is the whole story.  Consumers are simply too focused on price to have suddenly changed.

Price resistance means that most consumers aren’t willing to pay more for the same or similar wine, but they are willing to spend more for something different. Who is doing this?

The Millennial Theory

One theory holds that the changing shape of the wine market is driven by younger wine drinkers — we often call them the millennials here in the U.S. but I have also seen the term “echo boomers” used and Constellation’s latest Project Genome study calls them “engaged newcomers.” As a group they tend to buy wine less frequently than some other groups (they also drink spirits, craft beers and so on) but spend more per bottle. This is the opposite of my behavior as a young wine drinker and probably a good thing.

If what we think we know about millennials is true, then they can account for some of the trend towards higher price wine sales, but they are certainly  not the whole story.  They don’t explain the shift away from lower-priced wines because they were never the driving force there. And they cannot account for all of the upmarket shift because at this point they don’t buy enough wine to move the whole market this way. Millennials are part of the story, but not the whole answer. What else?

The Bad Wine Theory

One very interesting theory is that the relative quality of wine below about $9 has fallen, driving customers away in search of something better to drink. They have found it, too, in craft beers, ciders and spirits.

W. Blake Gray recently made this point in a column titled “Wine under $10 sucks. Should we care?”  Tim Atkin made a similar point about wine in the UK market.  It’s very difficult to find decent wine below £5, he says, which is a change from the past.

A recent article on Bibendum’s website tells the sad UK story, which this graphic illustrates. If you want to get value in wine in the UK, it seems you have to move upmarket. The actual cost of the wine is more than a third of the total cost of a £20 bottle, but less than 10% of the cost of a £5 wine. Shocking!

This deteriorating value of inexpensive wines, if true, is a surprising situation. Only a few years ago we experienced something of a revolution when the character of commercial quality wine improved  quite dramatically (I called it the Miracle of Two Buck Chuck in my book Wine Wars). A structural surplus of decent wine and grapes on the U.S. and world markets made it possible for winemakers to assemble products at low price points that rivaled some brands in higher price segments. The unexpected value they provided drew millions of consumers into the wine markets Is poor quality and value pushing them away?

Well, poor value is certainly part of the answer in the U.K., where high wine duties have distorted the market and undone much of the miracle of the past. And I have some friends in California who complain that cheaper and lower quality bulk wine imports are now filling bottles of California-brand wine. The brand is associated with California (like Barefoot, for example) but the wines themselves come from many places (and are so-designated on the packaging).

Have quality and value suffered? I’m an economist not a wine critic, so I will leave it up to you to decide, but some of my California friends think that’s what’s happened. If this is true, then where is the better California wine going? Some of it is sitting in tanks, which are pretty full after a couple of generous vintages in a row. The rest? Some of it, I think, fills the bottles of wine brands specially created for the new market environment.

The Branded Age

This supply-side theory holds that smart wine executives have noticed that many consumers are willing to pay more for something different (and are put off by the commodity wines) and they have responded by creating new brands to fill specific upscale market niches. This helps explain the great proliferation of wine brands and even virtual wineries on the scene.

Each year I enjoy Jon Fredriksen’s talk about the state of the U.S. wine market at the Unified Wine and Grape Symposium, but recently I have noticed that his list of the hottest wine brands is full of unfamiliar (to me) names. These aren’t new wineries, simply new brands created by innovative existing large- and medium-sized wine firms.

Jon’s data suggest to me that these are some of the wines that are attracting buyer interest and pulling the market along. An example? Take The Wine Group, which is the second largest wine producer in the U.S. with 57.5 million case sales according to Wine Business Monthly. A few years ago I thought of them in terms of brands like Almaden and Franzia wines, which are  in that lower market tier that is stagnating today.

Now when I think of The Wine Group I think of Cupcake Vineyards, which at 3 million cases is small compared to Franzia’s 26 million, but perfectly fits that upmarket profile and is often priced right at or just above key $9-$10 threshold along with Apothic, 14 Hands and other hot brands.

Which Theory? The New New Normal?

No single theory explains what has happened and the market is full of special cases. Take Argentinian wines, for example. Customers are buying more expensive products from Argentina now in part because the cheaper labels have disappeared. With inflation still soaring and the exchange rate stuck, many Argentinean firms cannot afford to export cheaper Malbecs to the U.S., which shifts the center of gravity upmarket.

All these ideas (and others, too) are part of the explanation of today’s transformed market. It’s a perfect story of effects (or a train wreck, depending which end of the market you are in). Is this the new “new normal” and, if so, how long will it last? That’s a question for next week.


Thanks to everyone who commented on last week’s columns — great ideas! Keep them coming.

The Surprising Rebound & Unexpected Bifurcation of the U.S. Wine Market

Let’s climb in my time machine and go back a few years to 2008-2009, when the impact of the global financial crisis was beginning to be felt in the wine markets. It was a pretty gloomy time and there was a lot of talk about the need to reset our expectations to the “new normal.”

Gone were the days of great expectations as everyone scrambled to cope with the changing economic and consumer environment. What did we imagine the future would hold? Well, opinions varied, of course, but the “conventional wisdom” generally revolved around a few dire trends.

Trading Down and Trading Over

One of the most-cited trends was trading down. It sure looked like wine consumers were pulling away from wines at higher price points and shifting to less expensive products — or even moving away from wine altogether. Here’s a video that captures the moment fairly well (it was the first time I was ever interviewed by an animated character)

Trading down seemed like an unstoppable force at the time, although I suggested that it was more complicated. I noticed the strength of the Barefoot wine brand and proposed that it wasn’t just the price of the wine that made it so appealing to recession-battered wine drinkers, it was also the casual image that it offered with its surfer dude footprint in the sand style.

No one wants to admit to themselves that they are trading down, I wrote. Not good for self-esteem. But we can all embrace the idea of trading over — over to a more relaxed, less serious (and incidentally also maybe less expensive) idea of wine. Relax (there is even a brand of Riesling called “Relax”) and just enjoy wine. That’s what I thought I saw in the marketplace.

The $20+ Dead Zone

Whether it was trading down or trading over, the result was the same: the $20 and up segment of the wine market was declared a “dead zone” where nothing moved.  People still drank more expensive wines, then just didn’t buy them. They “drank up” from their cellars rather than “trading down” at the wine shop.

Wineries found that many wine club members were pulling back from scheduled shipments. Restaurant wine sales took a very big hit, too, as consumers dined out less frequently and economized on wine purchases when they did. Restaurants coped by trading down themselves, putting more pressure on wineries.

Dumping, Discounting and Flash Sales

Some wineries held their prices and absorbed inventory accumulations rather than discount or dumped excess wine on the bulk market (where Cameron Hughes and others found some outstanding bargains for their customers). They saw price cuts as a one-way street. You can lower prices, but can you raise them back up again when good times return?  Some wineries split the difference by bringing out second labels to sell for less — chateau cash flow wines — while holding the price line on prestige brands.  Lots of mistakes were made along the way and some wineries fell out of the market.

Many discounting strategies were rolled out. Safeway stores began running promotions where $20+ wines could be purchased for 30% off the regular price (or 40% off with a 6-bottle purchase) — a clear attempt to reduce inventories in the “dead zone” category. A number of “flash sale” wine websites appeared that allowed wineries to sell off surplus stock quickly and outside of the usual sales vectors.

Sometimes wineries found themselves caught in competition with their own wines as buyers (wine club members, restaurants, a few distributors) dumped their stock back on the market, under-cutting carefully calculated producer pricing strategies.

There were some great bargains for buyers who recognized them (and had the credit card headroom to take advantage), but there were not very many true winners among wine producers, especially those in the higher price ranges. The frankly defensive strategy of generating cash flow while protecting key price points was the best that many wineries could hope for.divide

Up the Down Staircase

Would consumers shift back when the recession was over? Not many people held out hope for a reset of the reset. So the current state of the U.S. wine market, which Jon Fredrikson has called “A Tale of Two Markets” comes as something of a surprise.

The U.S. wine market has split in two as the table above shows. (The table shows recent data for off-premises wine sales as measured through the particular retail channels monitored by the Nielsen Company. These data are indicative of what’s going on in the broad market.)

While the market is expanding at a moderate +3.4% pace (at least it is growing, unlike wine markets in some Old World regions), there is a clear division between wines selling at prices below $9 and those that sell for more. Although the cheaper wines make up the majority of the market by volume, they are shrinking in dollar sales value, especially the $6.00 to $8.99 segment.

The New Conventional Wisdom?

More expensive wines, on the other hand, represent a rising market segment. All price segments over $9 are growing as per these data, with the fastest growth at the highest price point — $20 and above!

This is truly a dramatic turnaround for U.S. wine. What is behind this unexpected change?  I’ll survey the new conventional wisdom in my next column.


BTW that’s a really old picture of me in the video — I hope that  I’ve improved with age since 2008. The Costco reference is a bit off in that interview, too. Costco sells wine at a low mark-up, but they don’t try to compete at the very bottom of the market as the video images suggest. I don’t think I’ve ever seen boxes of Franzia at a Costco, for example.

Unintended Consequences: How the U.S. & Canada Accidentally Destroyed Wine

At one point in Kym Anderson’s new book about the Australian wine industry he reflects on what can be done to shorten that country’s current wine slump and to get things sailing again on an even keel. One of his suggestions caught my eye:

“Governments need to keep out of grape and wine markets and confine their activities to generating public goods and overcoming market failures such as the free rider problem of collecting levies for generic promotion and R&D.”

This is more than the simple Adam Smith “laissez-faire” idea. Anderson’s book clearly demonstrates the law of unintended consequences — how well-meaning government policies sometimes have had unexpectedly negative side-effects. No wonder he recommends a cautious approach to wine and grape policy.

I was reminded of this when I was researching the history of the Canadian wine industry for a recent speaking engagement in Ontario. I was struck by Canada’s experience with Prohibition in the 20th century, how it differed from the U.S. experiment, and how both ended up crippling their wine industries but in very different ways. Here’s what I learned.

How U.S. Prohibition Crippled the Wine Industry

The great experiment in Prohibition in the United States started in 1920 and lasted until 1933. The 18th Amendment outlawed the manufacture, sale or transport of intoxicating beverages, including wine. Most people assume that the wine industry collapsed as legal wine sales and consumption fell and this is partly true but not the complete story. Commercial wine production almost disappeared, but wine consumption actually boomed.

How is this possible? There were three loopholes in the wine regulations outlined in the Volstead Act. Wine could still be produced and sold for medical purposes (prescription wine?) and also for use in religious services (sacramental wine). This kept a few wineries in business but does not account for the consumption boom, which is due to the third loophole: households were allowed to make up to 200 gallons of wine per year for “non-intoxicating” family consumption.

Demand for wine grapes exploded as home winemaking increased (but not always for strictly non-intoxicating purposes). Total U.S. vineyard area just about doubled between 1919 and 1926! But the new plantings were not delicate varieties that commercial producers might have chosen but rather grapes chosen for their high yields,  strong alcohol potential and ability to survive shipping to eastern markets.

Thus did Prohibition increase wine consumption in the U.S. but it also corrupted the product by turning over wine-making from trained professionals to enthusiastic  amateurs working in often unsanitary conditions. The home-produced wine sometimes had little in common with pre-Prohibition commercial products except its alcoholic content.

Americans drank more wine during Prohibition, but it was an inferior product. No wonder they dropped wine like a hot stone when Prohibition ended. That’s when the real wine bust occurred and it took decades to fully recover. Do you see the unintended consequence in this story? But wait, there’s more …

How Canadian Prohibition Crippled Its Wine Industry

Prohibition started earlier (1916) and ended earlier (1927) in Canada and took a different fundamental form. With support from temperance groups, consumption of beer and spirits (Canada’s first choice alcoholic drinks) was banned as part of war policy with the stated intent of preserving grain supplies for vital military uses. Consumption was forbidden, but production of beer and spirits was still allowed for export, which accounts for the boom in bootleg Canadian whiskey in the U.S. in the 1920s.

Neither production nor consumption of wine was included in Canada’s ban on alcohol, although wine sales were limited to the cellar door. What made wine different? Maybe grapes were not as vital to the war effort as grains, although John Schreiner cites the political influence of the United Farmer’s Party in his account of this period in The Wines of Canada. Wine became the legal alcoholic beverage of choice for Canadian consumers and production boomed. By the end of Canadian Prohibition there were 57 licensed wineries in Ontario (up from just 12) to serve the big Toronto market.

Wine sales increased 100-fold, according to Schreiner, but “It would be charitable to describe the quality of the wines being made in Ontario during this period as variable,” he writes. The market wanted alcohol and set a low standard of quality, which many producers pragmatically stooped to satisfy. No wonder wine production collapsed at the end of Prohibition as consumers went back to spirits and beer.

Unintended Consequences

Thus did government policy in both Canada and the United States create wine booms during their respective Prohibition eras, but the worst kind of booms: bad wine booms. Quality suffered as quantity surged. It is no surprise that consumers turned away from wine once other beverages were available. It took decades for these industries to recover.

Both the Canadian and U.S. wine industries are vibrant and growing today, having recovered from the crippling effects of poor quality wine. But they both are still hampered by other policies — especially regarding distribution and sales — that date back to the end of Prohibition. Economic policies can obviously have unintended effects and the shadows they cast can be long indeed.

No wonder Kym Anderson is skeptical about government interference in the Australian industry. Prohibition is an extreme case, to be sure, but such cases clearly show the unintended consequence potential that exists even with other seemingly harmless proposals. A cautious approach makes sense.


You can read more about both the Australian booms and busts and also Prohibition in the United States in chapter 6 of my 2013 book  Extreme Wine. Look for a review of Kym Anderson’s book in an upcoming Wine Economist column.

How Will the Rising Dollar Affect the U.S. Wine Market?

fxHow will the rising dollar affect the U.S. wine market? The answer, predictably, is that it’s complicated. Read on for analysis organized around three questions. Why has the dollar appreciated? What are the textbook effects of a rising dollar? How and why is the impact on U.S. wine likely to be different?

Why has the dollar appreciated?

The U.S. dollar has appreciated dramatically on foreign exchange markets, powered by several factors. Expectations of higher interest rates in the U.S. is a big part of the story as the reality of the end of the Federal Reserve’s asset purchase program sinks in. Add to this the fact that the Europoean Central Bank is finally close to beginning its own quantitative easing program, which will keep rates down on that side of the pond. This combination is a recipe for the sort of change you see in the graph above.

The relative strength of the U.S. economy, weakness of the E.U.with its potential “triple dip” recession and uncertainty regarding China and oil prices all contribute to the economic environment that has helped fuel the dollar’s recent rise. Where is money going to go in a risky world? Can you say USA? A lot of us have been impatiently waiting for the dollar to move higher for a couple of years. Now that it has happened, what should we expect?

What are the textbook effects of a rising dollar?

The classic textbook effect of a rising currency is that imports increase because they are relatively cheaper and exports decline because they are costlier to those holding foreign currencies. Imports up, exports down. That’s where the Econ 101 story often stops, but the situation is a little more complicated.

Prices adjust faster than quantities in most cases. Price effects (rising export costs, falling import prices) tend to happen quickly, but quantities take longer to change because of inventory lags, recognition lags, and contract lags. Basically, it takes time before the new exchange rate translates into real actions because existing inventories must be depleted before new orders are made, because it takes some time before economic actors feel certain that the change is sustained and not just a market blip, and because existing contracts often preclude immediate adjustments.

These lags create what economists call the “J curve” effect, with opposite short-term and long-term payments impacts. The Econ 101 results take longer to show up in significant amounts than you might think and even then will only appear if other intervening economic factors don’t offset them. So predicting the short term impact of an exchange rate change isn’t as simple as you might think even if you earned an “A” in Econ 101.

But price is a powerful force, and the fact that a rising dollar makes our exports more expensive to foreign purchasers (and imports cheaper for U.S. buyers) should not be ignored even if immediate run impacts are not obvious. Don’t expect everything to change at once.

One more complication is that although we like to talk about the dollar rising or falling, the overall trend conceals the fact that the dollar might be higher relative to one currency and still falling compared to another. During one recent period when the dollar was quite weak by some standards, for example, it still rose compared to some other currencies that were even weaker.

How and why is the impact on the U.S. wine markets likely to be different?

Given all this, it is instructive to read a 2012 report by Kym Anderson and Glyn Wittwer titled “Studying the impact of exchange rate movements on the world’s wine markets, 2007-2011” (a University of Adelaide Wine Economics Research Centre working paper — the link takes you to a pdf of the paper). The Anderson-Wittwer study examined the impact of exchange rates on wine trade during a period when the dollar was falling instead of rising and finds that the impact of exchange rates was different in different import markets and in different wine market segments. (I told you it was complicated!)

In the U.K. market, for example, the exchange rate impacts were pretty much what theory suggested both in terms of import effects and distribution among different wine exporting countries. A good textbook case.

But the U.S. was a different story, as you might expect given that we have a substantial domestic wine production base and that we both export and import wine with the two trade flows connected to a certain degree by the “wine drawback program”  (Click here to read a 2012 UC/Davis report on the drawback program.)

The wine drawback program allows a refund of 99% of import duties and excise taxes on wine for which the importer has matching exports of commercially “interchangeable” wine. Because per-unit import duty and excise tax rates are substantial compared to the price of bulk wine, use of the program is high for bulk wine imports, which compete with wine from low-price Central Valley grapes. Bulk wine exports dominated imports until 2009 and the program stimulated import growth. Now, with imports and exports roughly in balance, the program stimulates both exports and imports—leaving net trade in bulk wine roughly in balance.

– Summary of the U.C. Davis Report

The Anderson-Wittwer study found that the falling dollar had different effects on U.S. consumption of  Old World and New World wine imports during 2007-2011. Old World imports increased despite the dollar’s fall and New World imports fell.  Obviously the price effects were more strongly felt for New World wines than for Old World products (see Table 6 of the report) and although Australia accounted for much of the import decline and may be a special case in some ways, Argentina, Chile and South Africa were also negatively affected.

The study found differences by price category, too. Non-premium and commercial premium New World wines were the most affected by the exchange rate changes while super-premium wines showed less impact. This makes sense because the lower priced products are often part of the bulk wine trade, which has become highly efficient, facilitating ease of substitution from one country’s products to another. A small change in cost can have a big impact on the size and direction of trade. Textbook effects rule here.

More expensive products benefit from greater product differentiation. The power of an established brand acts as a shock absorber when costs increase, although there are obvious limits to this.

It’s Complicated

So if Old World imports increased and New World imports fell during the period when the dollar was slumping, can we expect just the reverse now that the dollar is soaring? It would be great if we could just take the Anderson-Wittwer numbers and change the signs from plus to minus and so forth, but life is more complicated than that. Anyone who has tried to sell wine can tell you that it is easier to lower a price than to increase it! It’s a kind of hysteresis in the sense that where you can go now depends on where you have been. You can’t just back out to where you started.

That said I think there are important insights to take away here, key among them is the idea that the impacts are likely to be different for bulk wine and packaged good trade and for Old and New World products.

Textbooks and research give us good guides to understanding the impacts, but there aren’t any simple answers. And the exchange rate isn’t the only thing that’s changing this time around. I know a number of New World producers who made big bets on the Russian market, for example. Seemed like a good idea at the time, but my how things have changed! They’ll be desperately  looking for markets for the wine they can’t sell to Moscow. And imports from Argentina may be more affected by that country’s domestic policies (and the upcoming elections) than exchange rates.


It occurs to me that this column is a classic example of what Paul Krugman once called “up and down economics.” This goes up, that goes down, and so on. Made me think of the Winslow Homer painting “Right and Left” that you can see in the National Gallery in Washington D.C.

Not That Easy Being Green (Wine): Review of Two Books

Britt & Per Karlsson, Biodynamic, Organic and Natural Winemaking: Sustainable Viticulture and Viniculture. Floris Books, 2014.

John Kiger, A Vineyard Odyssey: The Organic Fight to Save Wine from the Ravages of Nature. Rowman & Littlefield, 2013.

It’s really not that easy being green if you are a winegrower or wine maker. For a long time green wines (organic, biodynamic, sustainable and so forth) were not a very dynamic category here in the U.S. You could find them, but they were tucked away in what I call the “green ghetto” neighborhood at the supermarket, close by de-alcoholized wines, half-bottles, and other sometimes slow-selling SKUs.

Some research actually suggested that consumers were not only unwilling to pay more for organic wines, as they often do with other organic products. They actually valued them less than other wines. So many people who made organic or biodynamic wines didn’t go out of their way to advertise the fact. Much different from Europe, where “bio” wines are a strong category.

This is changing and I expect to see green wine sales grow, albeit from its current small base. The dynamic is driven by both supply and demand. On the supply side, more and more wine grape growers and producers simply want to be green — they see it as the best way to do business, especially in the long run — and want to advertise that fact and develop the market category.

Jean-Guillaume Prats, chief of the wine group at LVMH, goes further. He told the Wine Vision 2014 audience that in considering vineyard investments, if you can’t grow the grapes organically, maybe you shouldn’t grow them at all! He’s obviously focused on the luxury wine segment, but the message resonates in other parts of the market.

On the demand side I see green wines as part of a bigger movement. A friend pointed out to me that consumers who shop at Whole Foods, Trader Joe’s and other upscale supermarkets simply expect that the products they find there will be organic — and are turned off if they are not. They look for organic certification everywhere else in the store. Why should wine be any different?

So things are changing, although it may take a while for the build-up of small ripples and waves to come crashing to shore. I think this is a good time to rethink green wines and the two books reviewed in this column are excellent places to begin.

Green Wine Primer

Britt and Per Karlsson write about wine from their base in Sweden and this book, which first appeared in Swedish in 2012, is a welcome green wine primer. Its scope is broad, including organic, biodynamic, sustainable and natural viticulture and winemaking.  The Karlssons provide good depth and detail, covering the science, economics and regulatory politics of green wine today. Theory and practice, just what you need.

I was especially interested in the curious politics of EU organic wine regulations. Because of the desire to have one set of rules for everyone from Greece to Latvia, the compromise results can seem illogical. The limits on copper use, for example, seem driven by the need to accommodate Burgundy in a particularly bad year and so are out of balance for other parts of the EU. A regional approach would seem to make better sense here as in many other instances, but I think some of the Eurocrats are suspicious of regionalism, so illogical compromise rules.

Although there is more detail about European practices and regulations than New World activities, I found plenty to work with and the contrast of regimes helped me understand them all much better.

The book is clearly written and organized and lavishly illustrated with color photos that are both beautiful and informative. I learned something new in every chapter, but I was especially interested in the biodynamics section. The combination of thorough research and personal interviews with growers and winemakers made this material come alive for me.

Sometimes the smallest points are the most satisfying, so I was pleased to learn the origin of the numbers that are used to identify the biodynamic preparations. These preparations often raise eyebrows because they seem to represent the “voodoo” side of biodynamics — manure stuffed in cow horns, buried in the vineyard and then made into a tea to spray on the vines, for example. Why are they identified with numbers not names? Numerology?

No, it’s more about politics. The numbers (cow horn manure is Preparation 500) may have come about when the Nazis in Germany banned biodynamic agriculture, the Karlssons report. Proponents learned to speak in a numbers code to avoid detection.  Who would have guessed?

The Karlssons present all this information objectively and openly question some of the most extreme claims of green wine proponents, but I don’t think you write a book like this unless you think there is something in the concept itself. In this regard I think they reflect both the times, which as I noted before now seems to favor organic products, and their location (Scandinavia is a good market for green wines).

This is a fine book and worth your attention.

Green Isn’t Easy at All

It really isn’t easy being green — not easy at all — and as much as the Karlssons give a strong sense of this in their survey, there is really nothing like a report from the front lines of the battle. John Kiger and his wife Deb own and operate Kiger Family Vineyard in Sonoma Valley, which is not a region where nature cuts the green winegrower any slack. Just the opposite in fact. At times it seems like being natural is a battle against nature itself.

Kiger’s book makes a nice pairing with the Karlssons’ because it is at once so similar in topic and yet so different in approach. Kiger’s book is clearly personal, for example. The author presents a first person account of the triumphs, failures and struggles. The book has heroes (including the Kigers and their allies) and villains, too, chief among them is oidium or powdery mildew, which  is a threat to vineyards everywhere and perhaps especially in cool-climate Sonoma Valley.

Kiger becomes obsessed with powdery mildew, by his own account, and so we learn a great deal about it. This intense focus is very helpful because an organic wine farmer necessarily becomes obsessed with all the harmful fungi and harmful insets and so forth and is driven to find natural ways to combat them.

The book’s first chapter is titled “If I’d Only Known Then What I Know Now,” which tells you that it really hasn’t been easy being green, and the last chapter is called “Truce.” which might suggest that the Kigers have come to terms with nature’s many sides. But I think it is really that they have accepted that  each new year starts a new cycle of natural challenges like powdery mildew and that this struggle has value in itself in addition to the grapes and wine that are produced.

These two books make a nice pairing for your wine economics bookshelf. File them alongside Caro Feely’s books on her struggles with organic and then biodynamic winegrowing in France. Follow this link to read my review of Feely’s books. Cheers to everyone who struggles to be green — we know it’s not easy!


Here’s the obvious music for this column and the lyrics sort of apply to the green wine case, don’t you think?


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