Is Craft Beer the Next Big Thing in Wine?

Is craft beer the next big thing in wine? No — not if you’re asking if wineries are going to start putting in tanks for IPA (India Pale Ale) alongside their racks of expensive french oak barrels.

But yes — maybe — if you are thinking about things in terms of market spaces. The wine market space and that of craft beer are increasingly overlapping as craft beers infringe on wine’s turf (and low alcohol wines threaten to do the same for beer). And if the common battlefield isn’t huge at this point, it is certainly growing and warrants attention.

Anatomy of Craft Beer

A Craft beer producer, according to CraftBeer.com, the Brewers Association website, has three essential qualities:

  • Small: Annual production of 6 million barrels of beer or less.
  • Independent: Less than 25% of the craft brewery is owned or controlled (or equivalent economic interest) by an alcoholic beverage industry member who is not themselves a craft brewer.
  • Traditional: A brewer who has either an all malt flagship (the beer which represents the greatest volume among that brewers brands) or has at least 50% of its volume in either all malt beers or in beers which use adjuncts to enhance rather than lighten flavor.

Although by definition craft beer producers are relatively small, the market category has made a lot of news recently because of its rapid growth, both in terms of number of retailers who carry craft beers and total sales. Rapid growth from a small base — sound familiar?

It’s the growth that gets your attention. Remember Moscato? It surged from a small market niche to become the next big thing and is according to one report is now the third best selling (by volume)  white wine varietal in the U.S. after Chardonnay and Pinot Grigio and ahead of Sauvignon Blanc. Is craft beer the next Moscato?

The Next Moscato?

I put the question this way because the particular beer that provoked this post was actually made with Muscat grapes. It was a 12 ounce  bottle of Midas Touch from Dogfish Head Brewery. that I bought for $3.50 at the Metropolitan Market up the street.

Although Midas Touch probably wasn’t made with wine drinkers strictly in mind, it is certainly being marketed to the wine space as the videos below will show you and I have to say that its complex aromas and flavors (plus wine-like 9% alcohol by volume) made it a beer that can stand up to many wines in a sip by sip comparison.

The brewery says that “This sweet yet dry beer is made with ingredients found in 2,700-year-old drinking vessels from the tomb of King Midas. Somewhere between wine and mead, Midas will please the chardonnay and beer drinker alike,” and I can’t really disagree. I found it very pleasing (and not overwhelmed by the addition of saffron as you might expect), although this is clearly a matter of taste. Sue was less impressed, saying that it didn’t taste like beer and wouldn’t be her choice over wine.

Midas Touch is not a typical craft beer, but it demonstrates pretty well what craft beer is capable of doing in competition with wine.  It is a complex and interesting beverage that pairs well with food — just like wine. It tells a story that draws in the consumer and deepens the attachment — just like wine.

New and Improved!

Innovation is a hot topic in the beverage business these days and craft beer presents more opportunities for innovation and product development than most wines if you are aiming at that market segment. Midas Touch, based on an ancient recipe using exotic ingredients — is an example of how far the innovations can go.

Interestingly, complexity comes at a lower relative price with craft beer than with wine, which is something to consider. The difference between the lowest and highest priced grocery store wines is huge — sometimes a factor of 50 or more — with $2-3 per bottle equivalent for a 5-liter Franzia box at the low end and $100 or more at the top is not unusual at an upscale supermarket.

By comparison, the exotic product premium for craft beers is relatively low. The Midas Touch was a bargain at $3.50 or about $7.00 per 750 ml bottle equivalent in the sense that it was not very much more expensive than basic beers and ales.  I have to admit that it was a lot more interesting to drink that a lot of $7 wines that I have tasted even if, like any particular wine, it is not necessarily to everyone’s taste.

And even the most exotic cult beers (like the locally fabled Pliny the Elder) can often be found for $10-$20. So the Screaming Eagle craft beer equivalent can be purchased for the price of a good but not exceptional bottle of wine. You can see how that might attract the attention of some wine drinkers, especially young ones. And I guess it has.

Wine’s Counterattack?

A lot of the attention has been focused on alcohol levels. Some craft beers are even more potent than the 9% abv Midas Touch, which puts the beer in ballpark of wine.  Certainly high octane beer should be treated like wine and sipped (wine glasses are often recommended) not gulped.

But not all craft beers are this boozy and in fact I think that their lower alcohol levels (compared with wine and spirits)  can be a competitive advantage when you look at the market that way.

The trend towards lower alcohol wine (like the 5.5% abv line of wines that Gallo recently launched in the British market)  might be seen as wine trying to capture some of the beer market through product innovation.

Craft beer drinkers often display the same sort of insane devotion and geeky attachment that we see in wine enthusiasts and there are even interesting beer tourist destinations like Bend, Oregon — an old mill town that is home to 14 craft breweries within easy walking (or stumbling) distance of each other along the Bend Ale Trail, which attracts some of my university students as a Spring Break destination.

Midas Touch

So craft beer has a lot in common with wine and maybe a couple of advantages. With these products more widely available and a growing customer base that is ready and willing to experiment, I think it is plausible and wine and craft beer will increasingly share market space and must take that competition into account.

Will some wineries take the next logical step and start brewing small lot beers? Well, it isn’t a crazy idea where regulations permit it. Compared to wine with its single annual harvest, beer is a Chateau Cash Flow business. Breweries can operate pretty much year round as one batch it bottled and another fills the tanks.

Cash Flow Ale? Maybe that’s how beer-drinking Midas got his golden touch!

OTBN: The Cure for Conspicuous Non-Consumption

The last Saturday in February has for some years been officially designated “Open That Bottle Night” and we plan to celebrate it again this year in the company of our friends Jenny,  Bonnie and Richard, Rosemary and Ken and Mary and Ron, who are hosting the gathering.

OTBN was invented by wine writers Dorothy Gaiter and John Brecher to solve a problem that plagues many wine enthusiasts. Some wines are just too precious to open. For one reason or another we want to let them sit, waiting for a “special occasion.” As if opening an intriguing bottle isn’t special occasion enough! Go figure.

So, Dottie and John proposed, let’s just pick an arbitrary date, pull the cork, and celebrate. The wine doesn’t have to be old (although it might not be a bad idea to drink up older vintages if you have any) or expensive, either. It’s the thought that counts. Or the story that goes with the wine — I like “story wines” best of all.

I’m a big fan of OTBN because I see it as positive step. Wine enthusiasts do lots of silly things, as I point out in my forthcoming book Extreme Wine. We spit out good wines (at tasting events, where there are too many wines to even think of swallowing them all) and then slurp down mediocre ones (at weddings and receptions, etc.)

And whereas others suffer what Thorstein Veblen called “conspicuous consumption,” we sometimes stand out because of what we don’t drink (but could). No doubt about it: time to open that bottle.

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otbn2013

Update February 24, 2013. I thought you might be interested in the menu and wine list for our OTBN dinner last night. Try not to drool on your keyboard or tablet screen as you read this. (Note: I failed get the maker of the 1990 Riesling .)

Hors d’oeuvres: Smoked chicken and dried apricot terrine with a lemon caper sauce /  Smoked lamb loin with tarragon aioli served on toasted baguette / Pecorino cheese beignets with pink lady apple butter

  • Gloria Ferrer Brut Sonoma

First course: Smoked salmon rosette, lemon cream, crispy brioche, shaved fennel and arugula with citrus olive oil

  • 2010 Venge Vineyards Bacigalupi Vineyard Pinot Noir Russian River

Second course: Seared jumbo scallop with forbidden rice, avocado poblano butter, and roast bell pepper foam

  • 2007 Joseph Drouhin Savigny Les Beaune “Talmettes” Premier Cru
  • 2008 Domaine Drouhin Oregon Pinot Noir, Willamette Valley

Third course: Sunchoke and cauliflower puree with coriander cream

  • 1990 Wehlener Sonnenuhr Riesling Auslese, Mosel
  • 2008 Joseph Rosch Riesling Kabinett, Mosel

Fourth course: Poached lobster tail, lemon beurre fondue, stewed leeks, and caramelized anise

  • 1996 Verget Puligny-Montrachet Les Enseigneres
  • 1996 Chavet-Chouet Puligny Montrachet Premier Cru

Fifth course: Muscovy duck, braised red cabbage, roast pearl onions and bacon lardons, herb spätzle

  • 1982 Gloria St Julien, Bordeaux
  • 1998 Cuvee Vatican Chateauneuf du Pape
  • 2000 Le Vieux Donjon Chateauneuf du Pape

All accompanied by Sue’s signature fresh-baked bread

Dessert: Bonnie’s famous chocolate dacquoise

  • 2006 Cakebread Cabernet Sauvignon Napa Valley

Afters: Fantasy of Spanish almonds, Italian hazelnuts, Turkish figs and dried apricots

  • 2004 Dobogo Tokaji Aszu 6 Puttonyos

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James May seems to be an opponent of conspicuous non-consumption, as this clip from the wonderful BBC mini-series he made with Oz Clarke makes clear. Enjoy!

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Juice Box Globalization: Is this the Future of Wine?

applegrapeI’m back from the Unified Wine & Grape Symposium and busy trying to process all that I’ve learned while simultaneously catching up on the work that seems to have piled up while I was away. You know the feeling …

One theme of the seminars this year was the impact of globalization on the U.S. wine industry. I thought I would approach this topic in two parts. First, let me tell you a little of what I said on the Tuesday Globalization panel and then I’ll try to synthesize what learned from the discussion in a follow-up post.

Thinking Outside the [Juice] Box

My remarks were an attempt to get the audience to think about the impact of globalization in a broader context (it’s that liberal arts thing I do in my day  job as a college professor). Globalization isn’t a simple thing, I told the audience, and it isn’t a one-way street, either.

Don’t think that globalization is just competition from imports from other countries (although that’s part of it, of course) or just export opportunities abroad (as important as they can be). Globalization is both of them and many more influences, too.

One way to understand wine globalization a bit better is to look at globalization in another industry and seek out parallels and note contrasts, too. The apple industry is a bit further along the globalization process than wine, so maybe it reveals something about the road ahead.

The apple market has always been segmented, for example, but globalization has magnified the category distinctions and intensified competition within them.  Maybe that’s happening to wine? Here are three flavors of apple globalization that may or may not have lessons for wine business in the future.

juicebox

Juice Box Globalization

Consider the common juice box. If you have children or grandchildren or pack your own lunch you probably have these things around you all the time. Who knew that they embody an extreme form of globalization?

Take a look at the list of ingredients. Water, juice concentrate, etc. — no surprises there. But look where the juice concentrate comes from: USA of course but also Argentina, Austria, Chile, China, Germany and Turkey.  The apple juice concentrate that supplies the juicy fruit taste could come from any of five countries on four continents. Wow! That’s globalization for you.

The concentrate is a completely generic product (simply apple — not some particular variety of apple) traded in highly competitive global markets where cost (for standardized quality) is king and minor changes in exchange rates, transport costs and trade fees can have big effects.

As we consider the major increase in bulk wine shipments around the world — 45 percent of all New World wine exports are now big bag – big box bulk shipments – you can’t help but wonder if Juice Box globalization might be on the horizon.

Granny Smith Globalization

I’m old enough to remember when Granny Smith apples entered the U.S. market in 1971 (from New Zealand, as I recall) as a premium product. The Granny Smith was developed nearly 150 years ago by a grandmotherly Australian woman named Smith who discovered the natural cross in  her garden  and propagated it.

Initially, I think, the appeal of Granny Smith was that it was a premium Southern Hemisphere apple that filled a seasonal market niche in United States. Now however, Granny Smiths are grown pretty much everywhere and have lost some of their premium appeal. Highly integrated international apple companies source them from everywhere and distribute them everywhere.

Granny Smith globalization is not nearly so extreme as Juice Box globalization, but it is still quite dramatic. It reminds me of some of the bulk wine trade today, where certain varietal wine brands at certain price points are increasingly sourced from all over the world. Product differentiation in some segments is increasingly based upon brand rather than appellation or country of origin — which can change from California to Chile to Italy and beyond from year to year — just like the  Granny Smiths.

Honeycrisp Globalization

The best margins in the apple business today are probably found in what I call the Honeycrisp market segment where innovative super-premium products command high prices. The Honeycrisp apple was developed by the Agricultural Experiment Station at the University of Minnesota to be an eating apple with distinctive flavor and especially texture profiles that consumers seem to love. Patented and licensed, it has been a very profitable product.

The plant patent on the Honeycrisp has apparently expired, so production is increasing and prices have fallen a bit, but the idea behind it is still strong. Plant scientists in Europe have developed new specialized patent apple products to take over where Honeycrisp left off. Sue is especially fond of  Kiku and Kanzi, which I think are variations on the Fuji variety from Japan that were developed in Northern Italy and the Netherlands respectively and are grown in limited quantities here in Washington State.

Honeycrisp globalization is about product innovation and product differentiation. Follow the money: the tight margins created by Juice Box and Granny Smith globalization have nudged the Honeycrisp strategy into the spotlight.

Apples, Oranges and Wine

Is there anything to be learned about wine by thinking about apples? Or is it an “apples and oranges” thing? Well, my goal was to get people thinking and I admit that when I asked the big audience if they thought that there was something to the Juice Box (or Granny Smith or Honeycrisp) idea of wine I saw many heads nodding “yes.”

Not a surprise, of course. Apples and wine are specialized industries, but they are both businesses, too, and perhaps the similarities that people see are because of that. Maybe this little lecture has got you thinking, too. If so, come back next time when I’ll talk about some of the interesting ideas I heard from other speakers regarding globalization and U.S. wine.

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Here’s a video about Kiku — about as far from a Juice Box (in terms of product differentiation) as you can get.  Enjoy!

The Unified Symposium: Globalization, State of the Industry and Book Signing

I hope to see many Wine Economist readers next week at the Unified Wine and Grape Symposium in Sacramento, California. The Unified is North America’s biggest wine industry gathering. Here’s how the website describes it.

Built with the joint input of growers, vintners and allied industry members, the Unified Wine & Grape Symposium is held annually in Sacramento, California and is the largest event of its kind in the western hemisphere. Serving as a clearinghouse for practical information important to wine and grape industry professionals, the Unified Symposium also hosts a trade show with over 650 suppliers displaying their products and services to the more than 12,400 people who attend annually.

It’s a Really Big Show (as Ed Sullivan might have said) and I’ll be part of three events: two sessions and a book signing. I’ll paste the details of the sessions at the end of this post.

  • I’ll be on the panel for the general session on globalization and the U.S. wine industry that starts at 9 am on Tuesday, January 29,
  • I’ll be moderator for the “State of the Industry” panel that starts at 8:30 am on Wednesday, January 30, and
  • I’ll be signing copies of Wine Wars at the Wine Appreciation Guild booth in the trade show from 12:30 – 2 pm on Wednesday.  Please stop by Booth # 1620 and say hello if you are there.

Here are the details:

How the Global Wine Market Affects U.S. Production

U.S. growers and wineries are directly or indirectly impacted by the global wine market. Bulk wine movements ebb and flow based upon changes in currency valuations, relative costs of production, transportation costs, and supply and consumer demand. U.S. producers are accustomed to competition from branded imports, but numerous U.S. brands also source bulk wine internationally to meet cost-of-goods targets or to satisfy consumer demand for popular wine styles or varietal grapes in short supply. These trends affect U.S. grapegrowers and wineries, and this session will help you understand the market forces that will likely affect your business.

Moderator:

Jeff O’Neill, O’Neill Vintners & Distillers, California

Speakers:
Kym Anderson, University of Adelaide, Australia
Greg Livengood, Ciatti Company, California
Stephen Rannekleiv, Rabobank, New York
Mike Veseth, The Wine Economist Blog and The University of Puget Sound, Washington

State of the Industry

The State of the Industry session will provide a comprehensive look at every aspect of the wine industry, from what’s being planted to what’s selling. This 2½ hour session features highly regarded speakers and delivers incredible value for attendees who need to understand the market dynamics of the past year and are seeking insight into the market trends that will define the year ahead.

Moderator:
Mike Veseth, The Wine Economist Blog and The University of Puget Sound, Washington

Speakers:
Nat DiBuduo, Allied Grape Growers, California
Jon Fredrikson,
 Gomberg, Fredrikson & Associates, California
Charles Gill, Wine Metrics, Connecticut
Glenn Proctor, Ciatti Company, California

Busting the Big Tank Myth: Durbanville Hills

dhwThere are easier ways to get to Durbanville Hills Winery than aboard a snorkel-equipped Land Rover, but I don’t think there’s a better way to go.

They brought out the 4×4 vehicles (snorkel-equipped — who knew? — so the engines can breathe even in deep water crossings) so that we could experience and appreciate the hills, the vineyards and the rugged terrain even before we came to the winery itself and the braai lunch that was planned for us there.

My visit to Durbanville Hills Winery started as adventure and became a learning experience about the diverse nature of wine in South Africa. Now it is also Exhibit A in the case against the One Big Tank myth that I wrote about last week.

The Big Tank theory is that giant wine and drinks companies with dozens of brands in their portfolios offer consumers the illusion of choice, not real choice. It’s as if all the different wines came out of one big tank.  Although there is a grain of truth in this idea, I think it is fundamentally bogus and Durbanville Hills is a case in point.

From Oom Tas to Nederberg Noble

Durbanville Hills Winery is part of the Distell drinks empire. As I wrote last week, Distell is South Africa’s largest wine and spirits producer and is a global power in several beverage categories. They superficially fit the Big Tank stereotype, but within their range of brands you will find choices over a wide range starting with very basic wines such as Oom Tas (described as “an inexpensive, dry, golden, unsophisticated wine of constantly good quality and taste”) and Kellerprinz (” an unpretentious, fun wine, its quality is nevertheless good and consistent, offering value for money”) and moving on up the ladder to the rather special Nederberg Noble Late Harvest wine I wrote about last year.

Durbanville Hills Winery is a relatively new addition to the Distell group.  The winery is beautiful in a modern way that does not seem out of place for its setting. The public spaces are welcoming, the restaurant gets good marks and you can’t beat the views looking out over the vineyards or on to the city. It looks like Distell has put a lot of time and money into the operation and the result is impressive.

Even Lettie Likes It

The wines are impressive, too. I especially liked the Sauvignon Blanc, which seems to do especially well in these hills. And the Pinotage is good enough to get a nod from self-confessed Pinotage-hater Lettie Teague, wine critic for the Wall Street Journal.

Durbanville Hills’ wines are distinctive (which runs counter to the Big Tank myth), but in fact the whole operation is unusual and not what you would expect from a “drinks company” winery at all.

Durbanville Hills was founded in 1999 as a partnership between Distell and seven wine farms in this region and the first wines were released in 2001. This area has a long history of wine growing — the youngest of the farms was founded in 1714 according to the winery website.

Triple Bottom Line

Distell’s representatives sit on the winery board, as I understand it, along with the farmer partners plus a workers’ representative. The wine farm workers have a 5% equity stake in the business that is administered through a trust that provides a number of social and economic benefits to workers and their families. Durbanville Hills was one of the first wineries to be accredited by the Wine Industry Ethical Trade Association. 

Cellar master Martin Moore is an enthusiastic promoter of a particular brand of sustainability that is sometimes called the “triple bottom line” approach (although he never used this term when talking with me). Businesses need profits to sustain themselves in the long run, of course, but economic sustainability doesn’t mean much if the environment is sacrificed (true for all business, but especially for wine), so you have to add that factor into the equation. And what are planet and profit without people? Communities must be sustained along with business and the environment. So true sustainability is the intersection of the three spheres of life taken together.

To quite intentionally organize a wine company around these values is a long term commitment and not the sort of thing that you associate with a corporation nervous about quarterly earnings reports. But it seems to me that everyone at Durbanville Hills is in this for the long run and the structure of the business is meant to keep it that way. It’s an impressive achievement and it makes a glass of Durbanville Hills wine a particularly satisfying drink.

Not Free Range

Clearly there are values and principles beyond a simple short-term profit motive behind the Durbanville Hills project, but they are usefully balanced with a sense of realism — you have to be pragmatic to make the triple bottom line work because this idea of business  isn’t about avoiding trade-offs, it’s about confronting them and making effective choices.

I saw this in a sort of sustainability manifesto that Martin Moore gave me at the end of my visit. Moore writes that, “We farm responsibly … not organic, not biodynamic … but sustainably.”  I think his point is that it is difficult to balance all three bottom lines if you swear off potentially important tools. “I would not even claim that we have free range vines,” he jokes, “as most of it is stuck in a trellis system.”

But I do believe that if we continue improving strengthening our 3 pillars of sustainable farming Durbanville Hills, our producers, our farm workers and community will hand over a successful business to the future generation without having to apologize.P1040576

Myth and Reality

Clearly Durbanville Hills Winery doesn’t fit the Big Tank theory and I think it is an indication that Distell and other giant wine and drinks companies are capable of offering wine consumers real choice — choice in both the wines themselves (which is the point after all) and in the entire wine experience.

It would be easy to make the case that Distell and Durbanville Hills are special cases. South Africa has a unique wine history that stretches back for hundreds of years and a unique social history, too, which motivates many there to address directly issues of race and inequality.

And then there is the Rupert family’s influence on Distell. If anyone understands the the benefits of product differentiation and avoiding a Big Tank syndrome, it is probably the Ruperts, whose broad holdings control many luxury brands including Cartier. They would certainly appreciate the business value of distinctive products compared with Big Tank uniformity.

Distell is a unique wine company in many ways, but I don’t see it as unique in terms of the Big Tank myth.  While I don’t deny that there are a few Big Tanks out there, in general I believe that even giant wine companies have strong business incentives to provide consumers with diverse choices (and even in some cases to take seriously the triple bottom line).

It is a sad fact that some of the great potential diversity of wine production does get filtered out by the logic of distribution and retail economics, and the vast scale and scope of the wine giants indirectly contributes to that problem. But, as I said in my last post, it takes a village to raise a child and it takes an entire supply chain to deliver diverse wine choices … or not. But it’s not just a Big Tank problem.

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I realize that one example, even a really good one like Durbanville Hills, isn’t enough to bust a myth (n=1 is a pretty small sample size). But there are lots of examples if you only take off the “Big Tank” glasses and look around.

Thanks to Cellar master Martin Moore and Managing Director Albert Gerber for taking the time to answer all my questions at Durbanville Hills and Cape Wine 2012. The images up top are from the winery’s website.

The “One Big Tank” Myth

My recent post about How Much Choice Do Wine Drinkers Really Have? made the point that true diversity in wine choice is complicated. Although there are constellations of wine brands that are theoretically available, from a practical standpoint the choice available to you depends on your price point “comfort zone,” how you shop (on-line or wine club versus bricks and mortar stores), where you shop (local shop versus national chain store), where you live (state regulations vary enormously) and many other factors.

It takes a village to raise a child, they say, and it takes an entire product chain to raise up a diverse selection of wine … or not!

The Illusion of Choice?

A persistent concern is the influence of giant wine companies with dozens of wine brands in their portfolios. The conventional wisdom seems to be that these big firms merely create the illusion of choice, not choice itself. I guess the idea is that all of these different wine brands actually pour out of the spigot of one giant wine tank. If they all come from Gallo (or Constellation Brands or Treasury Wine Estates, etc.) then they must all be the same — or so similar as to make choice irrelevant.  I call this the “One Big Tank” theory and I think it’s a myth, although like all myths it contains a grain of truth.

The reality is that giant wine companies can and often do produce distinctive wines. And smaller operations sometimes pump out quantities of relatively terroir-free negociant wine to pay the bills. Size matters in wine, but it’s not the only thing. My motto is still “think global, drink local,” so I am not arguing against small terroir-driven producers, but I think at least some of the big wine companies have an undeserved poor reputation from the wine choice standpoint.

Giant wine companies have many advantages: access to capital, technology and vineyards, for example, and economies of scale in purchasing, distribution  and some aspects of production. What matters from the consumer choice standpoint is how these advantages are employed. You can aim to fill that one big tank as cheaply as possible or you can leverage the large scale advantages to create real quality and diversity.

Big Tank Stereotypes

A good example of how the myth unravels at least some of the time comes from my visit to South Africa. I was a guest of Distell for part of my visit (Distell owns Nederberg and I gave the keynote at the Nederberg Auction) and this gave me an opportunity to learn about the company, which is South Africa’s largest wine and spirits producer.

If you go strictly on stereotypes, Distell has got to be one of those “big tank” operations because it has most of the defining characteristics. It is, first of all, a “drinks company” and not a “wine company,” to use a distinction I first heard from a New Zealand winemaker (who worked for a “wine company,” of course). Here’s how the wine vs drinks dichotomy works.

Wine companies make wine (and only wine) and are often family owned. Drinks companies, on the other hand, manufacture all sorts of alcoholic beverages and are usually public corporations.  Whereas wine companies think tradition and  terroir, the story goes, drinks companies think marketing and product positioning.  Wine companies sometimes stay in the founding family’s control for generations. Drinks companies often get acquired, merged and traded back and forth like properties on a Monopoly board.

Distell fits the drinks company profile pretty well. It dominates the market for brandy in South Africa and is the leading wine producer, too. It is the world’s #2 producer of cider, another “drinks” category. Distell has strong international interests and owns  both a French Cognac house (Bisquit) and an Asian distributor. It has over 30 spirits brands in its portfolio and an even larger number of wines, wine apertifs, ciders and “ready to drink” beverages.

Distell is probaby best known in the U.S. for its Two Oceans and Fleur du Cap wine brands, but its hottest product is a cream liqueur called Amarula, “the Spirit of Africa.” It is the #2 best-selling cream liqueur in the world according to the company’s 2012 annual report.

Circumstantial Evidence

Distell also has a complicated business history.¹ The current firm was created in 2000 with the merger of Stellenbosch Farmers’ Winery and Distillers Corporation, but the history stretches back a ways. Key players include the South African billionaire Rupert family, which controls a diversified multinational business portfolio (they own the  Richemont  group of luxury goods companies, for example), the South African wine giant KWV and the big beer player SAB (think SABMiller — SAB stands for South African Breweries).

So, Distell fits the big tank  stereotype pretty well and some of its products have the classic “drinks company” profile, too. But the evidence that wine choice at Distell is an illusion is what Perry Mason would call “circumstantial.”  Can a “drinks company” like Distell offer consumers wines that give then a real choice and not just an illusion of choice?

Inside the big drinks company I found a good deal of counter evidence to the big tank theory. Join me in my next post as I climb into a snorkel-equipped Land Rover 4×4 and visit Distell’s Durbanville Hills Winery.

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The top image is an historic example of a great big tank: the famous Heidelberg Tun, made in 1751, with a reported capacity of 220,000 liters. Here’s what Mark Twain had to say about it in A Tramp Abroad (1880). 

Everybody has heard of the great Heidelberg Tun, and most people have seen it, no doubt. It is a wine-cask as big as a cottage, and some traditions say it holds eighteen hundred thousand bottles, and other traditions say it holds eighteen hundred million barrels. I think it likely that one of these statements is a mistake, and the other is a lie. However, the mere matter of capacity is a thing of no sort of consequence, since the cask is empty, and indeed has always been empty, history says. An empty cask the size of a cathedral could excite but little emotion in me. I do not see any wisdom in building a monster cask to hoard up emptiness in, when you can get a better quality, outside, any day, free of expense.

¹ Most of what I think I know about Distell’s business history I learned from the company’s investor website and from Nick Vink, Gavin Williams and Johann Kirsten, “South Africa” in Kym Anderson (editor), The World’s Wine Markets: Globalization at Work (Edward Elgar, 2004).

How Much Choice Do Wine Drinkers Really Have?

galaxy2*

How much choice do U.S. wine drinkers really have? The answer to this question, according to a study by a group of Michigan State University scholars, is that it depends on how you look at the question and where you seek your answer.

The study is called “Concentration in the U.S. Wine Industry” by Phil Howard, Terra Bogart, Alix Grabowski, Rebecca Mino, Nick Molen and Steve Schultze and it follows up on previous research on concentration in the U.S. beer and soft drinks industries. (Click on the link to read the whole report and select the tabs you will find there to view the beer and soft drinks information.)

A Question of Perspective

If you look at the question in terms of the number of different wine brands on the market and varieties within each brand, then the answer is clear. U.S. consumers have a galaxy of choices when it comes to wine. I use the term “galaxy” because I’ve taken one of the key info-graphics from the report and doctored it up to look like an image of the stars in the night sky.  More wines than than there are stars in the universe — or at least it seems that way some of the time.

But click on that galaxy image above and you will open a window that shows how those wine stars are aligned. And I am sure that you won’t be surprised to see that there are several huge business “solar systems” with dozens of brands each: Gallo, the Wine Group and Constellation Brands among the producers, for example, and Deutsch and Winebow among the importers.

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The wine world has its share of Mega and Mini businesses and some of the Megas are very large indeed, although the degree of market concentration is much less in wine than in beer or soft drinks.  So if you look at wine compared to beer, for example (and I suspect that this would hold true for spirits, too), there is a very low level of concentration — lots of different choices even taking the biggest firms into account. And if you look at it in terms of number of individual wines for sale you get the same sort of answer. But if you look at the number of wine firms and the amount of the total wine market they fill, the choice seems a lot narrower.

As the graphic above suggests, the top 5 firms account for more than half of U.S. wine sales, which is a lot even if it is less than the corresponding figure for beer or soft drinks. Although the study does not provide any international comparisons, I believe the the U.S. wine market is much more concentrated than France, Italy or the U.K., for example,  but less so than Australia. (In the UK the critical concentration factor is at the retailer rather than the producer level since the big retail chains are so influential there.)

The degree of concentration also differs depending upon whether you look at all wine as this study does or segment the market according to price, which is the analysis I prefer. The market for wines selling for less than $5 per bottle equivalent is much more concentrated than the $20+ segment, for example. Most consumers make most of their purchases within a relatively narrow price range and it’s the diversity in that segment that matters most to them.

Location, Location, Location

The Michigan State team found that the nature of your choice also depends upon where you shop. Some of the supermarkets and wine shops that they surveyed in Michigan sourced their wine from dozens of different suppliers, providing that galaxy of choices that the vast potential selection promises. But other stores — national-chain convenience or drug stores, for example — can (and frequently do) quite easily fill a 100-item wine wall with products from just two or maybe three suppliers. The Megas can easily provide foreign and domestic selections of all the main varieties at every relevant price point. So choice is both smaller and different, if you know what I mean.

This has an impact on wines produced or imported by smaller firms, of course, and also (according to an interesting study by Rebecca  Mino) on local wineries.  Mino found that Michigan wines were far more likely to be available in Michigan-only retailers than at the Michigan affiliates of national retail chains.

These studies are very interesting and fun, too  — I admit that I played with the “galaxy” graphic for quite a while because I enjoyed seeing the business connections within the different wine portfolios. It is just fascinating — if you haven’t clicked on that “galaxy” image at the top of the page already you’ve got to do it now.

What’s the Right Way to Think About Choice in Wine?

But the main thing I appreciate about this research is the question that it raises: how should we think about choice when it comes to wine? Does that fact that some of the Megas have dozens of brands diminish choice? Certainly not if the brands have considerable autonomy when it comes to winemaking (like the “string of pearls” model that Ste Michelle Wine Estates follows).  Sometimes the vast perceived choice is real.

But that doesn’t mean that that there aren’t any effects of industrial concentration in wine, as the national chain store part of the study indicates. Some of the national retail chains treat wine as they do other products and attempt to minimize the number of suppliers while maintaining choice. Choice is diminished when the availability of “Mini” products and especially locally-produced wines is taken into account and  this would be a problem if these stores are the only choice for wine (as they may be in some areas). Apparently we need a mix of different retail suppliers to assure that the true diversity of wine is represented on the shelves.

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Thanks to Phillip H. Howard for sharing his results and giving me permission to reprint some of the graphics.  Speaking of “it depends on how you look at it” questions, here is one of my favorite science videos — “Powers of Ten” from the Office of Charles and Ray Eames (1977). Enjoy.

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