Get Ready for the Wine Industry Financial Symposium

Sue and I have just returned from a week in Northern Italy as guests of the Valpolicella Consorzio (look for a series of industry reports on Valpolicella and Prosecco in the coming weeks) and now we are getting ready to head to Napa, California for the Wine Industry Financial Symposium that will be held there on September 22 and 23.

The theme of the symposium is “Let the Good Times Roll,” which will strike some as a bit off-key since the California headlines this year have been dominated by bad news — first drought and then the recent Napa earthquake. The program (see below) doesn’t sidestep the challenges, but seeks to put them into the context of a rising tide in the U.S. market. It should be an interesting couple of days!

Monday’s program features workshops that focus on specific issues of interest to wine industry professionals including the Hispanic wine market in the U.S., the rise of craft beer, the emerging talent gap in the wine industry, tax issues and vineyard finance.  Lots of interesting topics and great speakers — something for everyone.

The Tuesday morning program accentuates the positive, beginning with David Freed’s industry overview and ending just before lunch with Carolyn Wente and the celebration of 130 years of Wente Vineyards. In between Dr. Robert Smiley will present the results of his annual survey of wine industry CEOs and John Ciatti will report on U.S. and global harvest trends.

I will talk about “Lessons from the Global Wine Wars,” with an overview of important global market trends, focusing on two that I think are particularly relevant for the U.S. industry today: the “premiumization” of the wine market and the surge in “disintermediation” in the wine industry.

Tuesday afternoon features sessions on social media marketing, “next generation” consumers and wine distribution. Looking forward to hearing the speakers and seeing everyone in Napa next week. Here’s the complete program. Cheers!

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Wine Industry Financial Symposium

Monday Workshops – September 22, 2014

Session I: 1:30 p.m. – 3:00 p.m. – Choose One

1. NEW DIRECT TO CONSUMER TRENDS
Examine new ways to relate to consumers through the direct to consumer channel. Speaker-moderator Craig Root will present several new tips designed to enhance your operation. Featured speaker Norman Stolzoff, President of Ethnographic Insight, will offer a detailed look at ethnographic research. This important field uses anthropological insights to solve real-world problems. Ethnography helps better serve customers, leading to profitable results.
Craig Root, Visitor Management Resources
Norman Stolzoff, PhD, President, Ethnographic Insight Inc.

2. TRANSACTIONS: WHO ARE THE BUYERS AND WHO ARE THE SELLERS?
John Mackie,
Partner, Carle, Mackie, Power & Ross, LLP, Moderator
Tony Correia, Owner, The Correia Company
Matt Franklin, Principal, Zepponi & Company
Josh Grace, Managing Director, International Wine Associates

3. THE HISPANIC WINE CONSUMER
What does it mean to the wine industry and what do we do to make wine the beverage of choice?
Steve Rannekleiv, Executive Director, Research, Rabobank International
Natalia Velikova, PhD., Texas Tech University

4. THE EMERGING TALENT GAP POSES RISKS FOR THE WINE INDUSTRY
Ray Johnson, Director of Wine Business Institute, Sonoma State University
Carol O’Hara, Partner, Burr, Pilger & Mayer, Moderator
Tom O’Brien, Director of Human Resources, Trinchero Family Estates
Larry Smith, Senior Vice President, Human Resources, Jackson Family Wines
Dawn Wofford, Managing Partner, Benchmark Consulting

Session II: 3:30 p.m. – 5:00 p.m. – Choose One

5. EQUITY AND DEBT MARKETS: CURRENT TRENDS AND FUTURE OUTLOOK
David Freed, Chairman, The Silverado Group
William Beyer, Principal, Prudential Agricultural Investments
Hal Forcey
, American AgAppraisal
Perry F. Deluca, Senior Vice President, Wine Industry Team Leader, Wells Fargo Bank

6. WHO IS THE COMPETITION? WILL CRAFT BEER AND CRAFT SPIRITS HURT WINE SALES, OR SHOULD YOU JUST JOIN THEM?
Bill Leigon, President, Jamieson Ranch Vineyards
Mark Crisler, CS, Founder & Chief Everything Officer, Trellis Wine Group
Jesus Ceja, Ceja Winery / Carneros Brewing Company

7. USE PERMITS: CURRENT ISSUES AND FUTURE TRENDS
Phillip Kalsched, Partner, Carle, Mackie, Power, Ross, LLP, Moderator
Dean Parsons, Project Review Manager, Sonoma County Permit & Resource Management Department
Jeff Redding, Principal, Land Use Environmental Planning Service
Beth Painter, Principal, Balance Planning

8. COMMON TAX ISSUES FOR VINEYARDS AND WINERIES
Federal Income Tax Updates, State Income Tax Updates, Sales Tax Updates and Estate Tax/Valuations
David Pardes, Tax Director, PricewaterhouseCoopers
George Famalett, Tax Partner, PricewaterhouseCoopers
Joan Armenta Roberts, Managing Director, PricewaterhouseCoopers
Eric W. Nath, ASA, Principal, Eric Nath & Associates
Thomas Garigliano, Tax Partner, Burr, Pilger & Mayer


Tuesday General Session – September 23, 2014
7:45 – 8:15 a.m.
COFFEE & REGISTRATION

8:15 – 8:20 a.m.
WELCOME & INTRODUCTIONS
Lisa Adams Walter, Director of Programs, Wine Industry Symposium Group

8:20 – 8:30 a.m.
WINE INDUSTRY OVERVIEW
David Freed, Chairman, The Silverado Group

8:30 – 9:15 a.m.
WHAT WINE INDUSTRY LEADERS THINK IS IMPORTANT FOR THE FUTURE
Robert Smiley, PhD, Dean and Professor Emeritus, Director of Wine
Graduate School of Management, University of California, Davis

9:15 – 10:00 a.m.
LESSONS FROM THE GLOBAL WINE WARS
Mike Veseth, Editor, The Wine Economist Blog

10:00 – 10:30 a.m.
GET – ACQUAINTED BREAK

10:30 – 11:15 a.m.
THE CALIFORNIA AND GLOBAL HARVEST UPDATE
John Ciatti, Broker, Ciatti Company LLC

11:15 a.m. – 12:00 noon
WENTE VINEYARDS CELEBRATES 130 YEARS
Carolyn Wente, CEO, Wente Vineyards

12:00 – 1:15 p.m.
NETWORKING LUNCHEON

1:15 – 2:15 p.m.
HOW SKILLFUL USAGE OF DIGITAL MARKETING AND SOCIAL MEDIA
NEED TO BE INTEGRATED IN THE BIGGER PICTURE OF BRAND BUILDING AND POSITIONING
John Gillespie, President, Wine Market Council and CEO, Wine Opinions
Karena Breslin, VP Digital Marketing, Constellation Brands
Alisa Joseph, Vice President, Business Development, The Nielsen Company
Mark Gordon, Digital Marketing Manager, Jackson Family Wines
Mike Osborn, Founder and VP Merchandising, Wine.com

2:15 – 3:00 p.m.
NEXT GENERATION WINE
Liz Thach, PhD, MW, Professor of Management and Wine Business, Sonoma State University
Judd Finkelstein, Judd’s Hill Winery
Lisa Broman Augustine, Broman Cellars
Nicole Bacigalupi Dericco, Bacigalupi Vineyards

3:00 – 4:00 p.m.
WINE AND DISTRIBUTION
Jonathan Pey, Principal, TEXTBOOK Napa Valley
Jon Moramarco, Principal, BW 166 LLC
Dan Grunbeck, EVP Corporate Business Development & Strategy, Youngs Market

4:00 – 5:00 p.m.
FINANCIAL SPONSOR FINALE
WINETASTING & RECEPTION – Hosted by WIFS Sponsors

 

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).

Fluid Dynamics: Washington Wine & Spirits Update

“Washington Wine Sales in a ‘State of Flux'” — that’s that title of a recent article by Peter Mitham on the Wines & Vines website and I think Peter is right on the money. It’s a little like Bob Dylan’s “Ballad of a Thin Man:” You know something’s happening, but you don’t know what it is.

At least some Washington State voters are feeling that way. They voted to privatize spirit sales last year, assuming that increased competition would drive prices down.

Never assume, they tell you in school, and that would have been good advice in this case, since the combination of higher taxes and fees plus distributor mark-ups have pushed the price of spirits higher on average (for now at least) than under the state store system. Click on the link to Peter’s story to see exactly how this came about (and how it could “maybe” change in 2013).

Wine Does the Wave

It has been interesting to watch as waves of reaction and response have swept over the wine market. The first wave was all about geography — would the addition of spirits to retail store shelves reduce wine’s territory? The overall answer is probably yes, but different retailers adopted different strategies. Some held the line on wine and carved out new space for spirits. Others made room for spirit SKUs by cannibalizing the wine wall. And new entrants such as BevMo added space for both.

The ready availability of spirits was a novelty at first and I think some wine sales were replaced by spirit sales on that basis initially. The fact that spirit prices are higher than before means of course that wine is now relatively cheaper in Washington — and that should have increased wine sales to the extent that the two categories are substitutes, but I’m not sure that this has actually happened. No one has come up to me and gushed that wine is now a great bargain compared to vodka. So much for relative prices? Not so fast …

It’s All Relative (Prices, that is)

It’s been about three months since privatization and the price and geography factors are starting to stabilize, but the commodity composition of the wine wall is still quite fluid. We are seeing shifts in what types of wines and in what quantities are offered for sale.

One of the changes from the old regime is that distributors are able to offer case discounts or assess broken case premiums, which amount to the same thing. Essentially this means that the wholesale cost can in some cases depend on the volume that is purchased. This is business as usual in most parts of the retail world and in most parts of the U.S. wine market, but it’s a big change for us here in Washington.  The bottle cost was the same whether you bought one or a dozen under the prior regime.

So now the relative price of slow moving wine has increased relative to fast-selling stuff and this seems to be having an effect on the commodity composition of the wine wall.  Even where the total area allocated to wine has remained the same I am sensing somewhat fewer choices as the space allocated to higher volume products is increased and the low volume space shrinks accordingly. It’s as if someone imposed a tax on low volume wine.

If a winery offers six wines at similar cost and price points, but one sells much more quickly than the others and therefore justifies a discounted case purchase, well you can see the incentive to streamline purchasing. As Peter’s article suggests, this effect can be powerful in theory but it is very uneven in practice since not all distributors (or self-distributing local producers) offer volume discounts or charge extra for smaller lots.

So the wine selection hasn’t changed much at all at some wine shops, like Pike & Western, the excellent Seattle store profiled in the Wines & Vines article. But the transformation has been quite dramatic in other places and, of course, the big box stores change the game in others ways.

It is my sense (unconfirmed by hard data at this point) that the availability of small producer wines is at least somewhat diminished, but not uniformly so and that some retailers (such as Wine World & Spirits in Seattle) have stepped in to fill the gap by offering a larger selection of boutique wines. I was encouraging small producers to focus on direct sales (rather than relying on retail channels)  before the recent changes and I think this is still good advice.

Some Gotta Win[e], Some Gotta Lose?

So what’s the bottom line? Well, I’ve actually avoided writing about this topic for several months (despite reader pressure) because I wasn’t sure. And I’m still not. It seems to me that the shoes are still dropping and the evolution of the market is not finished.

I’ve written in the past that wine markets bear  certain superficial similarities to financial markets. One of these is the tendency to boom and bust and another is that price and quantity often “overshoot” in response to exogenous shocks. Both make it difficult to predict what will happen next.

Will the reforms ultimately be beneficial for wine in general and Washington wineries in particular?  Probably, but I’m reminded of the late Chinese Communist leader Zhou Enlai’s reply when asked about the historical significant of the 1789 French Revolution. Too soon to tell, he said. In the case of wine, we’ve got to wait for things to settle down and for good data to be available.

Even then it will be difficult to pick apart the positive and negative effects that can be attributed to the privatization policies and regulatory reforms because of everything else that is going on. The wine market is in a rising trend generally and wine sales would have increased even without any change in the laws.

At the same time, the margin pressures that I wrote about in the Tight, Fat and Uncorked series would have put pressure on retailers and distributors to streamline their product lines even if the laws were unchanged.  It will be tricky to separate these and other factors from the retail regulatory change effect.

Wine Reviews: A Modest Proposal

Decanter, the self proclaimed “world’s best wine magazine,” is “relaunching” its Buying Guide section in an attempt to make wine ratings more transparent and therefore  useful to its global audience. You can read all about the new tasting panel protocols here.

Three Heads Better Than One

Instead of listing a single rating score for each wine, for example, Decanter will now provide the individual scores of three critics. I wasn’t sure if this would make much of a difference, but having read through the new issue, I am a fan. Let me take the big review of Rias Baixas Albarino as an example.

Having read the press release, I was expecting to see four numerical scores for each wine (one for each of the reviews plus the average). What I found was a good deal more, however. Each of the three tasters (regional experts Ferran Centelles, John Radford and Jane Evans in this case) also provided individual  tasting notes for the eight top wines plus summary assessments of the group of wines. (The wines were apparently spectacularly good — 8 top scores out of 74 wines and 25 designated as good value.)

Each of the tasters also provided notes for their “top three” recommended wines and John Radford wrote a brief essay to sum things up. Result: There is a lot of information here and a sense of a wine conversation rather than a monolithic judgment. Great new format.

Global Wine Drinkers Want to Know

For as long as I have been reading Decanter the wine ratings have had three components: a brief but useful tasting note, a numerical rating on a 20 point scale and finally an overall assessment of zero to five stars. Of these three the tasting notes are the most useful for serious study while the star system works well for me as a potential buyer. I’m not sure I can taste the difference between 15.5 and 16.0, but knowing what’s Good, Better and Best (my casual interpretation of three, four and five stars) is something I can use.

But Decanter’s scoring system has changed. Here’s a quote from the press release.

Perhaps the most significant new feature is the adoption of the 100-point score, to run alongside Decanter’s 20-point score, while the old five-star system has been dropped.

Introducing the 100-point system is essential as Decanter is now a global magazine with more than half its readership outside the UK,  [editor Guy Woodward] says in this month’s editorial. Readers can now ‘use whichever [scoring system] they are more familiar with’.

Fair enough — although “essential” is pretty strong —  but I’m going to miss the simplicity of the old five star system and I’m not really sure that I need to have the 20 point British scale translated into a 100 point American equivalent. Converting Decanter scores into Wine Spectator-type figures and back again isn’t exactly rocket science (see the conversation table below). But I don’t see any harm in it, especially if, as the Decanter story suggests, the point is to help “global” readers who may be unfamiliar with the 20 point system to make sense of the ratings.

Follow the Money: A Modest Proposal

It’s good to step back and rethink things like this every so often, but maybe Decanter’s relaunch didn’t go far enough, so in the spirit of Jonathan Swift, I’d like to offer a “Modest Proposal” for future reform.

Here’s my idea. Instead of asking critics to score the wines on a quality scale, let’s ask them how much they are worth! How much should someone be willing to pay for this wine?

Wine reviews generally tell us a wine’s price and a score, but what we really want to know is if it’s worth it. That’s the question that a lot of shoppers want answered and the question they are often trying to figure out when they read critic reviews. From a practical standpoint, don’t you think it would be more useful to translate scores into bucks rather than messing around with 20 points versus 100?

Yes, yes, I know there are lots of problems. A wine that tastes good enough to sell for $20 to you might only taste like it’s worth $12 to me. But that’s nothing new — differences in taste and the problem of what economists might call “interpersonal utility comparisons” are part and parcel of all wine rating systems.

The Mitt Problem … Solved

Income distribution is a more difficult question, however. Mitt Romney has mega-bucks, so me might be willing to pay a lot more for a given bottle of wine than I would. That would mess up the ratings if he were a wine critic. But, hey, Mitt doesn’t drink wine, so … problem solved!

There would be lots of benefits to this new system. Easy to use — just compare the price score ($15) with the market price and you know if the wine is “worth it” or not.  Under a set of ridiculously improbable theoretical assumptions that I won’t explain here because it would put you to sleep, the gap between price and critic-assigned value would be equivalent to the welfare economics concept of “consumer surplus” and so the scores would allow consumers to more efficiently maximize utility and achieve a Pareto Optimal resource allocation.

And while this doesn’t really work in theory, it is how many people behave in practice. How many times have you heard someone brag that their $10 wine tastes like it should cost $20? And although this is a silly thing to say, I believe many people really enjoy the benefit they think they have gained from that value-price gap. So the new system wouldn’t change that way of thinking — just improve it. We’d be drawing upon expert opinion for judgment rather than our own amateur assessments.

A Crazy Idea

Yes, I know this is crazy, but that’s the point. Jonathan Swift’s original 1729 modest proposal — that the rich  should eat the children of starving Irish peasants  — was also crazy, but the point was very sane. The cost of food (due to the high rents that landlords collected, according to the author) was already killing children in Swift’s day. As he said, the landlords had already “eaten” the parents through outrageous prices — might just as well go after the children next.

My wine rating reform is crazy, too. You can’t use money to rate wine. Wine doesn’t taste like dollars — it tastes like wine! But, that’s my point. It doesn’t taste like dollars, but it doesn’t taste much like points, either, however useful consumers and producers might find the ratings to be. Hey, don’t get upset. It’s just a modest proposal!

Here’s the Decanter conversation table. Cheers.

Tight, Fat, and Uncorked: Three Wine Scenarios

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

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

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

Scenario 1: Wine as a Global Commodity

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

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

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

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

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

Scenario 3: The Center Shifts [on the margin]

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

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

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

Not Nairobi [yet]

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

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

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Wine’s Future: Tighten Up

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

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

Up and Down Economics

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

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

This Time Really Is Different

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

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

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

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

Ebb Tide

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

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

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

Hysteresis: Winding and Unwinding

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

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

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

Is Carmenere Chile’s Next Big Thing?

Can Carmenere be for Chile what Malbec has become for Argentina — a game-changing wine that opens up new markets and upgrade perceptions in old ones? That’s the question I asked at the end of my last post.

An Unlikely Curse

Chile has earned a reputation for good value Cabernet, Chardonnay and Sauvignon Blanc; this good reputation is ironically an anchor holding the industry back as it attempts to move upmarket. It will be quite a struggle to get consumers to pay more for established varieties of Chilean wines in the UK and US. New markets and new wine varieties may be the key to future success.

This is where Carmenere comes in. Carmenere is a variety that once produced famous wines in Bordeaux. But when vines were replanted after phylloxera, Carmenere was phased out because of its succeptability to a disease called coulure, which reduces yields. It thrived in phylloxera-free Chile, where it was mistaken for Merlot, an error only corrected in 1994. It is still unclear how many of Chile’s Merlot vines are really Carmenere.

Carmenere is a niche product here in the United States. If you take varietal Carmenere and blends together they account for about 0.2 percent of Nielsen- measured U.S. off-premises wine sales. Concha y Toro is the leading brand followed by Santa Rita and Root 1. By comparison, Chile has about a 2.7% overall share of the measured U.S. market by dollar value, so Carmenere is still quite small, but not insignificant. Total sales of all Chilean Carmenere and blends are less than the dollar value of revenues from Concha y Toro’s 1.5 liter Cabernet Sauvignon alone.

The first Chilean Carmenere that I remember seeing here in the U.S. was a line of wines called Oops, playing up the Merlot-Carmenere mix up. Here’s a nice Chilean Merlot … oops! It’s really something else! I remember trying a bottle and while the label was memorable it didn’t do much to establish Carmenere or Chile in my mind as a quality wine segment.

Carmenere Comes to Britain

Fast forward to 2010. Wines of Chile launched a big campaign in the key UK market called  Carmenere: made for Curry.  It was apparently quite successful, winning the prize for “generic promotion campaigns” at the International Wine Challenge Awards. The idea was to link Chilean Carmenere with Indian food (generically called “curry” in the UK), which is Britain’s most popular ethnic food category, and hope that Chicken Tikka Masala would do for Carmenere what Argentinean steak has done for Malbec.

But a big Carmenere tasting report in the July 2011 issue of Decanter raises some doubts about the quality of the wines, which is obviously a key factor in the strategy. Chilean Carmenere is a “work in progress” according to one of the panelists. Others suggested that Carmenere’s best bet is in blends (especially with Syrah), not as a varietal wine. None of the 132 wines tasted earned Decanter’s top 5-star rating and only 6 received 4 stars. Eight-six wines were “recommended” and 35 were named “good value” (Chilean good value — of course!).

[By comparison, a June 2010 Decanter tasting of 255 Argentinean Malbecs produced four 5-star, twenty-one 4-star and 131 three-star "recommended" ratings.]

Interestingly, the panel suggested that the “overt, oaky, alcoholic, heavy-bottle wines” were made to appeal to the U.S. and South American markets and lacked the balance they’d need to find favor in the U.K. The tone of the review was not as dark as I am probably painting it here, but the conclusion was clear: there was nothing revealed in those 132 bottles that would fundamentally alter Chile’s reputation.

Curry and Carmenere in the U.S.A.

The Curry and Carmenere campaign was so successful in the UK that Wines of Chile brought it to the U.S. earlier this fall and we were invited to participate in a blogger tasting. Sue and I asked two of my “Idea of Wine” students, Marina Balleria and Mike Knape, to join us.  Marina and Mike both studied abroad in Chile and brought local wine knowledge to the table as well as excellent critical thinking (and tasting) skills.

 We concluded that Curry and Carmenere is not a ridiculous idea (Mike reported a “perfect” bite with one of the wines and an onion empanada with a curry sauce), but not all the matches were equally successful. In any case, curry doesn’t have the same significance here in the U.S. that is does in the U.K. Even if Carmenere hit a home run with curry that wouldn’t automatically open up a very large U.S. wine market segment.

We found the alcohol and oak that the Decanter tasters noted, but Marina suggested that oak is part of what she expects from Chilean red wine, so this was a positive feature for her — a defining style. One of the bottles was heavy indeed — 1084 grams according to our scale, the heaviest bottle I’ve encountered since I started keeping track.  Not exactly in keeping with the “Chile is good for you” environmental theme. Most of the wines were more interesting when re-tasted the next day.
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 So what did we decide about the critical question — is Carmenere the special one that will lead Chile into the next phase of its wine market evolution? Not yet — I think that’s the answer. We didn’t find the distinctive style and consistent quality that we were looking for although there were some we really liked (and — sorry! — thought were good values).
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Project Carmenere is still under construction. When will it be finished? This is hard to say. Malbec wasn’t built in a day, although the Malbec boom, when it came, developed very quickly. Carmenere’s story may be the same — or maybe the time has passed when hot new red varieties can make wine drinkers swoon.
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Either way I think it will be tough for Chile to achieve its 2020 goals but I think they need to try. Carmenere may be Chile’s best bet and I look forward to tracking its progress.

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Here are the wines we tasted for the Curry and Carmenere event. Thanks to Wines of Chile for inviting us to participate and thanks to Mike and Marina (see photos above) for their insights.

Blogger Tasting Wine List

1- Emiliana Natura Carmenere 2010 / Colchagua Valley 100% Carmenere SRP: $16.99

2- Casa Silva Los Lingues Gran Reserva Carmenere 2008 / Colchagua Valley 100% Carmenere SRP: $22

3- Santa Rita Medalla Real Gran Reserva Carmenere 2008 / Colchagua Valley 100% Carmenere SRP: $19.99

4- Montes Alpha Carmenere 2008 / Colchagua Valley 90% Carmenere, 10% Cabernet Sauvignon SRP: $24.00

5- Carmen Gran Reserva Carmenere 2009 / Apalta Valley 100% Carmenere SRP: $16.99

6- Santa Carolina Reserva de Familia Carmenere 2009 / Rapel Valley 100% Carmenere SRP: $19.99

7- Concha y Toro Marques de Casa Concha Carmenere 2009 / Peumo Vineyard, Rapel Valley 100% Carmenere SRP: $20.00

8- Haras de Pirque Cabernet Sauvignon / Carmenere 2007 / Maipo Valley 40% Cab. Sauv., 37% Carmenere, 13% Cab. Franc, 10% Syrah SRP: $13.00

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