Extreme Wine: O Canada Ice Wine

Ice wine, Canada’s distinctive contribution to the world of wine, holds a fascinating place in the world wine price tables and so qualifies for inclusion in The Wine Economist’s extreme wine series.

Top of the World

Which country gets the highest average price for its bottled wine exports? You might think it would be France with all those expensive Champagne, Bordeaux and Burgundy wines or Portugal with its costly eponymous after-dinner wines. But both of these countries also export a good deal of much cheaper wine, bringing their average  export earnings (USD per liter) down to $4.24 and $3.70 respectively. (Data are for 2005 from my copy of The Global Wine Statistical Compendium.)

New Zealand with its gorgeous Pinot Noirs and Sauvignon Blancs ($6.64) and the UK with its classy sparkling wines  ($6.87) both earn more per liter of bottled wine exports than the “usual suspects” of France, Germany, Italy, Portugal and Spain to say nothing of New World powers Argentina ($1.87), Australia ($3.65), Chile ($2.72) and South Africa ($2.42).

(Remember that wines that are exported for, say, $4.00 will have a much higher price on your store shelves due to transport  costs, distribution and retail margins and applicable taxes.)

At the very top of the table, for reasons that I think are due to exchange rate sand import resales more than domestic wine prices, is Switzerland ($8.23 per liter) followed closely by Canada ($7.32).  How can frigid Canada rate so high? Ice wine (or Eiswein) , of course!

The Highest Compliment?

Canada didn’t invent ice wine (credit Austria with that) but it is the world’s largest producer of this chilly wine, making nearly a million liters in a good year according to John Scheiner’s authoritative The Wines of Canada. Ice wine’s high cost is the biggest single factor in Canada’s lofty export earnings average.

Tiny bottles of ice wine bring enormous prices — $50, $100, even $500 and more for a half bottle at retail. Who pays these spectacular prices? Japan and other Asian countries are the largest export market.  Ice wine is the quintessential high end gift wine — attractively sweet, beautifully packaged and luxuriously expensive. Tourists snap bottles at Duty-Free to take home to Asia.

I’ve heard that so much ice wine is bought by Tokyo-bound travelers that some Canadian duty-free stores have special bonded facilities in Japan to make purchases more convenient. Pay at the airport in Canada and pick up your ice wine at baggage claim in Japan. Sweet!

Ice wines are so expensive and sought after in Asia that counterfeiting is a serious problem. Some experts believe that as much as 50 percent of the ice wine sold in Taiwan is bogus — sweet wines from Canada and elsewhere that are doctored up and repackaged.

Check out this image from the label of one of the faked wines — brewed, not fermented! Yikes. Must have got ice wine mixed up with ice beer. These may be big counterfeiting operations, but not necessarily sophisticated ones.

A recent Globe and Mail article suggests the problem may be even worse in China.

Well over 50 per cent of icewine in China is fake from what I’ve seen and heard,” said Allan Schmidt, president of Vineland Estates, which has quit the market entirely. “If it was 80 per cent … I wouldn’t be surprised.

The legitimate Chinese market for Canadian icewine has grown rapidly, which the industry attributes to a burgeoning middle class and the desire to give exotic gifts. It rose to $2.16-million in 2007 from $270,000 in 2005. The market sagged in 2008, but was worth $1.2-million in the first half of this year [2009]. It’s our most important flagship wine produced,” said Bob Keyes, vice-president of economic and government affairs with the Canadian Vintners Association.

Chilly Saga, Intense Experience

Ice wine is a very particular product. The grapes for ice wines are left on the vine long after regular grapes have been picked. By law natural ice wine in Canada can only be made from grapes that have been frozen to -7 degrees Celsius (17 degrees F) and harvested at minimum 35 degrees brix. The juice, what is left of it, is highly concentrated so each grape yields just a drop or so. Picking is done by hand, of course, since many clusters will have experienced bird damage or fallen prey to disease.

Vidal Blanc is the grape of choice for Canadian ice wine — its tough skin can stand up to harsh weather — along with lesser amounts of Riesling and other varietals. Most of Canada’s ice wine is produced in Ontario, where wine makers can pretty much count on frightfully low temperatures early in the winter season. But the first ice wines came from out west in British Columbia.

North America’s first commercial ice wine was made in 1978 by German-born Walter and Tilman Hainle of Hainle Vineyards Estate Winery in Peachland, British Columbia. Tillman Hainle, Walter’s son, generously shared precious bottles of a recent vintage from with us at the 2008 Riesling Rendezvous meetings. [See Tilman's helpful comment below.] It was one of the most memorable wines I’ve ever tasted, so I just had to visit Hainle Vineyards on my recent Okanagan wine country expedition.

Sue and I met with Dr. Walter Huber, the proprietor of Hainle Vineyards and Deep Creek Wine Estate, who purchased the business from the Hainle family after Walter’s death.  Dr. Huber was an extremely generous host, pulling corks with almost excessive enthusiasm. He’s refuses to release his wines before their time, choosing to let them dribble out slowly to lucky wine club members. He is generous to a fault with inquisitive visitors like me, even letting us sample an ice wine from 1984. Wow! I purchased some old vine Rieslings to drink a few years from now when they have fully matured.

Only the Beginning

Ice wine is what made Canada’s reputation in wine, Dr. Huber explained, but it’s not all there is to Canadaian wine these days, especially in the Okanagan Valley in eastern B.C., where the vineyards overlook Lake Okanagan and dozens of very different micro-climates co-exist. Winegrowers are able to ripen cool climate grapes like Riesling and Pinot Noir, of course, but also Cabernet Sauvignon, Merlot, Syrah and apparently even Zinfandel!

I love ice wine, but it is only one element of Canada’s dynamic wine industry. I’ll report on the surprising wine tourism industry in my an upcoming post, followed by a peek at what might be the future of Canadian wine. O Canada, you produce some unexpected wines! Check back soon to learn about what’s happening today and what the future may hold.

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[Note: This post is part of an occasional feature on extreme wines. Extreme wines? You know, the cheapest, the most expensive; the biggest producers, the smallest; the oldest, the newest and so forth.]

Restaurant Wine: A Double-Sided Puzzle

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

The Confidence Game

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

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

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

Putting the Pieces Together

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

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

Constantly Disappointed?

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

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

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

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

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

Wine-by-the Keg?

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

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

Someone should tell Lettie Teague the good news.

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

Big Squeeze on Small Wineries in Argentina

Argentina is generally seen as the big winner in the current U.S. wine market. Sales of Argentinean wines have surged at every price point led by the signature Malbecs, (something that I wrote about in a recent post).  The big picture is great — perhaps the New World’s biggest success story since Marlborough Sauvignon Blanc hit the scene.

Both Sides Now

The devil is in the details, however, and a more detailed analysis of Argentinean exports suggests that some parts of the industry are facing significant challenges. As usual, my source for news and analysis about wine in Argentina is WineSur, which reports that small wineries are really feeling the squeeze in the critical U.S. export market. (See the report by Gabriela Mazilia. )

Small producers are what economists call “price-takers.” They cannot do very much to control the prices they receive on the export markets and they don’t have much control over input prices, either. While a great many business decisions are theirs to take, some of the most critical factors are beyond their control. This is true for all businesses, of course, but more so for some than others.

Mazilia’s report suggests that small Argentinean producers are feeling the squeeze from both sides of the market. Costs are rising rapidly, perhaps especially for the goods and services that winemakers require. Argentina’s  inflation rate is about 10% according to official statistics, but unofficial estimates put the number at about 25%, amongst the highest in the world today. Yikes!  The Economist‘s Big Mac Index reports that Argentina’s currency is much less undervalued now than a year ago even though the exchange rate has depreciated, which is consistent with rapidly increasing local prices.

Magnified Price Effects

Small producers would like to pass higher costs forward to consumers or backwards on to input suppliers, but neither of these options seems possible at this time. Mazilia’s report suggests that export price increases of 5%-10% are possible for wines that retail in the USD 10-18 range, where Argentinean wines are seen as good values. Increases for more expensive wines are apparently out of the question — the market for $20+ wines in the U.S. is just too competitive, too filled with expensive wines selling a a discount.

One problem Argentinean exporters face is that every 10% increase in the price they receive is magnified in absolute terms as the wine passes through the supply chain. One producer cited the dismal math that a USD 1 increase in FOB export price translates into a USD 4 increase in retail prices. Here is an example from the WineSur report:

A case in point is the winery Sur de los Andes. The firm’s owner and manager, Guillermo Banfi, announced: “In the course of this second semester we’ll raise prices from 5 to 10%, in particular in our line of classic wines. We won’t touch the prices of the great reserve line or of our icon wine. Margins have shrunk so much that there’s no way we can keep absorbing the high increase in costs.”

When asked how much of a margin of increase could be born by an Argentinian wine without losing market share, Banfi provided an example that illustrates the situation in the US, a reference market. “In the US, our wines in the USD 10-18 retail price segment sell very well – these are wines with an FOB price of USD 3-5. With an FOB price of USD 3, the consumer price is around USD 11. A rise of 5-10% would imply an increase of USD 1-2 in retail prices, which would have a negative impact on sales, since pricing is a very sensitive issue in this segment.”

Not Much Wiggle Room

Small producers are caught in a squeeze without much room to wiggle. If they don’t raise prices they will watch their margins disappear. If they do, well, they risk finding themselves in unfriendly market territory.

“The problem is that there will be a radical change of scenario for Argentinian wines in the USD 10-20 retail price range. Up to now, these wines have sold well because they are, on average, superior in quality to similarly priced European wines. But from now on, the gap in quality will be narrower, and we’ll be competing with wines of similar quality and price, from regions with a longer standing presence in the market.

Turbulent Tide

It sounds like Argentina’s small producers face an uncertain future, but this is nothing new. The great success of Argentina’s large international wineries in the U.S. market has masked a churning pattern among smaller winemakers. Each year several dozen small wineries enter the U.S. market, but each year others are forced to exit as the turbulent tide advances.

International connections, effective distribution, economies of scale and brand prestige are always advantages in competitive international wine markets. The are especially important to Argentina’s struggling price-taking small producers today.

Vinonomics: The Mouton Cadet Index

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

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

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

Sky High in Seoul

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

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

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

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

Bordeaux with your Big Mac?

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

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

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

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

Wine vs Burgers

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

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

Mind the Gap

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

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

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

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

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

Wanted: Retail [Wine] Therapy

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

That ’70s Wine

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

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

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

Mind the Gap

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

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

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

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

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

Why Can’t a Wine Be More Like a Book?

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

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

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

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

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

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

Extreme Wines: Most Expensive Vintage?

[This post is part of an occasional feature on extreme wines. Extreme wines? You know, the cheapest, the most expensive; the biggest producers, the smallest; the oldest, the newest and so forth.]

2009 is by most accounts the most expensive Bordeaux vintage on record. Quite an achievement during a global economic slowdown! Jancis Robinson quotes some amazing prices for the en primeur wines:

Le Pin €1,050
Ausone €800
Cheval Blanc €700
Haut-Brion, Latour €600
Lafite, Margaux, Mouton €550
Yquem €540

Other’s People’s Wine

These prices are per bottle — except that no real bottles exist yet. The 2009 vintage is still in barrel and will stay there for several more months. Since Bordeaux wines are almost always varietal blends — and since the blending won’t take place until the wine is bottled — it is fair to say that the people who are paying these big prices can’t be completely sure what they are buying. They base their purchases on … on what? On faith (in the winemakers), on trust (in the critics’ judgments) and, of course, on speculation, since much of the action at this stage is to lock up hot wines for profitable resale later.

John Maynard Keynes once compared speculators to people who bet on the results of the “people’s choice” beauty contests that were popular in his day. The trick wasn’t to pick out the most beautiful entrant, but rather to  identify the one that other people would vote for. So making the bet was a matter of guessing what other people would think other people would do and playing the odds. That’s Bordeaux en primeur in a nutshell.

How did prices rise so high with the world economy in such a fragile state? There are many theories. Here are four.

(Another) Vintage of the Century

The first theory is quite simple. 2009 was an extraordinary year and the wines are (or will be) spectacular.  Wine enthusiasts will forever regret it if they don’t purchase this vintage, even at high en primeur prices.

This theory is supported by the rave reviews of many wine critics. Perhaps it really is the vintage of the century in Bordeaux, although it must be said that vintages of the century seem to come around pretty frequently these days — their schedule is more like the World Cup than Haley’s Comet.

The China Theory

A second theory is that the high prices of these wines reflects the full emergence of Asia as a market for fine wine.  I’m not sure what to make of all the chatter I heard during the en primeur tasting circus, but the scuttlebutt is that American buyers failed to show up in the usual numbers, but they were not missed because of the demand from China, both direct purchases and London houses buying for eventual Hong Kong resale.

One fact that supports this theory is the huge gap in prices between the top trophy wines and the rest of the Bordeaux market. It is said that Asian buyers want to purchase only the best, most famous wines (rather than looking for bargains or good value further down the list). I don’t know if this stereotype is true, but the stratification in price indicates a disproportionate demand for the top wines, which is consistent with the China theory.

Auction Theory

Another article by Jancis Robinson suggests that the Bordeaux winemakers and their agents are using strategic techniques to try to boost prices, dividing them in tranches, for example, a popular practice in financial markets. Tranche is French for a slice and it is a word that moved from financial jargon to everyday use during the economic crisis, when we all learned how Collateralized Debt Obligations (CDOs) were sold off in “slices” that allowed people to convince themselves that their sub-prime mortgage investments were safer than they turned out to be.

Bordeaux wine is sold in tranches, too, with the price of the first slice used to set the standard for the second.  This year, Robinson reports, the first tranche was ridiculously small, creating leaving excess demand and therefore forcing more buyers to weigh in for the second tranche (or risk not getting any wine), which was priced at €100 per bottle more than slice #1 in some cases.

(Wine fact: Tranche is also a winery — and a good one —  Tranche Cellars in Walla Walla.)

Cost-conscious wine drinkers can only hope that the Bordeaux merchants do not start reading the technical economics literature on auction theory, where they would likely find other ways to manipulate the market to squeeze out higher prices.

The No Theory Theory

A final theory is really no theory at all. It holds that the idea that Bordeaux 2009 (broadly defined) is the most expensive Bordeaux vintage ever is a misconception. There are about 8000 Bordeaux producers according to reports I’ve read recently and only about 400 of them take part in the en primeur market. The total production of “first wines” by these makers is surprisingly small. I think it is fair to say that 90 percent of the market’s recent attention is focused on less than 10% (by volume) of the wine produced in Bordeaux.

The prices of the top wines have gone through the roof, but what about the region as a whole? You don’t have to have a theory to appreciate the fact that the makers of ordinary Bordeaux wines do not share the status or benefits of the trophy wines and are probably feeling the pain of hard times like so many winemakers around the world.

Bordeaux 2009 might be extreme in two ways: most expensive and biggest gap between top and bottom!

Washington Brands vs Brand Washington

Lettie Teague’s column in today’s Wall Street Journal provokes a post on Washington wine’s identity crisis.

Teague writes in “Stalking the Wines of Washington” that the Washington wine industry has expanded rapidly in the last few years and that there are many great wines and great wine values. Yet Washington wines are hard to buy (she had trouble finding them in New York wine shops) and hard to sell (she quotes several winemakers in this regard, including Chris Camarda of Andrew Will, who is holding back wine and reducing capacity by 40%). What’s the problem?

I Can Get it for you Wholesale

Well, as in most cases, it is not a single thing but a confluence of forces at work. Although she says that fine wines from Washington have a reputation for good value, Teague suggests that many are currently over-priced relative to Napa Valley products. Judging from my email inbox, the reason for this is that a lot of Napa producers are selling off their wines at deeply-discounted prices.

The typical deal I am offered is “limited time only” 50% off the retail price plus discounted shipping. A great deal, except I can sometimes find even lower prices on these wines at local stores. The wholesale prices must be rock-bottom if wineries can do better with these low revenue direct sales. Teague writes that

One Washington winemaker lamented to me, “We can’t compete when Pahlmeyer Cabernet that used to be $90 a bottle is now $45 a bottle.” And so, while the quality has never been higher—Washington has had three excellent vintages (2006, 2007 and 2008)—the wines are getting harder and harder to find in stores outside of Washington state.

[Interestingly, some of the offers have six bottle limits -- a psychological ploy in most cases, I think, to make customers believe that surplus wines are really quite scarce. Wine people tell me that it works every time.]

I think that Washington wines are still a great value, given their high quality, but deep discounting by the competition is never a good thing for producers.

Napa Valley vs Columbia Valley

The lack of a strong regional wine identity is a second issue that Teague identifies (she also cites the small scale of most Washington producers as a disadvantage). Everyone thinks they know what Napa Valley wine is (although it is a large and very varied AVA that produces lots of different types and styles of wine). Napa was a strong brand.

What is Washington wine?  Washington apples have a strong identity and Washington cherries, too. But Washington wine — not so much. A stronger, more prestigious identity could be a real advantage, especially in this economic climate, Teague notes.

… Napa Valley has just done a much better job of marketing itself, according to Marty Clubb, whose L’Ecole 41 Winery in Walla Walla is probably one of the best known and oldest (circa 1983) wineries in the state. “Nobody really knows where our wines are from. People recognize our brand but not as a Washington-state winery.”

Washington has well-known wine brands at nearly every price point from Columbia Crest to Quilceda Creek, but there is no well-established Brand Washington. This is an issue that Paul Gregutt identified in his terrific book,  Washington Wines & Wineries: The Essential Guide (watch for a second edition on bookstore shelves this fall). He interviewed leaders in the Washington wine industry about their vision for Brand Washington and, while most considered this an important issue, no consensus emerged.

I’ve heard that Allen Shoup (the godfather of Washington wine: former head of Chateau Ste Michelle, now the driving force at Long Shadows) wanted to promote the idea of the Columbia Valley as Washington’s equivalent of Napa Valley — building the Columbia Valley brand to compete with California.

But this plan ran into a collective action problem as individual producers invested in their own private brands and sub-AVA brands instead. I’m sure some buyers today see Columbia Valley as a generic designation, not the prestige brand originally envisioned. And I’m sure a lot of people don’t associate it with any particular place (some people still confuse Washington  State with Washington DC; maybe they think the Columbia Valley is in … Columbia!).

Although the lack of regional identity may be a serious issue in the long run, I think other problems are more pressing right now. After all, most of those deep discount emails I’m getting aren’t coming from Washington, they’re being sent out by famous wineries in famous Napa Valley.  A strong identity surely helps, but can’t completely compensate for competitive market forces.

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One area where Washignton’s wine identity is strong is in Riesling. Riesling Rendezvous — sponsored by Chateau Ste Michelle and Mosel’s Dr. Loosen, begins tomorrow. Riesling makers from around the world will gather near Seattle to discuss the problems and opportunities they face. Look for a Riesling Rendezvous post in the near future.

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