Bottoms Up: The Bargain Wine Revolution

George M Taber, A Toast to Bargain Wines: How innovators, iconoclasts, and winemaking revolutionaries are changing the way the world drinks. Scribner, 2011.

George Taber knows something about how seemingly small events can sometimes turn the world of wine upside down. He was the Time magazine reporter who covered the famous 1976 “Judgment of Paris” tasting where top French wines were matched against California Cabs and Chardonnays in blind tastings evaluated by famous French critics. The New World wines held their own and even took the top prizes in both red and white categories. Thus was a fermenting revolution recognized and encouraged.

Now the issue isn’t so much Old versus New as it is Expensive versus Cheap and Elites versus Masses. Taber sides with a democratic vision of wine and this book is a celebration of the fact that there are more drinkable bargain (less than $10) wines in the world now than ever before. The glass is more than half full. Drink up!

What to Drink (for $10 or Less)

Taber’s celebration comes in two parts. The second half of the book is a bargain wine buyer’s guide. Taber provides top 10 lists of his favorite “$10 and less” wines and wine brands sorted by grape variety and region. He also recommends a couple of splurge wines in each category for good measure.

My, what a lot of inexpensive wine George Taber must consumed to write these recommendations. Bottoms up, indeed!

Here’s what I mean. The section on blush wines highlights 10 wines including a $3 Oak Leaf White Zinfandel (from Wal-Mart) and a $6 Riunite Strawberry White Merlot. I assume that Taber tasted the big selling Sutter Home White Zin and found it wanting since it does not appear on the list, but he doesn’t list all the wines he tried in each category, only the best ones, nor (and this would be particularly useful) the really really bad ones to steer clear of.

Revolution from Below

The first half of the book makes the case that maybe you should take bargain wines more seriously (and not just because of the current economic situation). Taber sets out to undermine the conventional wisdom about wine. Maybe wine judges are as confused as the rest of us. Maybe taste is so subjective that your opinion really is all that matters. Maybe (gasp!) bottles and corks are a pointless anachronism when it comes to everyday wines and you should reconsider your prejudice against “box wines,” which have changed a lot since you tried them in college.

My favorite chapters are the profiles of the iconoclasts who are leading the wine revolution. Taber’s reporting skills are put to good use in telling the tales of Fred Franzia (the godfather of Two Buck Chuck) and John Casella (the father of Yellow Tail wine).  Both wines changed the world in important ways and it is interesting to have their stories told so effectively and to be able to see these two phenomena side-by-side.

The final chapter (before the buyer’s guide) examines China. Will it too change the wine world? Maybe – that’s the answer here. China is still a work in progress and perhaps it is too soon to draw many conclusions. Taber does a good job pulling together different trends and facts.

What’s a Bargain?

One of the ironies of this book comes from the fact that Taber needs to define what he means by “bargain wine” and value (like taste) is pretty subjective. He draws the line at $10, which is a good thing I believe since this allows him room to include a lot of pretty good wines in his lists and not just focus on extreme values. Ironically, however, a $10 wine is classified as “premium” and sometimes “super-premium” here in America. The majority of American wine drinkers think of a $10 wine as a splurge.

I have friends who are afraid to try a $10 wine because they fear that they will be able to taste the difference and be forced to turn their backs on the $6 wines they’ve been enjoying for years.

I wonder if wine snobs will be annoyed by George Taber’s book? After all, with this book Taber seems to suggest that democratic wines deserve the same respect as those Judgment of Paris aristocrats. Me? I’m just grateful that he’s done the dirty work of tasting and sorting all those really inexpensive wines so that I don’t have to! Bottoms up!

Retail Wine Sales: Big versus Hot (Hot Hot)


I thought it would be interesting to take a look at what’s “big” in the wine market (where the most consumer dollars are going) versus what’s  “hot” (or “hot hot hot” as in the video above), showing the fastest growth.  I’m using U.S. off-premises wine sales data from Nielsen for the 52 weeks ending 9/18/2010 taken from the December 2010 issue of Wine Business Monthly.

Baseline information: Off-premises wine sales in the U.S. totaled $9,172 million in the period covered here according to the Nielsen report, with an overall growth rate of 3.2%.

Which product categories are the largest in absolute terms and which are growing the fastest? I’m going to break down the data by wine varietal, country of origin (for imported wines) and price category. Take a minute and write down what wines/countries/price points you think will be at the top in each category and see if you’re right. Here goes

Chardonnay Leads the Way

Forget what you thought you knew about Chardonnay being so yesterday and Pinot Noir kicking Merlot’s butt. In terms of the overall retail market sales, the giants (or are they dinosaurs?) still dominate.

BIG varietals

Varietal $ million
Chardonnay $1,996
Cabernet Sauvignon $1,347
Merlot $911
Pinot Gris/Grigio $734
Pinot Noir $526
White Zinfandel $427

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American wine drinkers are nothing if not traditional, reaching again and again for familiar varietals, so the usual suspects come top of the table. Pinot Noir has indeed surged in the post-Sideways era, but its lead over wounded White Zin is not large and it still lags far behind arch nemesis Merlot.

Obvious Chardonnay is the consumer default with a 50% lead on Cabernet and double the sales of Merlot. Pinot Grigio, the #2 white varietal, lags far behind.

I find the varietal “hot list” below quite interesting. The fastest growing wine varietals  are Riesling, Pinot Noir (of course), Sangiovese and Sauvignon Blanc. (Interestingly, varietal Sangiovese is rising while Chianti is a shrinking category in the Nielsen league table.)

HOT varietals

Varietal Increase
Riesling 9.4%
Pinot Noir 8.9%
Sangiovese 8.7%
Sauvignon Blanc 8.5%

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It seems to me that while the “big” varietals are wines that many consumers purchase to drink on their own (because of their high alcohol levels and for other reasons), the “hot varietals” are a bit more likely to be food wines. I wonder if that’s a trend?

World Wine Web

Most of the table wines that Americans drink are American — there is a very strong home country preference. Domestic wine sales totaled $6,524 million for the period covered here while imports accounted for $2,648 million. What countries supply the most imported wine as measured by total expenditures? Here’s the Big list:

BIG import countries

Country of Origin $ million
Italy $804
Australia $771
Chile $243
France $228
Argentina $187
New Zealand $125

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As the table shows, Italy and Australia are #1 and #2 respectively in off-premises sales. It is interesting that France has fallen to #4 behind Chile. Argentina and New Zealand make the cut here (Spain did not!) as you might expect, but bear in mind that Italy still sells more wine in the U.S. than Chile, France, Argentina and the Kiwis combined. The concentration ratio in this market is very high: Italy and Australia may be struggling at the moment, but they are in a league of their own.

Italy and Australia will not be over-taken soon, but the market momentum seems to have has passed. Look at the big growth numbers that Argentina and New Zealand are putting up below! Wow. Annual growth rates of more than 20%!

HOT import countries

Country of Origin Increase
Argentina 27.6%
New Zealand 21.1%
Germany 4.4%
Chile 1.7%
Spain 0.6%
Portugal 0.3%

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Now look at the gap between the really hot ones and the rest! Germany comes in at #3 on hot list, but with a low 4.4% increase for the year. Sales of most wine imports (including Italy and Australia) have actually fallen in the last year. Spain and Portugal squeeze onto the list at #5 and #6 by simply avoiding utter collapse. The import wine segment is slumping badly, with Argentina and New Zealand the only significant exceptions.

The Price is Right

Finally, let’s look at the market in terms of price points.  What are the biggest and hottest parts of the wine wall in terms of price?

BIG price points

Price Segment $ million
$3.00 – $5.99 $2,688
$6.00 – $8.99 $1,903
$9.00 – $11.99 $1,868
$12.00 – $14.99 $910
$0 – $2.99 $794
$15.00 – $19.99 $557
$20+ $446

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You can see from the data why Gallo is having a good year (or probably having a good year, since they are a private company and don’t release data so I can only guess). Their brand portfolio is aimed at the heart of the market, from $3.00 to $11.99. Lots of good targets there!

You can also see why Constellation Brands is probably finding this a challenging year. They reconfigured their brand portfolio to take advantage of what they saw as upmarket opportunities.  They moved up the wine wall a bit but the market changed directions and went downmarket, leaving them in a less competitive position.

HOT price points

Price segment Increase
$9.00 – $11.99 9.1%
$20+ 7.4%
$12.00 – $14.99 5.0%
$3.00 – $5.99 4.5%
$15.00 – $19.99 2.5%
$0 – $2.99 (0.1)%
$6.00 – $8.99 (4.0)%

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But Constellation’s upmarket bet may yet pay off. The hot price segments are all in the wine wall’s upper strata.

The Old Elasticity Trap

The rise in spending in the super-premium + categories is an encouraging sign, but I think some caution is necessary in interpreting the data. Many observers see the big increase in expenditures on $20+ wines and conclude that consumers are coming back to this segment strongly — that the demand curve has shifted. But I suspect that there is a lot of bargain hunting taking place and that margins are falling – bad news. Maybe we are just following discounted prices down the demand curve.

For many of today’s buyers a $20+ retail wine is a highly discretionary purchase and so the demand curve may be quite elastic. Econ 101 students will remember that total expenditure increases when price falls for a product with an elastic demand.

The large percentage expenditure increases we seen in the data could result from discounting — $30 wines being sold off for $25 and so on — rather than an actual increase in demand or shift in the demand curve.  The increased revenues are good and inspire optimism, but they may disguise the bad news of shrinking margins.

(As I am writing this, the neighborhood Safeway is offering an extra 20% off any wine selling for $20 or more. I suspect sales revenue will increase at the lower retail markup.)

Overall conclusions? I’d rather not, thanks. These data are interesting more for the questions they raise than the answers they provide. But the questions about how the U.S. wine market is changing are worth pondering (hopefully over a nice glass of wine). Cheers.

Wine and the China Syndrome

A few years ago I edited a book on globalization for a New York Times series. I was given everything that was published in the NYT in the 20th century and asked to tell the story of globalization’s rise and fall and rise again. One of the things I uncovered as I studied the history of world trade over those 100 years was what I call the China Syndrome.

Nightmares and Dreams

The China Syndrome is both the dream that China will buy all the goods we try to sell her and the fear that she will return the favor and take over our markets. The Times was full of China Syndrome a hundred years ago. History buffs might want to look up an article called “The Future of our Trade with China” that promoted the dream on April 13, 1900 and an early suggestion of the nightmare in “Japan and China find a Ready Market Here” published on September 3, 1905. Both are reprinted in my NYT volume.

The same dreams and nightmares are commonplace today. I was reminded of this recently while reading the Grape Wall of China blog, a reliable source for China wine news and views.  An article by Jim Boyce (aka Beijing Boyce) caught my eye: “No Worries: Australian targeting China wine market at every level.” The article tells of Australia’s dreams for Chinese wine sales.

The Blunder Down Under

The Australian wine industry is dreaming about a Chinese future because their present reality is an emerging nightmare. Australian wine is being battered by a number of factors, both natural and market driven. Australian wine sales are falling here in the United States and in Britain, too, I understand. Although there are many distinctive and delicious Australian wines, “Brand Australia” is pretty much defined by one-dimensional Shiraz and over-oaked Chardonnay, both of which have fallen from consumer favor. The “brand” was easy to understand and promote, but it didn’t have legs. Many consumers seem to have moved on and there are plenty of options for them to choose from. The recession only makes things worse.

The situation in some parts of Australia is really dire. Constellation Brands, for example, is closing its second Australian winery for lack of either a market for its output or a buyer for its assets. The global recession puts the big multinationals like Constellation under more pressure than in the past. They are less able to afford to nurse along failing brands. That’s bad news for the particular part of Australian wine that seems to define the brand. It’s time to dream up a better plan.

Australia has adopted a new marketing plan called Landmark Australia that is meant to highlight the quality and diversity of its fine wine industry. It’s a good idea but a difficult one to put into practice — hard to un-ring the Yellow Tail bell, if you know what I mean. And I am generally suspicious of regional or national marketing plans because I think collective brands (especially quite diverse and ill-defined ones) are always harder to sell than private brands.

Working in China … or Not

The Landmark Australia plan may be working in China. Or maybe not.

Beijing Boyce reports that Australia is promoting its new image pretty vigorously and has risen to #2 in bottled wine imports after France. The French have 40% of the fine wine market to Australia’s 20-22%. The U.S., Italy and Chile trail far behind. So perhaps Australia will be successful in redefining itself in a new market and maybe, ultimately but with more difficulty, in markets like America and Britain where it is already established. The geographical proximity to China is certainly an advantage.

There’s evidence of the China Syndrome dream in the data, but also hints of a possible nightmare. It seems that Australia is doing even better (in terms of rising market share) in the bulk wine market than in sales of bottled wine. Grape Wall reports that

… in the first half of 2009, Australia ranked second as a source of imported bulk wine. While Chile (~15 million liters) represented half of the ~31.5 million liters entering China, Australia came second with a quarter. Argentina (last year’s number two, with a quarter share) and the United States (~6.5 percent each), Spain (~5 percent), and South Africa and France (just over 1 percent each). This is quite a leap from the past four years, when Australia represented from 2 percent (2005) to 10.5 percent (2007).

One reason for higher sales at the low end of the market is that surplus bulk wine is being dumped (sold below cost). Hard to compete with that, of course. I know it is better to get something than nothing for all that surplus wine, but it is hard to be optimistic when this market segment is Australia’s greatest Chinese success. Australia wants to get out of the bulk market, in terms of its brand, not deeper into it.

China versus Colorado

How real is the dream part of the China Syndrome for wine? I asked Tom Hedges of Hedges Family Estate (an important independent producer here in Washington State and a pioneer in the Red Mountain AVA) because he is particularly knowledgeable about export markets in Asia. Tom put the dream into perspective. Here is his take:

As an American producer, we have the U.S. market, which today is number one or number two in the world for total consumption.  An example is flying to Denver costs $300 round trip, and takes no time.  Our potential to sell in Colorado alone is equal to or better than that in all of China;  the Chinese consume very little wine, in total, of which 85% is Chinese production.  And, being [an emerging] consuming market, they want only two kinds of wine:  Famous and cheap.  About 99% of the world’s wineries are neither, which means you have to develop a market for your brand.  Costly!

Tom’s clear conclusion was that he could achieve more and do it more economically by focusing on Denver and Boulder instead of Shanghai and Beijing.The allure of China is great,” he says, “the economic reality not so great.  American producers still have lots of Colorados to conquer here in the U.S.

This view aligns perfectly with my own, for now at least. Not many of those folks who dreamed the China Syndrome dream a hundred years ago woke up to great wealth, although a few probably did. I guess that’s why the call them dreams.

Restaurant Wines: Good, Bad and Ugly

Many people have written to me over the years expressing their dismay at the sorry state of restaurant wine. Usually they complain about high restaurant prices and ask how they can possibly be justified. They are seldom satisfied with my answer — restaurants charge high prices because people will pay them. Now, however, the critique has shifted to the wines themselves and what they reveal about wine in America.

What Does American Really Drink?

My recent post on “Olive Garden and the Future of American Wine” (see previous post) seemed to catch many wine enthusiasts by surprise. It reported data from Restaurant Wine magazine for the best-selling wines in American restaurants as determined by distributor “on-premises” shipments. This data, based on volumes shipped to all “on-premises” establishments in 2008, reveals that when America goes out it drinks a lot of White Zinfandel, Pinot Grigio and (gasp!) “Chablis.” Only one red wine made the top 20 list: Yellow Tail Shiraz.

The list changes only a little if we look at the data for wine brands (as opposed to specific wines):

  1. Kendall-Jackson
  2. Sutter Home
  3. Beringer Vineyards
  4. Franzia Winetaps
  5. Inglenook
  6. Yellow Tail
  7. Copper Ridge
  8. Cavit
  9. Woodbridge
  10. Salmon Creek (Bronco)

The complete list of the top 20 brands is dominated by America’s three largest wine companies with three brands each from Constellation Brands (Woodbridge, Taylor California Cellars and La Terre), Gallo (Copper Ridge, Barefoot Cellars and Ecco Domani) and The Wine Group (Franzia, Inglenook and Almaden). These three giants have large brand portfolios and strong distribution machines. They get their wines into every nook and cranny, both retail and on-premises sales. You can see the results virtually everywhere.

Only 4 of top 20 are international brands (Yellow Tail, Cavit, Ecco Domani and Mezzacorona). I think the fact that three of these four are Italian wine brands says something about the importance of Italian restaurants, including especially Olive Garden, in the American wine market.

Another Picture: The Wine & Spirit Rankings

The Restaurant Wine data give us one picture of the market, Wine & Spirits magazine’s annual restaurant report (April 2009 issue) provides a different (and perhaps more comforting) image. W&S asks a group of wine-focused restaurants to report which wines are on their lists — now how much they sell, but which ones are on offer. Since wines don’t stay on lists long if they don’t sell, this is an indirect measure of availability and popularity, although it isn’t the same as as volume rankings. Here is the W&S top 10 for 2008.

  1. Sonoma-Cutrer Vineyards
  2. Cakebread Cellars
  3. Jordan Vineyard & Winery
  4. Silver Oak Wine Cellars
  5. Ferrari-Carano Winery
  6. Robert Mondavi Winery
  7. Veuve Cliquot
  8. Chateau Ste. Michelle
  9. Rombauer Vineyards
  10. Kendall-Jackson Vineyards

Sonoma-Cutrer is #1 on this list, yet it appeared on only about 14% of the surveyed wine lists (and, as noted above, there is no indication of how much was sold).  Only one winery appears in both top 10 lists – Kendall-Jackson. Only two other wineries appears in both top 20s – Beringer and Chateau Ste. Michelle. Gallo and The Wine Group are missing from the W&S top 20, although Constellation Brands makes the list through Robert Mondavi.

Looking over the data, I find myself especially impressed by the performance of Kendall-Jackson and Chateau Ste. Michelle. Both makers seem to combine wide distribution with a range of wines at attractive price points. It isn’t surprising that they rank high on both lists. Perhaps other producers will try to emulate K-J and CSM, especially given this tough economic climate.

Good, Bad or Ugly?

If the first list of restaurant wine brands depresses you, then ignore it and focus on the second list, where White Zin is much harder to find, but don’t get too smug. Remember that there are many markets for wine and that the US is no different from other countries in this regard. Compared to Germany, in fact, much more fine wine is sold here and proportionately less of the bulk product.

For myself, I see a glass half full. My experience working with college students who study wine is that the inexpensive wines serve a really useful function of introducing students to wine and diverting them from beverages that are more closely associated with binge drinking.

Although some White Zin drinkers suffer from arrested development and never move beyond it, I am persuaded that many do. Every staircase, no matter how high it reaches, needs a bottom step.  We have a broad first step in America — no surprise there — but I think it is a step up.

Wine Economist Top 100

This is the Wine Economist‘s 100th post.  The idea of a Wine Economist Top 100 — my 100 best blog posts — is therefore kinda ridiculous.

But my wine enthusiast friends hungrily devour Top 50 and Top 100 wine lists even though the idea that it is possible to identify and rank the Top X [fill in the number] wines is kinda ridiculous, too, although in a different way. This provokes a digression on wine rankings and a brief report on what I’ve learned so far from writing this blog.

Supply and Demand

Ranking wines from 1 to 100 is certainly not an exact science; there are literally  thousands of wines on the market, so narrowing down the list to 100 and then actually ranking them from bottom to top (with no ties) is necessarily a problematic exercise when examined closely.

Individual tastes differ significantly and consumers are not uniformly able to detect even objective qualities in wine (much less make comparable subjective judgments), so it is hard to see why so many people take these ratings so very seriously. But they do.  It’s a matter of demand and supply.

Consumers demand wine rankings.  They use Top X lists as guides to shopping (or investing) and sometimes as a means to establish status or credibility with other wine enthusiasts.  This makes top wine lists a really useful tool for wine merchants and distributors, who supply what consumers demand (and sometimes try to help the demand along a little, too).

Wine critics must feel some pressure to supply what buyers and merchants want.   The Top X lists get so much attention that any critic who fails to issue a ranking must be a little bit concerned about the effect of this action in the crowded wine opinion marketplace. If I ranked wines, which I don’t, I’d sure want to publish a Top X list of some sort if only to draw attention to my other work. Everyone has an interest in these lists, so it’s no wonder they are so popular.

Winner-Take-All

It is interesting to consider how Top X lists and the attention they receive  may have invisibly shaped the wine world. Cornell economist Robert H. Frank has written two books that are worth reading in this regard.  The Winner-Take-All Society (co-authored by Philip J. Cook, 1995) looks at what happens when market attention is focused on a few top-rated products.  The result, not surprisingly, is that everyone wants the best (or what is rated the best) and the nearly-as-good and really-quite-pleasant are left behind. Who wants to drink pretty good Chardonnay when you can get a 90+ bottle for the same price (even if you cannot really taste the difference yourself)?

The book’s subtitle tells you where the argument goes: “How more and more Americans compete for fewer and bigger prizes, encouraging economic waste, income inequality and an impoverished cultural life.” If you’ve seen Mondovino, you know what Frank and Cook are talking about.

Frank’s 1999 book Luxury Fever continues the argument, looking more deeply at the impact of a world where status, identity and satisfaction are linked to money and the purchase of top-rated products.  Frank talks about the high price that some consumers will pay for goods that are just a little bit better or harder to get.  He calls it the “charm premium.”  Unsurprisingly, he cites the “charm premium” that highly rated ultra-premium wines receive as an important example (pp. 29-30).

Elite winemakers can mine the charm premium effect by offering increasing expensive variations on their main product: regular bottling, reserve, single-vineyard and so on. Each increase in perceived quality (or decrease in general availability) produces a disproportionate increase in price.  Or at least that’s how it is supposed to work.

Some wine merchants and producers see the charm premium in a different light.  Wines that get 95+ points sell out immediately — they essentially don’t exist.  Ultra-premium wines that receive less than 90 points are hard to sell, because no one wants a merely very good wine when they can get an apparently excellent one.  (I understand that there is at least one wine store that automatically discounts any wine that is cursed with an otherwise unsellable 89-point rating.) That just leaves the 90-94 point wines and large charm premiums are sometimes paid for what must be impossibly small absolute quality differences within this range.

Wine buyers are a diverse group and so it is dangerous to generalize, but a lot of them search not just for good wine, but for the best wine (or the best wine value).  For better or worse, Top 100 lists have evolved to satisfy that demand and have therefore helped spread luxury fever and create the winner-take-all wine market segments we see today.

Lessons Learned

I’ve been writing this blog for about a year and a half and it has been a great experience — I’ve met a lot of thoughtful, interesting people and had some great wine conversations.  Because my posts are a bit longer than most — about 900 words on average — the total 100-post output is equivalent to a short book.  What have I learned from this process?  Well, I know a little more about what internet wine readers are looking for.

The most popular Wine Economist article in its 100-post history is my piece on Decanter magazine (The World’s Best Wine Magazine?), part of an occasional series on wine critics.  This post gets a lot of hits because the web is crawling with people searching for “best wine,” “best wine magazine” and “world’s best wine.”  The winner-take-all dynamic this represents shows up everywhere, even in my blog stats.

Almost as many readers are searching for the best wine value, which   explains why my posts on[Yellow Tail] Tales and Costco and Global Wine are the second and third most read articles on this blog.

Wine industry readers are worried about the future, as most of us are in this economic environment.  This helps explain why How will the Economic Crisis affect Wine? and Big Trouble Down Under: Crisis in Australian Wine receive so many hits.

Finally, many readers come here looking to unlock the mysteries of the wine buying experience.  What do the ratings mean?  Who are the most credible wine authorities?   This search leads them to posts onWine by the Numbers and Masters of Wine (and Economics), which get dozens of hits each week.

Thanks for reading The Wine Economist.  I’ll give an update on trends in reader interests and concerns in a few months, when I published the Wine Economist Top 150.

Turning Water into Wine

The Bible tells us that Jesus turned water into wine (John 2:1-11) — a miracle!  Given the amount of water used in making wine today I think the miracle isn’t so much the conversion itself (no sacrilege intended) as the efficiency with which it was accomplished.  Jesus didn’t waste a drop.  Improving water use in winemaking is a serious issue today.

The End of Cheap Water

Readers of this blog know that water is important in wine production, but you may not appreciate just how much the wine industry depends upon cheap water supply.  I have written about the effects of the Australian drought on wine output there, for example, and how producers like Casella (Yellow Tail) are adjusting.  But water isn’t just an Australian wine problem, as everyone in the business knows, and the situation isn’t getting any better.

So the December 2008 issue of Wine Business Monthly is especially welcome.  WBM chooses a theme for the last issue of each year and this time it’s “The End of Cheap, Plentiful Water;” it is required reading for anyone interested in the economics of wine. Much of what follows is based on data from the WBM report.

Given all the attention that the Australian drought has received it would be easy to dismiss wine’s water woes as just another example of the challenge of global climate change.  And while this is undeniably true to some extent, I think it is more useful to think about the water problem in terms of supply and demand.

Winegrapes: Squeezed and Dried

The supply of water for wine production is limited by nature, of course, especially in the long run, but that’s the easy part (and the focus of the climate change discussion).  It is perhaps more realistic to consider that the supply of water for wine is limited by competing water needs. Water is valuable for environmental purposes, such as to maintain fish runs, for example.  Water is needed for residential and industrial uses, too.  And of course water is in very high demand for agricultural crops other than winegrapes.  About 80% of California’s annual non-environmental water “budget” goes to agriculture, including wine.  Residential and business use accounts for rest.  As population continues to grow, the squeeze will affect everyone.

Between competing uses and recent drought conditions, it is no wonder that the water supply for winegrape production is being squeezed.

All agriculture suffers when water becomes scarce and drought conditions force both a general reduction in farm output and also a shift away from the most water-intensive crops to those that use water more sparingly.  In Australia, for example, we have seen a decline in grape production in some areas due to drought and a shift from rice to grapes in other areas. 2001 data from the California Department of Water Resources estimates that grape growers in that state use an average of 2 acre-feet of water.  That’s about 25% more than used for grain crops, but much less than rice production (nearly 6 acre-feet of water) or corn and tomatoes (about 4 acre-feet).

Water use in winegrape production varies considerably.  Irrigation isn’t always necessary or even desirable, but high volume production is very water-dependent.  It takes 75 gallons of water in the vineyard to grow the grapes for one gallon of wine in the California North Coast area.  That seems pretty inefficient until you compare it with Central Valley production, where the ratio is 430 gallons in the vineyard to one gallon of wine! Water is also used in some areas for frost protection, which can adds to the total water bill.

Water use doesn’t end once the grapes have been harvested. On average it takes about six gallons of water in the cellar to make a gallon of wine. Barrel-washing and tank cleaning account for much of the water use, but everything in a wine cellar needs to be as clean as possible, and  water is often the most convenient tool.

The trick, as many wineries have discovered, is to conserve and recycle.  High pressure / low flow nozzles and barrel-cleaning rigs can do more with less.  Waste water can be collected and filtered for many uses from irrigation to flushing the toilets.  Erath Winery in Oregon employs a filtration process that allows it to reused 97 percent of winery processing water in one way or another. (Local ryegrass farmers use the rest as fertilizer.)  Snoqualmie Vineyards, like Erath part of the Ste. Michelle Wine Estates group, uses just 2.9 gallons of water in the cellar per gallon of wine, an indication of the sort of savings that are possible.

What’s Your Water Footprint?

article. It’s only a matter of time, I think, until we start worrying about our water footprint as well as our carbon footprint. You can learn more about the water footprint concept at WaterFootprint.com. Here are some estimates of water costs associated with various products as reported on their website.

Water Footprint Logo
  • One cup of tea: 30 litres of water
  • One slice of bread: 40 litres
  • One apple: 70 litres
  • One glass of beer: 75 litres
  • One glass of wine: 120 litres
  • One cup of coffee: 140 litres
  • One glass of milk: 200 litres
  • One liter of wine: 960 litres
  • One hamburger: 2400 litres

I have seen reports that a Big Mac’s water footprint is 5000 litres, a huge number but understandable when you consider that the production of beef and cheese are both very water-intensive (particularly when the cattle are raised on diets of irrigated grains instead of natural grasses).  I guess a kilo of beef requires  15,500 litres of water.  Amazing!

These figures are estimates of the total water use, including transportation and packaging, which is why the wine figures are so high.  I’m sure that it takes a lot of water to produce and clean wine bottles.  The labels (paper), closures and shipping boxes add to the water footprint.  It all adds up, for wine as for other products.

It Isn’t Easy Being Blue

The wine industry is in the vanguard of many important environmental movements.  Being green (and now blue, I suppose, to represent water) is good marketing for a lot of industries.

But it is good economics for the wine industry, too, because water is such a key resource that we need to manage well in the vineyard, in the cellar and throughout the production process.

[Thanks to Wine Business Monthly for the information in their December 2008 issue and to a former student, Jenna Silcott, for making me think about water resources once again.]

Australian Winequake

Market tremors seem to be felt everywhere — food, fuel, money, natural resources. And now in the wine world.

Wine Tremors

It has been hard to ignore the feeling of instability in the wine world for the last few months. There has been a lot of shifting around of brands and alliances, as if the big wine producers are feeling off balance and need to get recentered. In January, for example, Constellation Brands, the world’s largest wine company, sold off their high volume Almeden and Inglenook brands along with the Paul Masson winery to The Wine Group. The reported logic was that Constellation wanted to focus more on premium and superpremium wines. The Wine Group is a privately held San Francisco-based company that has its roots in Coca Cola’s old wine division. (See Note below.)  It makes and markets a variety of high volume brands, including Franzia, Concannon, Corbett Canyon, Glen Ellen, Mogen David and several international brands.. It is the third largest wine company in the United States, behind on Gallo and Constellation, with 44 million case sales in 2007.

I felt another tremor on Tuesday, when a Decanter.com story reported that Constellation had sold more of its wine brands, this time to a new Healdsburg, California-based group called Ascentia Wine Estates. The wineries are Geyser Peak Winery in Alexander Valley, Atlas Peak in Napa, Sonoma Valley’s Buena Vista Carneros, Gary Farrell Winery, Washington’s Columbia Winery and Covey Run, and Idaho’s Ste Chapelle. They produce about a million cases of wine a year between them. Vineyards in Napa and Sonoma county were included in the $209 million deal. The logic, the article said, was to allow Constellation to continue to sharpen its focus on key upmarket brands.

There are several interesting things about this sale. From the Constellation standpoint brands like Geyser Peak, Buena Vista Carneros and Columbia are a good deal more upscale than high-volume Almaden and Inglenook brands that were sold in January. Constellation sold 59 million cases of wine in the U.S. alone in 2007, so the loss of a million case capacity is less important, I think, than the sign that the company is very serious about reshaping itself to adapt to changing market conditions. Constellation says that they are going to focus on fewer brands at the top of the pyramid and I guess they really mean it.

Ascentia is clearly making a different bet. Ascentia is a private group that includes major investors GESD Capital Partners, a San Francisco-based private equity fund, wine distributor WJ Deutsch & Sons and Jim DeBonis, former chief operating officer of Beam Wine Estates (several of the brands included in this deal were part of the Beam Wine Estates portfolio when Constellation acquired that operation last year).

The involvement of the Deutsch family is significant. Deutsch is the masters of marketing and distribution of value-priced wines. They partnered with Australia’s Casella family to create [Yellow Tail], the best selling import wine in the U.S. (I have written about this in my [Yellow Tail] Tales article. They also import and distribute George DeBoeuf, J. Vidal Fluery and other important wine brands. They clearly see opportunity where Constellation does not. It will be interesting to see how this group adapts to the shifting wine landscape. I cannot believe that they are through assembling their new portfolio because I think there may be more wine brands on the market soon (see below).

Winequake

The news from California on Tuesday regarding the Constellation-Ascentia deal was interesting. But the news from Australia in yesterday’s Financial Times as stunning and represents the first of what might prove to be a series of significant winequakes.

Foster’s, the big Australian drinks group, announced major write-downs of its wine assets and the resignation of its CEO, Trevor O’Hoy. The FT’s Lex column summarized the situation like this:

We all know the feeling: a night of bacchanalian excess followed by regrets and a light wallet the next morning. Foster’s, after a 12-year bender in which it spent A$8bn in the wineries of Australia and the US, has a severe hangover. Australia’s biggest beer and winemaker on Tuesday announced A$1.2bn of write-offs, lowered profit forecasts and parted company with its chief executive.

Foster’s last big splurge, the A$3.7bn purchase of Southcorp, is partly responsible. Foster’s bought the Australian winemaker in 2005 for a generous 14 times enterprise value to forward earnings before interest, tax, depreciation and amortisation, among the highest multiples for deals in the wine sector at the time. It even mocked Southcorp, as it attempted to defend itself against the hostile takeover, for being unduly conservative with respect to its own earnings forecasts.

Fast-forward three years and the hubris has been punished. Integration was botched, partly due to the ill-judged decision to blend sales forces into a single unit in Australia. In the US, distribution was poorly managed. External factors packed the final punch. Australia’s vineyards produced a glut of wine and prices plummeted. The Aussie dollar surged, from about 76 US cents at the time of the acquisition to 95 cents today. Foster’s reckons that every cent move lops A$3.2m off the wine business’ earnings before interest and tax – forecast to total A$1.2bn this year.

Fosters owns 22 wineries in five countries and 60 wine brands, including Beringer, Lindemans, Wolf Blass, Penfolds, Rosemont and Matua Valley. Among other things it is writing off A$ 70 million of bulk wine inventory. It will try to trim its US inventory by 1.4 million cases. (Fosters was the fifth largest wine seller in the U.S. in 2007 with 20 million cases, about the same as Bronco wines and its Two Buck Chuck brand). This is more than a tremor. What does it mean? It is a Foster’s problem, or does it have larger significance?

The assumption for the last few years has been that bigger is better in the global wine market and that big global firms like Constellation and Foster’s had an unbeatable advantage. Is this just a shakeout, or are these recent events a signal that the world of wine is experiencing a fundamental change? Watch this space for updates.

Note: Coke purchased Franzia some years ago and built its wine division from that foundation. The Franzia family now owns Bronco Wines, the Two Buck Chuck company.

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