As the economic crisis deepens and spreads, most of the news about the impact on the wine industry is not so good — falling sales and lower prices as consumers pull back and trade down.  I’ve written about this in How Will the Economic Crisis Affect Wine? and Trading Down: Wine and the Recession.

GOOD News on Wine

A number of journalists and wine writers have called me to talk about the trading down phenomenon, but yesterday was a first: I was interviewed by Roger Numbers, a bright blue animated avatar who is the host of a daily news show on the GOOD News network.  You can view the resulting 91 second report on “The Grapes of Economic Wrath.”

The program packs quite a lot of information unto a few seconds and is very lively and interesting — check it out and I think you will be impressed.  And look through the other recent programs while you are there. Kudos to Roger and the GOOD News team.

There is one point of clarification I’d like to add to the interview, since it is obviously impossible to cover every detail in 91 seconds.  One part of the trading down effect is that consumers are changing not only how much they spend for wine but also where they buy it. So upscale supermarkets are losing sales to discount stores like Costco and Sam’s Club.  But they aren’t going to Costco to buy the very cheapest wines (like the Franzia pictured in the video) because Costco doesn’t typically carry the cheapest wines. They leave that market to others.

Trading Down and Switching Over

Consumers are going to Costco and similar stores because they have lower mark-ups on better quality wine.  Costco’s wine mark up is no more than 14% over wholesale cost versus maybe 50% in a supermarket or wine shop, depending on the type of wine and other factors.  Costco can do this because it has a much smaller selection of wine than other stores, higher sales volume and of course because members pay $50 to $100 annual fees.  Read more about Costco wine economics here.

So wine buyers are both trading down (lower price) and switching over (changing where they shop). I knew this was happening when a friend who manages the Wine Wall at an upscale supermarket told me he was sellng less wine, but at a higher average price.  Explanation?  The trading down effect (lower prices) was being overwhelmed by the switching over effect (consumers of the cheaper wines were buying them elsewhere).  Good news?  Yes — for Coscto and other wine discounters.

To jump the shark means to go ridiculously over the top in a desperate attempt to stay relevant.  The term derives from a famously terrible episode of Happy Days where a character called The Fonz jumped over a dangerous shark on water skis (Fonzie wore the skis, not the shark, in case that wasn’t very clear).  The stunt was supposed to keep viewers glued to their screens, but it ultimately failed to delay the perhaps inevitable demise of this long-running classic TV series.

Wine Comes to Reality TV

Fonzie jumps the shark

I wonder if the recent wine boom has reached the point where it “jumps the shark” — turns from a positive long term trend to a self-destructive short term craze.  You never know when this could happen.  The rising interest in wine, the growing number of wineries, and the fantastic popularity of wine lifestyle products continues with no end in sight.  Maybe it’s more than a rising trend — maybe it’s become a bubble.

I was worried for a while about the celebrity wine phenomenon.  Maybe this was the start of the sort of silliness that culminates in a shark-jumping, bubble-popping tragedy (to mix metaphors rather extravagantly).  But, having thought about it a while, I’m not so concerned (see next blog entry).  I am not entirely comfortable with celebrity wine, but I don’t think it does any particular harm.  But now there’s this: wine is about to enter a  more terrifying terrain of popular culture, one that lies beyond simple celebrity:  reality TV.  This has me worried about the future of wine.   Very worried.

You Can Almost Blame the French

A press release arrived yesterday from the Côtes du Rhône winemakers industry association.  They are pleased to announce that they are the sponsors of The Wine Makers, a reality competition television show that will be aired in early January 2009 on — get this — PBS, America’s national public television network.

As near as I can tell from the website and YouTube.com videos, The Wine Makers will be a lot like those other television reality shows such as Top Chef and Project Runway.  A dozen aspiring winemakers from all walks of life are selected (from a pool of over 500 applicants) to gather in Paso Robles, California for a set of competitions. Someone will be ejected from the contest each week until there is only one winemaker left.  The winner’s prize includes the opportunity to launch a wine label and a trip to France.  Celebrity judges from the world of wine appear each week to vote contestants off of the vineyard or out of the cellar.  You know how it works.

The downside of this project is easy to see:  making wine is reduced to a silly competition among amateurs and semi-amateurs.  We are encouraged to root for and against these contestants and cheer or moan when their inevitable errors force them off the show.  Reality shows generally highlight personalities and play up conflict.  They sometimes focus more on the harsh realities of life than the happy ones. Needless to say I wasn’t too thrilled to imagine wine trivialized in this way when I read the press release.  And I wasn’t very happy with the French, either, for sponsoring the show.

It is interesting to speculate about the  motives of the Rhone Valley winemakers in sponsoring this project.  The contestants won’t be making Rhone wines, of course — the show is set in California and Rhone wines can only be made in France — but it sounds like they will be making what are sometimes called Rhone Ranger wines — New World wines made from Rhone valley varietals like Syrah and Viognier.  Perhaps, in a rather unexpected turnabout, the French producers hope to raise their profile in the U.S. through sponsored association with New World Rhone wine wannabes.  Hmmm.  I guess I’ll have to wait and see how that plays out!

No Wine Before Its Time

And maybe I should withhold judgment about the whole reality show idea, too.  On one hand, I am put off by the idea of a reality winemaking competition.  On the other hand, the show’s producers promise that the competition will lead us through all of the stages of making wine.  So maybe there will be a significant educational component and instead of trivializing wine it will make us better informed about it.  I am all in favor of wine education and if it comes packaged in a reality TV format, well that might be OK.

I guess I will have to watch the show to find out.  Will I come away feeling like I’ve closed my wine knowledge gap with Master of Wine Jancis Robinson just a little?  Or will I feel more like The Fonz, speeding recklessly across the lake toward a ski jump and shark pool dressed only in a pair of Speedos and a motorcycle jacket?  I guess only time will tell.

Check you local PBS listings for The Wine Makers in January 2009. Are you interesting in being a contestant in the planned second season of the show?  If so, visit the website to learn how to apply.

We live in the age of Celebrity.  People are celebrated for their achievements in sports, politics and the arts.  Some people are even celebrated for their lack of achievement — famous for being famous, as the saying goes.  I won’t name names, but you know what I mean. Celebrities are everyone — in the news, on TV and all around us through ads and product endorsements.

People Magazine’s Wine

Lil Jon, Celebrity Winemaker

So we shouldn’t be surprised that there are celebrity wines, too.  Some wines simply use a celebrity name as a marketing tool.  I think the Martha Stewart label falls into this category (the wine is made by Gallo). Other celebrity wines are more than just marketing projects (although having a famous name doesn’t hurt).  The Fess Parker and Francis Ford Coppola wines come to mind here.

Celebrity wines are hot, or at least that’s what the indicators say.  People magazine features an article on celebrity wines in their November 10, 2008 issue.  People asked Gary Vaynerchuck, a celebrity wine critic, to rate the wines of four celebrity wine makers.  Hip-hop artist Lil Jon’s Little Jonathan Winery Chardonnay ($15.99) scored a solid 89 points.  Sopranos star Lorraine Bracco’s Italian-made Pinot Grigio ($11.99) earned an 86+ rating.  Mötley Crüe rocker Vince Neil’s $9 Petite Sirah is an 88-point good buy, Gary says.  And the $20 Victory Rosé from Olympic figure skater Peggy Fleming’s winery, Fleming-Jenkins, received 87 points. (Fleming donates $2 to breast cancer research for each bottle of this pink wine she sells — a use of celebrity clout that is difficult to criticize.)

The Nielsen Report

Maybe you aren’t entirely comfortable taking wine recommendations (or wine market analysis) from the pages of People magazine. If so, then a study released by The Nielsen Company (market research experts) might interest you.

The Nielsen data, which do not reflect the impact of the current economic crisis, indicate that grocery store sales of celebrity wine grew by nearly 19 percent in 2007, albeit from a low base (the celebrity wine category is still a small market segment — less than one percent).

The average price of the celebrity wines, $8.50, is higher than the supermarket average of $5.75, according to Nielsen. Unsurprisingly, the Nielsen report focuses on marketing and distribution (not the quality of the wines themselves) as the key factors driving sales growth.

“Several factors are fueling the growth of celebrity wines,” said Hurst.  “First, existing brands are expanding and gaining new distribution through new line extensions.  Second, more celebrities have launched their own brands in the past year or have had suppliers launch products under their names.   As these brands have proven themselves, they’ve gained distribution in other retail outlets, which has further stimulated growth.   And third, savvy marketers leverage the ‘celebrity’ benefit into expanded marketing programs via in-store vehicles, outdoor events and traditional and online media.”

Celebrity Wine Myths

Like the “critter wines” that they superficially resemble, celebrity wines are associated with a number of myths that should be briefly considered.

Myth #1: Celebrity wines are an American phenomenon. Alas, no.  One of the most famous celebrity winemakers is the French actor Gerard Depardieu, who now owns vineyards in Bordeaux, Languedoc, Spain, Morocco and Argentina in partnership with wine tycoon Bernard Magrez. Ernie Els, the South African golfer, has a line of wines from his home country, following the example set by Australian Greg Norman. New Zealand actor Sam Neil has an estate in Central Otago.

Myth #2: Celebrity wines are bad wines. No again, although I admit I haven’t tried very many of them.  The studies I have found suggest that celebrity wines are just like wines generally, you can find examples that are good, bad and maybe even a few that are ugly (hey — good, bad, ugly — that would make a great name for a line of Clint Eastwood wines!).  Because celebrities have an incentive to protect their personal “brands,” I suspect they try to avoid associating their names with really foul products. At least some of the celebrity winemakers take a real personal interest in their products, which is likely to make a difference in quality.

Some celebrity wines are excellent, which is easy to understand. Celebrity is a powerful force in today’s world and celebrity winemakers can often leverage their fame through connections and associations that contribute to wine quality.  You know what I mean — privileged access to quality grapes, personal advice from talented professionals, and so forth.  Football hero Drew Bledsoe is opening a winery called Doubleback in Wallla Walla, his hometown. I think he is bound to make good wine because so many wine professionals have taken an interest in it.  Wine people, even prominent ones, are only human and like to be associated with heroes and to participate in their projects. The wine can’t help but benefit form this attention.

Myth #3: Celebrity wines are bad for the wine business. Celebrity brands draw attention away from “real wine,” this argument goes, and only cheapen and commodify the idea of wine.  There is obviously some truth to this, especially if we consider multi-product lifestyle brands that have expanded to include a wine component in their portfolios– Martha Stewart, for example, and Sir Richard Branson’s Virgin empire. It seems to me that these associations diminish wine as a distinct product by reducing it to “just another” Martha S or Virgin label.

But most celebrity wines that I’ve seen don’t fit this mold and create a different kind of celebrity association.  These products may benefit the wine market by attracting new customers and encouraging wine drinkers to try new types of wine.  They also probably distort the market a bit, making it marginally more difficult for non-celebrity wines to get distribution in some market segments.  On balance, the influence of celebrities is probably positive since they draw public attention to wine.  Even the readers of People now know a little more about wine thanks to the Lil Jon piece.

The Future of Celebrity Wine

Prediction is difficult, economists like to say, especially about the future.  But I’ll hazard a guess about the future of celebrity wine.  As a category of wines I think celebrity wine will remain a small but vital niche.  Wine is part of society, so why should wine be excluded from the celebrity effect?

Some celebrity wines will thrive, but I don’t think it will be because of a famous name.  In the long run I believe that the quality of the wine is what matters.  I cite Fess Parker as evidence in this regard.  The wines are very good and speak for themselves.  The Fess Parker name and Davey Crockett association hardly matters after you’ve pulled the cork.

But most celebrity wines will rise and fall in sync with the notorious name on the label. Celebrity itself tends to be fleeting and I suspect that most celebrity wines will be here today and gone tomorrow, replaced by someone and something new. Fame’s famous quarter hour passes quickly these days as the media moves on to tomorrow’s headline and a new People profile appears.

[Note: Special thanks to Emily Gordon for bringing the People article to my attention.]

Suddenly it seems like everybody’s trying to sell me wine.  I wonder what’s going on?

Drinking and Flying?

It hit me earlier this week when I received an email from Alaska Airlines inviting me to earn frequently flier miles by buying wine.  Here’s the offer

You could stand in front of a wall of confusing wine labels and search for a special selection or you can take advantage of Vinesse Wine Clubs’ exclusive new customer offer.

Try a hand-selected sampler of their favorite wines for only $6.99 per bottle; plus earn 2,750 Mileage Plan Miles with your first shipment, free shipping, and a welcome gift. Plus, earn an extra five miles per dollar spent (or six miles per dollar spent when you use your Alaska Airlines Visa) on all wines from American Cellars Wine Club.

… This limited time offer is a way of introducing you to American Cellars Wine Club. Every two months, American Cellars Wine Club brings wine lovers a new shipment of six captivating wines.

The $6.99 per bottle (and free shipping) price applies only to the introductory offer, of course.  Prices are $12-$15 per bottle after that.  You’ve probably seen wine club plans like this before..  The interesting thing (to me) isn’t the wine club itself, it’s the tie in with Alaska Airlines’ frequent flier club.

Investment Grade?

The Wall Street Journal wants to sell me wine, too.  Perhaps they think I need more wine to help me forget what’s been happening to my retirement portfolio recently.  Go to wsjwine.com to read the news. You might expect the WSJ wine group to be a bit upmarket, but their come-on introductory offer is about the same - a $69.99 (a savings of $120, it says here)  mixed case of wine (plus some cool wine parephenalia). Future cases, if you join the club, are $139.99 plus tax and shipping (a saving of 20% over retail is guaranteed). Wine shops will sometimes give you a 15%-20% discount on a case purchase — just ask. Pre-selected mixed cases (this seems to be something wine clubs like to offer) range from about $80 to just under $200.

You can purchase individual wines, too, of course. A search for Pinot Noir found five wines ranging from a $19.50 2006 Mendocino single vineyard bottling to a 1996 Domaine Ponsot Clos de la Roche Grand Cru ‘Vielles Vignes’ for $250. The Cabernet Sauvignon offering includes 13 selections priced from $14.99 to $101.99 for a 1999 Heitz from the Trailside Vineyard.

Amazon AVA

The third announcement comes from Amazon.com, the internet book (and almost everything else) seller.  Wine is coming to Amazon country, although not necessarily in a big way.  The beauty of Amazon.com for books is that you can find everything there.  Wine will be different.  Early reports suggest that the Amazon store will stock about 300 wines that it will ship to customers in 26 states. That’s not a big presence, but it is a start.

Actually, Amazon made a start in web wine some years ago.  Amazon invested $30 million in WineShopper.com in 1999, during the dot com boom.  That venture didn’t really pan out. I understand that Wine.com sells gift baskets (but not wine) through Amazon.com now.  Amazon is counting on its new wine shop to be different.

Amazon.com is not the first big box retailer to sell wine on the web.  Costco.com has a pretty interesting wine selection, although they will ship to just four states: California, Washington, Oregon and New Mexico.  Here’s a snapshot of what’s available to Washington State buyers:

• Twenty two wines from Bordeaux.  Chateau Mouton Rothschild 2005 ($599.99), a magnum of 1997 Chateau d’Yquem ($499.99) down to lesser names for about $10 per bottle. (It is interesting to note that big name Bordeaux wines are for sale to Washington buyers, but not to those in other states.)
• Ten Champagnes and sparkling wine gift packs ($25 5o $139).
• Thirty-three red wines in the $10 to $50 price range. Plus just a few white wines in the same general price area.

Costco is the largest single retailer of wine in the United States.  It is interesting, therefore, that they have taken a conservative approach to internet wine sales.  I wonder if Amazon.com can succeed where Costco (so far) hesitates to venture and where other sellers have found considerable challenges?

Leverage

What do these examples have in common.  Well, they are selling “mail order” wine, dummy.  Yes, I know.  But it seems to me that they are really examples of leverage.  Each of these businesses wants to leverage some proprietary asset to increase profits through wine sales. It’s a classic business strategy, but not one that works every time.

Alaska Airlines has a very successful frequent flier program, with lots of retail “partners” and mileage point purchase tie-in deals.  It’s pretty natural that they would try to leverage their big investment in the frequent flier program in ways that would both generate revenues and promote the “brand.”  Wine is seen as an upscale product that probably lends status to the airline brand, if anyone really thinks about these things the way marketing consultants say they do.  Interestingly, however, a really upscale wine buyer probably wouldn’t jump to purchase a case of seven-buck wine that someone else selects.  But probably some people will buy the package, to get both the discounted wine and the extra miles, and maybe that will be the start of good wine relationship (I don’t think wine clubs would exist if customers didn’t find them useful). If not, well there’s bound to be another introductory offer in the next email.

The Wall Street Journal is in good company in starting a wine club.  Other periodicals that feature wine reviews often offer wine clubs, special promotions, or other tie-ins.  The well regarded work of Dorothy Gaiter and John Brecher, the WSJ wine critics, gives the Journal and therefore the wine club instant credibility (even though Dorothy and John don’t have any connection with the club itself — the website says that the wine club is independent of the WSJ news department).  Prestige by association, you might say, and a way to leverage borrowed reputation to some extent, but not in any unusual or deceptive way.  It will be interested to see if the venture is successful and how many WSJ readers are attracted by the $69 introductory offer. Ultimately, it will be quality and service, not the WSJ name, that determine this venture’s fate.

Amazon.com has earned a sterling reputation as an online seller and perhaps they can leverage their reputation for  selection and service in books and other products to sell wine.  But I am a skeptic.  My feeling is that wine is never going to be as easy to commodify as books. You can do this to a certain extent by using numerical wine ratings to sell the wine (Costco does this for its more expensive online wines, but everyone does this in stores using “shelf talkers”), but really numbers don’t capture the complexity of wine.  How could they? (I wrote about this in Wine by the Numbers.)

So how can Amazon succeed?  Well, they might not. But I think the key is going to be whether customers really buy into the project and leave detailed feedback on the wines.  Anyone who has shopped Amazon for books knows that customer reviews can be very useful. If thoughtful wine drinkers use the Amazon marketplace to as a forum to exhange information, opinions and observations, they could make it into a virtual wine group that could at once demystify wine a bit and decommodify the internet wine buying experience. That would be a successful implementation Wine Web 2.0.  And, interestingly, it would mean that Amazon was able to leverage their most valuable assets, which are their active customer base and interactive feedback model. Let’s see what happens when Amazon wine goes live.

The second in a series of reports on how the economic crisis is affected the wine market. (Click here to read the first post.)

A Wine Recession?

Evidence continues to pour in that the economic crisis is having a significant impact on the world of wine, but some industry people seem to be in denial.  They tend to fall into three groups.  The first say that yes, customers might trade down and away from your part of the wine market, but my wine is still selling fine, thank you! The second group believes that people drink more, not less, in bad times, so the overall wine market is recession proof.  The third likes to think of wine as an investment and argues that with traditional financial investments doing so poorly affluent people will switch over to fine wine and power a continuing boom in these “liquid assets.”

There is of course some truth in each of these views. Cult wines like Screaming Eagle will still sell out no matter what happens on Wall Street — no one wants to be dropped from the distribution list in bad times because it’ll be impossible to get back on when the economy picks up. And there are wines that are positioned to benefit from a down market (see below) while others suffer.  But this only tells us what we already knew, which is that wine isn’t one big market, it is a lot of big, small and medium sized market segments and it is no surprise that they all aren’t affected equally by any trend.

People may in fact drink more alcohol in a a down economy — call it wine relief or corkscrew therapy. But even if they do, it doesn’t necessarily mean that they’ll drink more wine, does it?  Wine isn’t always the cheapest way to drown your sorrows. And it sure doesn’t mean that they’ll pay more for wine, even if they do drink more of it, because they are likely to trade down to cheaper products. Econ 101 teaches us that total expenditure falls with price when demand is inelastic, as it may be in some wine market segments.

And the evidence shows that some but obviously not all wines are good financial investments, but it is important not to over-generalize this effect.  When the influential Canadian wine writer Beppi Crosariol recently quoted the importer of wines such as Domaine de la Romanée-Conti on the benefits of wine investment in his column in the Global and Mail he was flooded with comments ridiculing the idea of wine as a general investment strategy.

The Permanent Lifestyle Hypothesis

There is lots of evidence that the economic crisis is affected the demand for wine.  Restaurant sales have been especially hard hit and grocery store customers are trading down in the quest for good value.  But is trading down really the right term to describe this phenomenon?  We know from Constellation Brand’s market surveys that some wine buyers are influenced mainly by price, so that trading down to a cheaper product comes naturally to them.

But other market segments (the ones responsible for much of the growth in wine sales in recently years) are what I think of as lifestyle wine consumers.  They watch the Food Network, buy lifestyle magazines like Gourmet and Bon Appétit that are heavy with wine advertising and think of themselves as people with sophisticated lifestyles that include wine, fine dining and probably even wine-related travel. (Note: even Cooking Light magazine has a wine column now — I was quoted on page 184 of the October 2008 issue.)

Lifestyle wine consumers are unlikely to give up wine during a recession because it would mean more than changing consumption patterns, it would mean sacrificing an important element of their carefully constructed identity.  But I don’t think they will necessarily simply trade down to lower priced wine — Carlo Rossi or Two Buck Chuck — either, because that would also undermine self image (to the extent that this is based upon consumption patterns).  I believe that people will try to maintain their lifestyle identity through the economic cycle to the extent they can.  This is a lifestyle variation on Milton Friedman’s economic theory of the permanent income hypothesis.

So while some people will trade down to lower price, others will trade over — to a different idea of wine that allows them to spend less without feeling like they are giving up their lifestyle.  I’m still serious about wine, their choices say, but I don’t take my self so seriously all the time.  I like to have fun with wine and so I’m buying wine that reflects this fact now.

Barefoot Cellars: Trading Down or Trading Over?

This, I argue, is what’s behind the recent success of Barefoot Cellars wine, which has experienced rising sales in the decling market.  It is pretty clear that consumers are trading down or trading over to Barefoot.  Why?

Barefoot Cellars is a wine with a casual image — kick off your shoes and relax! — but the wines have a serious side, too.  Barefoot wines are entered in various wine competitions and the labels proudly display the gold medals they’ve earned, something that gives these products credibility on the Wine Wall despite their competitive price point.  (Barefoot California Zinfandel retails for $6.99 or less in most markets.) Wine critics have given some of the wines favorable ratings and they often appear on published “Best Buy” lists.

The Barefoot brand was founded in 1965 by Davis Bynum and passed through various hands before being purchased by Gallo in 2005. (Here is a history of the brand.) Jeremy Soine, a former student of mine at the University of Puget Sound, is the brand’s manager; I asked him why it has been so successful.  Here is our Q&A.

Who is buying Barefoot and why?

Barefoot Wine is marketed to the “young at heart.”  The idea of “getting barefoot” is universally appealing, whether you are 25 years old or 75 years old.  At the end of the day, most of us look forward to that moment where we can “kick our shoes off” and disconnect for a few minutes from our hectic lives.

What can you tell me in terms of sales trends? 

Barefoot Wine is one of the top selling wines in the United States, and sales growth continues to significantly outpace the wine category. The sales growth of Barefoot has actually increased during the past six months, and I believe this is because people are seeking out better values as they have fewer extra dollars to spend. Much of Barefoot’s popularity has occurred during the past few years, but many people don’t realize that Barefoot Wine was actually started in 1965 by Davis Bynum, who is not now famous for his Pinot Noirs.

Have you changed your marketing strategies in any way to compensate or take advantage of the changing market conditions?

Barefoot is the most awarded Winery in U.S. wine competitions for under $15 per bottle, and we actively communicate these awards to people by placing medallion stickers right on the bottle.  We believe that the medallions give people the confidence that they are buying a wine that has been recognized by wine critics.

Do you think that Barefoot’s succcess is due mainly to the trade-down effect — that is, is it driven by the poor economic times, with consumers trading down to cheaper products?  Or is there more to it than that?

Barefoot does not spend money on traditional advertising like other large wine brands.  Rather, we donate wine to local non-profit organizations.  This allows people to try Barefoot wines, and also frees up funds for non-profit organizations.  In 2008 Barefoot Wine will be poured at more than 3000 non-profit events in most communities in the United States.  We believe that this grass roots approach will win in the end because people appreciate these donations, will love the wine and will recommend the wine to their friends.  Fewer than half of all wine drinkers have even heard of Barefoot Wine, and we are fine with that because people want to “discover” wine, not be mass-marketed to through television ads or billboards.

So Barefoot seems to have benefited from the trading down effect, but I think you can also see a trading over effect.  Paying less?  Yes.  But buying a different idea of wine: relaxed but not unsophisticated and with a social agenda that fits the times. I don’t want to push the Barefoot case study too far — to over-generalize it — but I think there’s something to be learned from this brand’s success.

“We are all socialists now.”  That’s what my wife Sue said yesterday as we drove back from the airport listening to radio reports about the U.S. plan to stabilize American bank capital by making direct government investments in financial firms. Yes, I thought, like Sweden (and its solution to an earlier banking crisis).  Then I started thinking about the Swedish solution to wine …

Systembolaget

Here’s a paradox.  The Swedes have relatively low levels of alcohol consumption, but are home to one of the world’s largest alcoholic beverage retailers. How can we reconcile this paradox?  The answer is Systembolaget, the Swedish wine and liquor monopoly.

Systembolaget, until recently the world’s largest single purchaser of alcoholic beverages, reflects an interesting Swedish viewpoint.  Capitalism is pretty good — profit incentives are very powerful.  And alcohol is OK, too.  But when you mix the two of them, well you only get trouble.  So you need a non-profit state monopoly to handle alcohol sales.

Here’s how the Systembolaget website explains it.

The monopoly is based on the principle that there should be no private profit motive in the sale of alcohol. (Without any private profit motive, there is no reason to try to persuade customers to buy as much as possible, and no reason to sell to people less than 20 years old). This idea has proved highly effective in practice. Alcohol consumption in Sweden, which in the early 1800s was among the highest in Europe, is today among the lowest.

The idea seems to be for the organization to respond to “demand pull” for wine and spirits but not to use a “supply push” to encourage excess alcohol consumption.  Unlike some state-run systems I have known Systembolaget seems to be relatively responsive to consumer needs (perhaps Swedish readers can leave comments regarding this observation).  This is partly driven by the system’s continuous need to justify its existence in the face of EU regulations that challenge its right to monopoly status. The stores, of which there are many, are bright and well organized, the staff gets continuing education on food and drink topics  and there are regular tastings and other events.  A recent study suggests that eliminating the monopoly would be detrimental to Swedish public health.

Systembolaget seems to work in a typically different Swedish fashion, although it is certainly not above criticism.  I reject the fundamental assumption, which is common here in the U.S., too, that alcohol is alcohol and the rules that government hard liquor should apply to table wine.  It seems to me that wine is associated with the culture of temperance rather than alcohol abuse.  But this is an old debate and I don’t expect to be able to resolve it here. (Here in Washington State where I live the state has a monopoly on spirit sales but wine, although still tightly controlled, is available through both state and private sector retail outlets.)

The Swedish Solution?

Certainly Systembolaget represents an alternative to the market as a way to satisfy the demand for wine.  A monopoly that puts public health first is not necessarily a bad thing, especially if it can avoid becoming a “lazy monopolist,” to use Albert O. Hirschmann’s phrase, and ignore legitimate consumer interests.

This got me thinking about the financial crisis again.  What if the Swedes are right that the profit motive is dangerous in some markets.  Alcohol?  Well, that’s the idea behind Systembolaget.  Banking?  Hmmm.  Is finance like booze — useful, but potentially lethal?  Fine when legitimate needs are addressed, but explosive when the profit motive leads to abuse?

It is heresy for an economist to say these things.  But it looks like this financial crisis is pushing us to adopt a Systembolaget system of banking.  Wine is life!

Some people think that wine is recession proof.  They’re wrong.

Demand and Supply

The still evolving economic crisis is already having serious impacts on the wine industry.  Although some segments of the industry are gaining as a result of the collapsing credit markets and contracting real economy, there are a lot of losers, too.  Herewith a brief report compiled from a variety of published and industry-insider sources.

In the short term the problem is all about falling and shifting demand.  In the longer run, the supply effects of the financial crisis need to be considered.

The hospitality industry is a bellwether of the overall economy — restaurant meals and hotel stays are some of the first things to be sacrificed when people and businesses are uncertain about the future.  It is no surprise, therefore, that restaurant wine sales are down, apparently a reflection both of fewer customers and smaller tabs (wine tourism is falling, too, although high gas prices are part of that story).  This is already affecting both wineries who target restaurant sales and restaurants that have invested in high-margin wine programs in the last year to try to compensate for soaring food costs.  The squeeze is on, as I wrote in March, and getting worse.

The evidence I’ve seen concerning supermarket and wine store sales suggests that buyers are trading down.  The $10 and up market segment has been the fastest growing part of the Wine Wall in the last two years.  It’s still expanding, but the pace of growth has slowed considerably and there is evidence that buyers are trading down within it.  An article in today’s New York Times suggests that even very affluent buyers are being more cautious.

Low cost wines ($4 and less) are seeing a surge in sales.  This has apparently created something of a crisis in Great Britain that pits the big retailers (the supermarket chains) versus the big producers (the global wine companies like Constellation Brands) in a battle for control of the Wine Wall.  The producers see their long term future in upmarket wines and have worked hard to reposition themselves in at the top of the Wine Wall.  They are very much committed to this strategy.  The retailers, however, are focused on value wines.  They see a real short term threat in discount store competitors.  They need to stress value and lower price, on the Wine Wall and throughout their stores, they believe, to keep their customers from switching to Aldi-class hard discount outlets.

There is a lot of turbulence in the middle of the Wine Wall ($4-$10), which is the heart of the market in some respects.  Microdata harvested from grocery store loyalty card programs suggests that buyers really are trading down from $7.99 to $5.99, for example.  Since the cost of making the distributing a $5.99 wine is not $2 less than a $7.99 wine, trading down has a big effect on producer and retailer profits.  Wine may be recession proof if you look only at overall volumes, which have held up pretty well for the industry as a whole, but don’t expect revenues and profits to tell the same sanguine story.

Not everyone will lose from this trend, of course, as there are many wines that are positioned to appeal to value-conscious buyers.  But the upmarket strategy that so many winemakers have embraced, and which I still believe is wise for the long run, is taking a short term hit.  And the effects on the wine industry may be especially large because some of the key regional wine markets are also the areas that have been most affected by the mortgage crisis and will be heavily hit by credit tightening.

Credit Crisis Effects

Most industry people I’ve talked with are focused on the short run impact of the recession on wine demand, and that makes sense.  Making wine is all about long term decisions and relationships, but making a living  from wine means holding onto buyers now. But I think there will be longer term supply effects that should be considered because this economic downturn isn’t just a recession, it is also a credit crisis.

Even if the Treasury rescue plan is a success, I still believe that credit will be much tighter for the next three years (some of my colleagues think it will take even longer to work though the credit cycle).  This will have serious effects because so much of the real economy has become dependent upon ready credit to finance business operations and to fund customer purchases.  Winegrowers are obvious potential victims of this trend.  Winegrowing is a risky business with special credit needs and an overall credit freeze could have serious effects that may extend all the way from the price and availability of the grapes themselves to the value of vineyard properties. Retailers and distributors may also need to scale back their operations to match their reduced access to credit.

The big global wine companies may be affected, too.  Anyone who follows the business has noticed that the big corporations are all trying to reconfigure themselves around particular market strategies.  Constellation is moving upmarket and shedding downmarket wine units while others are refocusing on particular parts of the Wine Wall.  A credit squeeze will both change the logic of some of these investments and make funding of sales and purchases more difficult.

Finally, the credit squeeze is affecting foreign exchange rates and this means that producers around the globe, who may or may not be affected directly by the crisis, will inevitably suffer indirect effects. The dollar has appreciated rapidly against many currencies in recent weeks (the Euro’s cost has fallen from $1.44 to $1.38 is just the last few days, for example) as international investors have sought a save haven for their capital until the international effects of the crisis become clearer.  This exchange rate effect will work against those US producers who hoped to increase sales abroad and benefit European exports here.

There will be a lot of economic turbulence from shifting demand and supply before we come out of this crisis. Buckle your seat belts.  We’re in for a bumpy ride.

First Sideways, then Bridget Jones.  Now Bottle Shock.  How will the new film about the 1976 Paris tastings affect the wine market?

The Sideways Effect

Sideways (a 2004 film by Alexander Payne) is famous for helping to provoke a global Pinot Noir boom.  A soliloquy (see below) on the thoughtful, fragile glories of Pinot spoken by an equally thoughtful, fragile character named Miles was enough to get thousands of wine enthusiasts to set aside their usual glass of Merlot and pull the cork on a bottle of Pinot Noir.

“Um, it’s a hard grape to grow … it’s thin-skinned, temperamental, ripens early … it’s not a survivor like Cabernet, which can just grow anywhere and thrive even when it’s neglected. No, Pinot needs constant care and attention … it can only grow in these really specific, little, tucked- away corners of the world. And only the most patient and nurturing of growers can do it, really. Only somebody who really takes the time to understand Pinot’s potential can then coax it into its fullest expression.”

Movie messages matter when it comes to wine, I guess.  This conclusion was recently reinforced by the Bridget Jones effect, noted in Britain, where the film character’s tendency to drown her sorrows in glasses of Aussie Chardonnay caused the market for these wines to tank.  Apparently wine drinkers want to be thoughtful and fragile (Pinot) not pathetic (Chardonnay) and movies are where they pick up their cues. Who knew?

This makes me wonder how a new film called Bottle Shock will affect the wine market.  Bottle Shock is loosely based on Steven Spurrier’s famous 1976 Paris tasting of French and California wines, which George M. Taber wrote about so well in his book The Judgment of Paris. Napa Valley wines (Chateau Montelena Chardonnay and Stag’s Leap Cabernet Sauvignon) were top rated at the tasting and this surprising result is said to have put California wine on the map.  It is interesting to speculate if Bottle Shock will have as much influence as Sideways.

Bottle Schlock

I have my doubts.  Sideways was actually a pretty good movie (not that I am qualified to judge) whereas Bottle Shock strikes me as a less serious effort.  A fruit bomb of a movie, if you know what I mean, but not a lot of depth or complexity.  It is Merlot to Sideways‘ Pinot Noir.

Alan Rickman is funny in a sort of Terry-Thomas way as Spurrier, but the two main male characters seem to be slightly modified younger versions of the Sideways cast - one is an oversexed surfer dude with a good heart while the other is, well, fragile and thoughtful. Do you see the resemblance? The female love interest is obviously a younger version of the Sideways Maya character. Not much character development here and many of the plot elements are predictable and cartoonish.  This is not necessarily a barrier to commercial success, however.

The movie says that it is based upon a real story (the one that Taber covered for Time magazine), but it takes incredible liberties with the facts.  Most of the nouns (people, places, things) are wrong in some way although some of the numbers are correct (1976 - check - got the right year).

Chateau Montelena’s winemaker, Mike Grgich, is left out entirely even though he is a central figure in the true story. Warren Winiarski, the winemaker at Stag’s Leap, is nearly as invisible.  I feel sorry for others, like George Taber and Paul Draper (who made the Ridge Monte Bello), who appear only as crude caricatures. Artistic license, I suppose.

Perhaps the biggest error is the most basic: who won?  Although California wines came out on top in both red and white competitions, they also came dead last (see the actual rankings and judges’ scores at right).  In fact the bottom two Chardonnays were from California (Veedercrest and David Bruce) as were the four (out of 10) bottom Cabs (Heitz, Clos du Val, Mayacamas and Freemark Abbey).

If the Paris tasting was judged as a team competition, France versus California, rather than a rating of individual wines, I think you might reasonably conclude that the whites were a dead heat while the French won the battle for the reds, depending upon how you calculated the team scores.  As you can see here,  however, the variations among the judges was almost as  great as among the wines, so clear winners and losers are difficult to determine. Toss out a couple of judges or bring in some new ones and the rankings could change quite a bit.

The movie didn’t do anything to correct the record in this regard, but that would be asking too much of a simple film. Instead it concludes with the Spurrier character’s prediction (with 20/20 foresight) that soon we’d be drinking wines from all over the world, Australia, New Zealand, South America, South Africa and so on.  So globalization was the real winner of the competition.

The Bottle Shock Effect?

It is unclear as yet if there will be a Bottle Shock effect in the wine market of any kind, but if there is, what will it be?

One thing that we can predict is that the specific wines featured in the film will experience a boom.  This means Chateau Montelena more than any other wine because it is the focus of the film.  It is hard to say if this effect will extend to the other Paris tasting wines or to quality California wines more generally.  A local wine shop organized a tasting of recent releases of all the California wines in the 1976 competition in celebration of the film, so perhaps Bottle Shock will encourage events like this on various scales and have a broader effect.  Even so, the world of quality California wine extends far beyond the few wines that went to Paris thirty years ago.

Perhaps the best possible result would be if Bottle Shock somehow helped demystify wine, taking it out of the hands of the critics, who do so badly in the film story, and empowering ordinary people to trust their own tastes.  That would make Bottle Shock a really useful film.

But I doubt it will happen — it is hard to break away from our acquired dependency on wine critics.  We tasted the famous California wines “blind” at the Bottle Shock event I attended, for example, which naturally encourages you to think for yourself (a good thing, even if it isn’t my favorite way to taste wine).  But we were also given a set of “expert” tasting notes and challenged to smell and taste the same things the critics did, (as a way to identify wines none of us had previously tasted), which kind of defeats the purpose.

Mark Twain warned his readers to think for themselves and not to get “drunk on the smell of another man’s cork.”  It seems to me that’s the most important message of Bottle Shock.  I hope it gets through.

A recent book review and an article in today’s Financial Times provoke a short essay on wine exceptionalism.

Bad Samaratans

Choice magazine, a publication of the Americal Library Association, recently asked me to review a book called Bad Samaratans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang of the University of Cambridge.  I was happy to do this and gave the book a generally favorable review because the message is a useful one that I have written about in the past.

The advocates of hyper-globalization often tout totally free markets as the only way forward, but the “secret history of capitalism,” as Professor Chang calls it, is that there are plenty of examples of countries that only advanced when they adopted protective measures that gave domestic firms room to grow.  This lesson goes back as far as Alexander Hamilton in the United States, Friedrich List in Europe (and so is not really a secret) and lives today in the economic miracles of Japan and Korea. This  doesn’t mean that protectionism is always good, only that is is not always bad.  Life is complicated.  Deal with it.

I think this view is true in general, but is it also true about wine?  Or is there such a thing as wine exceptionalism?  An article in today’s Financial Times makes we wonder.

Indian Wine Tariffs

The article reports on a dispute between the European Union and India that is apparently headed to the World Trade Organization.  The issue is Indian wine tariffs.  India has tariffs on imported wine and high taxes on domestic products, which is perhaps not unexpected, given India’s low per capita income.  You might expect a country like India to impose high excise taxes on luxury goods as a way of funding needed government programs.  I imagine that wine is a luxury for most Indian households, so a high tariff would be a way of taxing the affluent to benefit the poor.  Wine consumption is very low in India (5 million liters per year, which is practically zero per capita, given India’s huge population) and the high tax is one reason for this.

But the India market is growing, expected to double in the next two years, so there is something at stake here.  More to the point, however, the Indian taxes are not for revenue only — some are intended to protect the nascent Indian wine industry.  That’s the rub.

WTO rules allow countries to have tariffs, but require that they satisfy a “national treatment” rule.  This means that, once foreign products have entered the country and paid the duty, they must be taxed and regulated just like domestic goods.  This is where India has run afoul of the WTO.

According to the Financial Times article, three Indian states, Goa, Maharashtra and Tamil Nadu, which represent important potential import wine markets, impose additional discriminatory domestic taxes on foreign wines, while exempting domestic wines to try to encourage the growth of the industry.    The FT reports that

India imposes customs duties of up to 150 per cent on bottled wines and spirits at the border. These are supposed to be equivalent to the excise duties paid by domestic producers.

But the EU says Maharashtra is imposing a special fee on imported wines and exempting local producers of wines and spirits from excise duty. Goa and Tamil Nadu are charging extra import fees while Tamil Nadu continues to operate restrictions on the sale of imports.

This is contrary to WTO rules, if the accusations are true, and hence bad trade policy. But is it good economic development policy?  That is, is it a good idea way to build the Indian wine sector? Or is wine different?

Vino Exceptionalism

I have to admit that my answer is, no!  I have studied a lot of countries that have chosen to try to protect their domestic wine industry from foreign competition and I am not aware of a single case — not one — where it was effective.  Captive markets (in wine if not more generally — sorry Prof. Chang) seem to breed what Albert O. Hirschman used to call “lazy monopolists.”  The wines they produce are easy money — made to appeal to a least common denominator market and quality products are neglected in a sort of tragedy of the vineyard commons.

Quality wine emerged only when competition was introduced.  This was true for Argentina, Canada, New Zealand, Washington State and now, I believe, in Languedoc in the South of France, although it is still too soon to tell how EU market reforms will work there.  If vino exceptionalism holds for India, then I suspect that their protective policies will not benefit them much.  Indian wine drinkers may thank the EU in the short run for its vigorous prosecution of WTO rules.  Indian wine producers may also thank them in the long run for forcing them to focus on quality in order to compete with imports.

The Principal-Agent Problem

You might think that the job of wine critic would be heavenly - traveling the world, tasting wines and talking and writing about them.  What could be better?  But there are downsides and trade-offs to the job.  One is that your credibility depends upon objectivity - if your ratings are thought to be biased, your advice is correspondingly discounted.  But, on the other hand, you need income to work as a critic or to publish magazines and websites and the most obvious source of income is the wine industry itself.  How can we trust wine critics when the potential conflicts of interest are so obvious?

This situation is not at all unlike that faced by candidates for political office, who receive money from “special interests” but still need to serve (and appear to serve) the general interest. It isn’t impossible to walk this tightrope, but it isn’t always easy either.  You probably can think of many politicians who have done it successfully and a few who fell off.

In economics we see this as an example of the principal-agent problem.  You understand the principal-agent problem if you’ve ever wondered if the cab driver was really taking the shortest route back to the hotel.  Although cab driver and rider have entered into a mutually advantageous contract, interests are not fully aligned and the fact of asymmetric information means you may not be sure that you are getting a fair deal.

Wine enthusiasts (the principals) hire critics (the agents) to give us objective advice, but we know that the critics may have their own interests as well as ours in mind.  How can we trust them to place our interests above their own?

It seems to me that all the wine critics I have surveyed confront this problem openly and honestly, although they arrive at different strategies to deal with the problem.  All the examples I will cite below are effective, in my view,  so I have come away from this little study well satisfied, but the fact that they are so different can create some confusion for wine enthusiasts who fail to read the fine print.

Parker and Vaynerchuck

Robert Parker’s solution to the problem of potential economic conflict of interest at the Wine Advocate is simply to refuse all advertising and to charge his principals fees for web access, hard copy subscriptions, books and so forth.  Who does Parker work for?  He works for us.  It is pretty hard to criticize this model, although interestingly he is probably the most criticized wine critic.  People don’t complain about economic conflict of interest, however, but rather that Parker’s particular idea of wine favors particular styles of wine and particular producers.

Gary Vaynerchuck at Wine Library TV takes a different approach.  His family owns a major wine retailer in New Jersey, so in fact he has a very direct financial interest in the sales of some of the wine he reviews.  Rather than trying to build a firewall between the wine critic business and the wine retailer business, however, he tries to be completely transparent about it and to accentuate his personal credibility as an objective reviewer.  Unexpectedly, this seems to work.  Reputation matters. Accepting the conflict of interest and being open about it is a risky strategy, but Gary pulls it off.

There was one case of a potential conflict of interest a few months ago that shows that he is not unaware of the risks.  The top wine in a particular tasting turned out to be a proprietary label of Gary’s store.  Apparently Gary didn’t know this when the tasting was recorded and when he found out he immediately took the video down from the internet so that he could not gain financially from his honest appraisal of the wines. We only know about it now because of his online apology and explanation.  I think this case shows just how very important it is to wine critics to maintain their reputations as honest objective agents.

Worth a Thousand Words

I’ve been studying how wine magazines handle reviews and the images that sometimes appear with them because it seems to me that a review that is shown along with a photo of the bottle or label is a lot more memorable than the plain text, so the choice of which wines to favor with an image is important..  Some of the magazines use these images to generate advertising revenue, others do not.  This is potentially confusing for readers who may mix up editorial content (the review) with paid advertising (the label image).

Britain’s Decanter magazine keeps its paid advertising and editorial wine ratings reasonably separated.  The top rated four- and five-star wines are featured with bottle photographs while the rest (three stars and below) have simple text listings. It is clear that the photos reflect editorial evaluation. Advertising pages bookend each set of ratings, but they are labeled “Decanter Promotion” so it is pretty clear that the wineries have paid for the space.

Wine & Spirits magazine has a different system (clearly explained in each issue).  After it has rated a group of wines it invites the wineries to purchase feature space in the form of wine label images that are included with the relevant reviews.  You might assume that the editors picked the wines to receive more attention this way, but you are wrong — stop assuming!  The label images are product placements and I appreciate Wine & Spirits’ honesty in revealing it.

Wine Enthusiast has a similar policy according to the explanation I found on page 182 of the September 2008 issue.  All the rated wines appear in long unadorned columns of reviews, but some wines also show up along with label images in the colorful pages that precede the main review text.  Some of these are top-rated wines, but others are not.  Like Wine & Spirits, producers are invited to buy image space in this section of the magazine, but only after the wines have been rated so that it is clear that they are buying the image space not the review — a good policy.

Wine Spectator doesn’t sell image space.  There are highlighted pages of wine reviews with labels at the front of the ratings sections, but these are editorial endorsements rather than paid placements.  Otherwise all the listings get equal treatment in the magazine.

Mixed Messages

If you see a bottle or label image alongside a review in Wine Spectator or Decanter, it means that the editors recommend the wine.  Label/review combinations in Wine Enthusiast and Wine & Spirits are product placements. Each publication is very clear about this to protect its reputation - and I believe them when they say that their reviews are not influenced by advertising.  But the fact that there is more than one system means that readers of Wine Enthusiast and Wine & Spirits and other magazines with similar practices may sometimes confuse paid product placement with editorial endorsement.

Solution?  I think all the critics cited above are honest agents and they have the right to choose different strategies to protect their reputations while generating needed revenues.  The burden falls on us, the wine buying “principals,” to understand what sort of “contract” we have with our critic “agents” so that we know when we are viewing paid product placements.