What’s Ahead for Idaho Wine?


Everyone we met in Idaho was keen on the potential of this sometimes overlooked wine region but at the same time aware that greater success — in terms of sales, recognition, and premium prices — is far from guaranteed.

Idaho, as I discussed in last week’s column, is unique in many respects, but it is typical of emerging American wine regions in that it is searching for the key that will unlock the latent potential of the people and the land.

Idaho Wine Surprises

One thing that surprised me was the vitality of the local wine market. Although Idaho has wine roots going back to the 1860s, the industry and the local wine culture was destroyed by Prohibition and was slow to recover afterward even by American standards.

Boise — the state capital and largest city — has changed enormously since I first visited over 30 years ago. The downtown now boasts both a Whole Foods Market and a Trader Joe’s — a sure sign that there is a critical mass of resident upscale consumers — and the wine department of the Boise Co-op supermarket grew so large that it took over a nearby building (it was crowded with interesting wines from Idaho and the world and buzzing with activity when we visited).

Pluses and Minuses

Boise impressed me as quite cosmopolitan. We had lunch on the Basque Block, for example, a cluster of Basque restaurants, social clubs and community center. Boise celebrates the cultural diversity that its Basque community brings and is working to strengthen ties (including wine connections) with the Old World. A group of local winemakers recently traveled to Spain to exchange ideas with wine people there, which seems like a great idea given the success some wineries are having with Tempranillo. A lot of pluses here.

And some minuses, too. Idaho wine is not well known outside the region and this is a disadvantage for those with national ambitions for their wines although obviously less of a factor if you define your market territory carefully to include the mountain states and parts of the Pacific Northwest.

Focused effort seems to be what is needed. Greg Koenig looks to be on the verge of success in China, for example, where buyers may not know where Idaho is but they understand what he has to offer — delicious Snake River Valley Riesling Ice Wine!

Building Brand Idaho

The economic structure of the Idaho industry is not ideal with big dog Ste Chapelle dwarfing the rest of the industry. It would be great if Ste Chapelle were to play a hegemonic role, working to grow markets and develop the supply chain for all of Idaho wine the way that Chateau Ste Michelle did for Washington wine in that industry’s early days. Or at least that’s what I was thinking  before my visit.

But these are different times and Idaho is a different place. Ste Chapelle is part of the dynamic Precept Wine group which has important wine assets in Washington, Oregon and Idaho and competes in a market environment where important new players (Gallo in Washington and Kendall Jackson in Oregon) have recently entered. Ste Chapelle must necessarily act as part of an ensemble, not as a solo performer, and while I think that great success is possible for the winery itself, it might not necessarily be able to pull the rest of Idaho wine along with it. The smaller wineries need to make their own paths and they seem to realize this fact.

I noticed that some of the new Ste Chapelle “soft” releases were designated “American Wine” even though they are for now at least made using only Idaho grapes. This will help the Ste Chapelle brand if and when they scale up production using fruit from other areas, but it doesn’t promote Brand Idaho. Not a criticism,  because I understand the business logic, but true nonetheless. On the other hand, however, it must be said that the Idaho wine industry would be much less vital without Precept’s key vineyard investments, which provide grapes for many smaller producers.

Opportunities

What will it take to bring Idaho wine to the next level? Well, I’m tempted to say that a big critical success would do it and high scores certainly help. The quality of the best wines makes strong ratings more than a dream (and in the case of a few wines, already a reality). But the market is very crowded right now and my winemaker friends tell me that even 90+ scores don’t always have the impact on prices and sales that they would like.

Wine tourism is another strategy that holds promise. The Sunnyslope area is a short drive from Boise and a wine trail is in place although it is hampered a bit by state restrictions on signage that limit the ability of individual wineries to direct buyers to their tasting rooms. Visitors from adjacent states represent an obvious marketing opportunity that effective wine tourism promotion could enhance.

New investment in vineyard assets would be welcomed hereabouts, as I wrote last week. But what will it take to get major vineyard investments that would fill the barrels and bottles that Idaho winemakers long to produce? Well, it’s complicated of course. From a strictly economic point of view the situation is that land must be worth more as a vineyard than at its next best alternative use — orchard, pasture or residential development — and this isn’t always the case.

Economic Impact

Idaho wines are often a bargain given their quality and tend to sell for much less than the Walla Walla wines that some makers compare them to. This helps sell the wines, but it also limits vineyard growth. Low wine prices dictate low grape prices, which means low vineyard land valuation.

 An economic impact statement prepared in 2008 projected that the number of Idaho wineries would continue to grow from 11 in 2002 to 38 in 2008 to 78 in 2015. The current number is around 50, much less than that estimate, and the number of vineyard acres has probably declined a bit from the 2008 level.  Is this just an understandable (given the Great Recession) pause in the upward trend or has the industry plateaued?

Too soon to tell, really, but I am cautiously optimistic. The land is there and the people, too, both thoughtful consumers and smart, hand-working producers.  I sense a new energy in America’s regional wine industries (this energy was captured in the book American Wine by Jancis Robinson and Linda Murphy). Idaho’s time will come.

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Here’s a list of some wineries from our visit. Sorry that we didn’t have time to visit others!

Bitner Vineyards

Huston Vineyards

Koenig Vineyards

Fujishin Family Wine Cellars

Hat Ranch Winery

Ste Chapelle Winery

Cinder Winery

Coiled Wines

Mouvance Winery

Telaya Wine Co.

Tight, Fat, and Uncorked: Three Wine Scenarios

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

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

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

Scenario 1: Wine as a Global Commodity

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

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

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

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

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

Scenario 3: The Center Shifts [on the margin]

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

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

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

Not Nairobi [yet]

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

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

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Wine’s Future: Tighten Up

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

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

Up and Down Economics

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

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

This Time Really Is Different

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

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

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

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

Ebb Tide

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

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

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

Hysteresis: Winding and Unwinding

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

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

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

State of the Wine Industry: Global Perspectives

I’m back from Sacramento where I moderated two panels at the Unified Wine and Grape Symposium, North America’s largest wine industry gathering.  I chaired the morning “State of the Industry” session (estimated audience = 2200 according to one news report) and a smaller afternoon break-out on “Leveraging Global Supply.”

You can find a list of the session speakers at the end of this post and you can read a comprehensive  news report here. I thought I would use this space to outline what I said   in the morning session. My job was to try to provide a global frame for the speakers who followed.

Silver Linings and Dark Clouds

Global Perspective. Wine is a global business. When David Ricardo wrote his economics textbook almost 300 years ago the example he used to illustrate international trade was the wine trade between Britain and Portugal. It has always been important to have a global view of wine, but now more than ever as the wine world gets smaller and more tightly connected.

Silver Linings. This is a year with much good news for the wine industry, especially for winegrape growers as the shortage phase of the wine cycle unfolds and prices rise after years of structural surplus.

But as an economist, it is my responsibility to channel Alan Greenspan and to caution growers to avoid irrational exuberance. Silver linings don’t always come wrapped in dark clouds, but sometimes they do. There are dark clouds a plenty for the global economy and some of them will affect the wine industry.

A Dangerous Phase

A Dangerous Phase. The global economy has entered a “dangerous phase” according to the International Monetary Fund. It is a time of great uncertainty and risk because global growth is slowing, albeit unevenly, at a very inconvenient time.

The problem, of course, is the debt crisis. And while each country has built “mountains of debt” in its own way, there is only one route down from the summit: stop adding to the debt and then try to outgrow the debt burden.

Europe, the U.S. and Japan are all struggling to contain growing debt. Stopping the bleeding is the first priority, of course, but no one seriously expects the debt to be paid off. The only solution is for debtor countries to grow faster than their  compound interest bills and to slowly make the debt and its burden a smaller and smaller proportion of GDP.

Catch 22: Slowing growth (and the probability of recession in Europe) means that even more emphasis must be put on cutting budgets, which unfortunately makes it even more difficult to generate growth.

The Growth Squeeze. So everyone will be desperate for growth, but where will they find it? Consumer spending? Not likely with unemployment high and the housing crisis still unresolved. Business investment? Not with credit so tight and business confidence so low. Goverment spending? Please! The pressure is on to cut government outlays, not expand them.

This leaves only international trade and it seems likely that many countries will try to stimulate exports through currency depreciation to get the growth they so desperately need. This has worked for the U.S., which has had a secret “weak dollar” policy. Look for currency wars as many countries try to follow suit by depressing their exchange rates.

Wild Cards. There are many “wild cards” in the global economic scenario — factors that could change everything. The Euro is probably the biggest wild card, since a collapse of the single currency would be a financial earthquake with global repercussions. The U.S. economy is another wild card, especially in an election year.

A Tight Squeeze for Wine

A Tight Squeeze. The wine industry is connected to the global economy but not perfectly synchronized with it. The wine industry is in for a tight squeeze in the coming year. There will be increased competition on both ends of the market — for wine grapes (and bulk wine) and for wine drinking customers and retail accounts.

[The intensity of the squeeze, as detailed by the other speakers in this session, was probably the biggest news to come out of the State of the Industry panel. Vineyard plantings have been stagnant for several years, so there is not enough supply to meet rising demand in many market categories.]

The shortage of grapes and bulk wine will force wineries to search high and low for product to sell. The higher costs that result will put even more pressure on margins and this may be the biggest squeeze of all since buyers are now accustomed to discounts and, having reset once down to lower prices, will be not quickly reset back up again across the board.  The pressure on margins will increase because of rising competition for market share.

Currency Wars. Exchange rate shifts will make this situation more complex. The U.S. has enjoyed a weak dollar for several years — this stimulated wine exports and kept the price of import competition high. The dollar strengthened in 2011 and  is likely to continue to strengthen in 2012 and this will reverse some of those effects, making the U.S. wine market more attractive to foreign wine firms. These effects will loosen the big squeeze in some places and tighten it in others, creating both dark clouds and silver linings.

Wild Cards. There are lots of  wild cards, but the most interesting one for me is China. We expect China’s growth to slow in 2012  — perhaps to 8% or less — if Europe’s recession is more serious than projected and if U.S. growth stalls.

The “bicycle theory” of Chinese economic growth holds that China must grow by at least 8% in order to overcome structural weaknesses and social instability. If growth falls below 8%, the theory holds, a “tipping point” effect might cause rapid deceleration.

No one knows if the bicycle theory really holds for China, no one knows if 8% is the tipping point number. And no one wants to find out.

A Chinese slump would have some direct effect on wine sales there, but the biggest impact on global wine would be indirect, spread through trade flows and financial flows. The Chilean Peso, Australian dollar and South African rand would all likely fall in value dramatically altering the competitive structure of global wine trade.

All this could happen, but of course it might not. That’s the biggest squeeze this year — uncertainty.

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Thanks to the Unified Symposium’s organizers for inviting me to take part. Special thanks to my fellow panelists, who helped me so much, and to Jenny and Lisa for their guidance and support. Here are the details of the two sessions.

State of the Industry

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

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

Speakers:
Nat DiBuduo, Allied Grape Growers, California
Steve Fredricks, Turrentine Brokerage, California
Jon Fredrikson, Gomberg, Fredrikson & Associates, California

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Leveraging the Supply Side of the Global Wine Market

This session will focus on supply to Brazil, Russia, India and China (BRIC) as well as to Chile and Argentina.

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

Speakers:
Steve Dorfman, The Ciatti Company, California
Liz Thach, Sonoma State University, California

Fluid Dynamics: Charting the Global Wine Market

I’m in Innsbruck today, on my way home from the annual meetings of the American Association of Wine Economists. About 160 of us gathered last week in Bolzano, Italy, which is surely one of the most beautiful wine cities in the world, to ponder the state of the world of wine.

I’ll be writing about the meetings in future posts (and about fieldwork we did while in Italy, too),  but for now I want to focus on the conference’s final session, which was on the global wine market.

The gist of the session was that the global wine market is going through a period of seemingly chaotic change (hence the “fluid dynamics” title to this post). Several new trends are emerging and each of them can be tracked, but it is hard to know how they will interact in the global markets.

I’m not sure any one of the speakers (see list below) stressed the uncertainty of the dynamic interaction, but this was the message that came through to me.

Up the Down Staircase in Europe

In Europe, for example, there is some good news in the form of increased wine consumption among young people — a possible reversal in the secular decline in wine consumption in “old world” countries (a group that includes Argentina) which has been responsible in part for the global wine market surplus. A good sign that demographic trends may be changing in a positive way.

On the other hand, there is bad news about the EU wine market reforms that were designed to dry up Europe’s wine lake by rationalizing the wine system there and forcing/permitting wine producers to compete head to head with new world wine companies. The recession’s effects are being used as a tool by anti-reform interests and it now appears possible or likely (depending upon who is talking) that the whole reform program may be ditched in order to stabilize grower incomes.

Although European consumers may be drinking more wine, it is not the wine that the reforms were designed to eliminate, so structural imbalances (and high budget costs) may soon return.

Bulking Up (and Down)

Australia is another dynamic wine region. While wine officials have high hopes for China in the future, the present is problematic. Bottled wine exports (with their higher value added) have dropped quite suddenly and more of the export demand is now being met with lower value bulk wine. This is not a step in the right direction for the long term, of course, although I’ imagine that some Australian producers are happy to export in any form.

Javier Merino from Argentina noted the recent growth in both Chile and Argentina (Argentina is the mirror of Australia, reducing its bulk wine exports and increasing bottle wine sales) as well as the economic problems that both nations face (exchange rate issues in Chile, inflation in Argentina).

China is on (almost) everyone’s mind, of course, as it appears to be one of the major growth areas for the near future, but Brazil and Russia are growing, too, and on the radar for countries with extra wine to sell (which is more or less everyone).

This Changes Everything

But South Africa may be a different story. Nick Vink said that he believes that South Africa’s markets of the future are Africa and India (not Britain and the US) as wine consumption rises in these regions and favorable wine market reforms are implemented (a particular problem in India, I believe, but probably in many parts of Africa, too).

Wine markets shifting to Shanghai? That’s interesting. To Nairobi? That’s very interesting! Nonlinear dynamic systems are very sensitive to initial conditions and the Africa shift (or any of the other changes mentioned here) could very easily “change everything” in faraway corners of the world of wine.

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Here’s a list of the wine economists who spoke at the session on the Impact of the Economic Crisis on the Global Wine Market

  • Kym Anderson (University of Adelaide, Australia)
  • Johan Swinnen (University of Leuven, Belgium)
  • Nick Vink (University of Stellenbosch, South Africa)
  • Julian Alston (University of California, Davis, USA)
  • Javier Merino (Área del Vino, Mendoza, Argentina)

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The Wine Economist is going to take a short “Fourth of July” break to give me time to get my notes in order. We’ll be back in a few days with more from our fieldwork in Italy. In the meantime, run out and buy a copy of Wine Wars — it makes great holiday reading.

The BRICs: The New New World of Wine?

This is the first of a series of articles on wine markets in the BRICs. BRICs? Is that a wine term? No, although it sounds just like brix, a measure of a grape’s sugar level. Jim O’Neil of Goldman Sachs coined the term BRIC in 2001 to refer to  Brazil, Russia, India and China.

Initially many people suspected that BRIC was just a gimmick — a way to package four very dissimilar countries into an appealing acronym that would draw investor interest. If it was a strategic maneuver it was a brilliant one because of the way it captured the world’s imagination.

More than a Gimmick

“BRICs” is an attractive name for many reasons, perhaps especially because it looks and sounds like NICs — the Newly Industrialized Countries of Hong Kong, Singapore,  Taiwan and South Korea that have been so successful in the global economy.  There was some question initially about why these four particular countries were chosen (why Brazil and not Mexico, for example, and what about Turkey?) and what if anything they had in common, but the idea quickly caught on.

Today the BRICs are firmly established, as the Economist noted earlier this year in an article titled, “The BRICs: The trillion dollar club.”  The BRICs have turned into something real.  Why? According to the Economist

The BRICs matter because of their economic weight. They are the four largest economies outside the OECD (Organisation for Economic Co-operation and Development, the rich man’s club). They are the only developing economies with annual GDPs of over $1 trillion (Indonesia’s is only half that). With the exception of Russia, they sustained better growth than most during the great recession and, but for them, world output would have fallen by even more than it did. China also became, by a fraction, the world’s largest exporter.

In a recent Economist article (that included this provocative graph), Goldman’s O’Neil was asked to look ahead 25 years, from 2011 to 2036, and to speculate about the future.

One of the questions he raised was whether the BRICs would have greater total (but obviously not per capita)  income than the G-7 countries and what that might mean if they did. A good question to discuss … over a glass of BRIC wine.

The Future of BRIC Wine?

BRIC wine? Well, yes. All the BRIC countries produce wine and all are important wine markets for the future. As these economies grow, their expanding middle classes will be increasingly attractive target markets for the world’s wine makers and their wines will begin to appear on you local shop’s shelf.

China was the 6th largest wine producer in the world in 2007 according to International Organization of Vine and Wine (OIV) statistics, with an estimated 12 million hectoliters of wine produced (for readers who still think in “English” units, a hectoliter equals 100 liters or a little more than 11 standard nine-liter cases of wine).

By comparison, #1 Italy and #2 France produced nearly 46 million hl each in 2007 followed by Spain (34 million hl), the U.S. (20 million hl) and Argentina (15 million hl). BRIC Russia was 11th in the global wine league table, with 7.3 million hl of output followed by Brazil in 15th place with 3.5 million hl.

India does not appear in the OIV wine statistics, indicating that its wine industry is quite small at present. But India definitely is on the wine map — the omnipresent Michel Rolland even has a client there (Grover Vineyards). India is already a major producer of table grapes, with 2007 production only a little less than Chile and the U.S. combined (that’s a lot of grapes), so it is not unreasonable to suppose that higher levels of wine grape production may follow. India would be on the wine BRIC list for its potential as wine import market, of course, even if it didn’t make any wine at all.

Solving the BRIC Puzzle

Some people in the wine industry dream that the BRICs will be the solution to the problem of global over-supply. OIV estimates that 266 million hl of wine was produced in 2007 but only 249 million hl consumed,  a gap of 17 million hl or about 200 million cases. Yikes! Do the BRICs have the potential to soak up all that extra wine and bail out the global industry?

Dream on, say the experts consulted for a 2009 article in Meininger’s Wine Business International. “Are the BRIC countries going to solve the problems of oversupply in the world today? I don’t think so,” said Arend Heikbroek, associate director for beverages at Rabobank (and one of the sharpest wine analysts I know). “It’s a long-term shot,” he continued, ” it’s complicated, each market is completely different. You need to understand the risk, the dynamics, the traders, the distribution system and the legal system in each of these markets.”

Fair enough. Each BRIC is its own particular puzzle, I guess, and it is too soon to know how they will fit into the bigger puzzle of global wine.

The BRICs will be important to the future of global wine even if they aren’t a silver bullet solution to current problems. They are the new new world of wine and we need to figure out what we know about them– and we don’t know.

In this series I’ll examine each BRIC wine market in turn starting with Brazil by bringing  together and synthesizing various published reports and then try to pull things together into a summary. I hope readers with particular expertise will leave comments to help broaden and deepen the analysis. So away we go!

DIY Wine Economics

I’ve just returned from a research trip to Canada to investigate the wine industry in British Columbia (watch for my upcoming report). The wines were very good and the scenery spectacular, but for some reason my attention kept being diverted to small storefront do-it-yourself wine making facilities.  So herewith a report on a Canadian phenomenon:  Wine Kitz stores.

The Old Pandosy Street Connection

Somehow we found ourselves on Pandosy Street in Kelowna, B.C.; I checked out the Wine Kitz store while Sue investigated a yarn shop on the next block. It was a very interesting visit. I have seen many stores that sell wine-making kits and supplies, including grape juice concentrate, yeasts, jugs, hoses, bottles and so forth, but this Wine Kitz was something else — it really got my attention.

Kim McLean and her husband James operate this shop, which has been in Kim’s family since 1976, first an an independent DIY wine operation, now as part of  Wine Kitz.  Wine Kitz is a franchise chain, started in 1959 as “Wine Art” with 70 stores across Canada. There were three stores in Kelowna, a wine, tourism and agriculture town of about 120,000 population, with another store just across the bridge in West Kelowna. There must be a lot of DIY wine on tap here to support four stores!

Wine in a Box

Wine may be made in the vineyard, as they say, but it comes in a box at Wine Kitz and similar stores. Each box makes 23 liters of wine, or about 30 bottles from whichever sort of wine grape juice you choose. There are three quality tiers of juice available, starting with the Wine-Art line (CND 120 per kit) and moving up to Tradition (CND 138) and Ultimate (CND 185). (One USD equals about 1.03 CND at today’s exchange rate — that’s roughly par when you take FX fees into consideration.) The cheaper products have a higher percentage of juice concentrate while the more expensive tiers have more natural juice (and less manipulation). You can dial up the quality level depending upon your preferences and bank account balance.

The juice comes mainly from California, Australia and Italy. The juice selection is really quite broad. Merlot, Chardonnay and Shiraz, of course, but also Barolo, Chianti and Valpolicella. You can even make sherry and port-style products as well as various dessert wines.

The Secret of DIY Success

Why are kit wines so popular in Canada? One reason is the high retail price of bottled wine. Wine that you can make in a Wine Kitz shop for about CND 6 per bottle would sell for perhaps CND 20 or more in one of the province’s government liquor shops, Kim told me.

Checking around I found that Chateau Ste Michelle Columbia Valley Riesling sells for CND 14 in BC and CND 17 in Alberta. You can buy it for less than USD 6 at Costco in the U.S.  That’s a pretty strong incentive to make your own wine if the quality is anywhere close. You can, of course, set up your own home winery using the packaged juice as raw material to bring the cost even lower.

The ongoing recession is a second factor, Kim said. People are a bit more interested in saving money when the economy is uncertain. You can think of this as a trading down (to lower prices) effect, but I’d argue that it is more like “trading over” (to different wine experiences) since the product is both cheaper but also a bit more personal and fun.

A final reason is that it is easy to make this wine — much easier that you might think. A loophole in liquor laws allows Wine Kitz to streamline the winemaking process.

Amateur Antinoris  need invest only about 45 minutes per batch of wine — 20 minutes to initiate fermentation and another 25 minutes filtering and filling bottles when the wine is ready to go in a few weeks. All the work in between can be done by Wine Kitz staff on their premises using their equipment. You can be as involved as you want to be as long as you put in that minimum 45 minutes but you can also leave it to Wine Kitz. Honestly, you can’t get much easier than that.

One important rule: once you bottle your wine you must remove it from the store immediately. I asked Kim if her operation was highly regulated and she said it was — and that the easiest thing to do was simply to follow all the rules to the letter and avoid legal problems. Sounds like a good plan to me.

Back Room Confidential

The back room of the Kelowna store I visited was filled with glass carboys in various stages of fermentation and a satisfied young couple (from Switzerland if my ear is any guide) were happily bottling their latest vintage. Perhaps Canada’s longstanding policy of welcoming immigrants is another factor in DIY wine’s popularity — maybe they bring an interest in home wine making with them. But that’s obviously not the whole story. When I asked Kim about her customers she said they are just thirsty — they don’t come from a particular socioeconomic class or walk of life. They just want to make wine.  Interesting — wine-making as a popular home craft like scrap-booking.

I didn’t ask to sample any of the wine — this isn’t a wine rating blog and my opinion wouldn’t matter anyway. What does matter is what the people who come to stores like Wine Kitz think and there are apparently many happy wine drinkers among them (enough to keep four stores busy in a medium-sized town).

DIY wine is an interesting reaction to both the expense of commercial wines (especially in Canada) and the desire of many to be more a part of the products they consume (even if boxed juice is involved) — to be participants as well as consumers.

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Thanks to Kim McLean for taking time to show me around her Kelowna store and explain her DIY operation. The photos shown here are for typical Wine Kitz locations — not the Kelowna store I visited. Watch for additional reports form my BC fieldwork expedition.

The Wine Economist 200

This is The Wine Economist’s 200th post since it began a little more than three years ago under the name “Grape Expectations” —  a good opportunity to reflect briefly on readership trends, just as I did when we passed milepost 100.

Not that kind of list!

Milepost 200

The Wine Economist has an unusually broad readership given its focus (wine economics), content (no wine reviews, no ratings) and style (most posts are way longer than is typical for weblogs).

I never expected to get millions of visitors like Dr. Vino or Gary V. and other popular wine critic sites, so I’m surprised by how many people have found this page and come back to read and re-read.

About 200,000 visitors have clicked on these links, sometimes with surprising intensity. The Wine Economist has been ranked as high as #6 in the big “Food”  category where wine blogs are filed in Technorati‘s daily ratings and as high as the top 30 in the even broader “Living” group.

Reader Favorites

The most-read articles of the last few days are always listed in the right-hand column on this page, so it is easy to see track reader behavior. I thought you might be interested in readership trends since the blog began. Here are the top ten Wine Economist articles of all time.

  1. Costco and Global Wine — about America’s #1 wine retailer, Costco.
  2. Wine’s Future: It’s in the Bag (in the Bag in the Box) — why “box wine” should be taken seriously.
  3. The World’s Best Wine Magazine? Is it Decanter?
  4. [Yellow Tail] Tales or how business professors explain Yellow Tail’s success.
  5. Olive Garden and the Future of American Wine or how Olive Garden came to be #1 in American restaurant wine sales.
  6. Australia at the Tipping Point — one of many posts about the continuing crisis in Oz.
  7. No Wine Before Its Time explains the difference between fine wine and a flat-pack  antique finish Ikea Aspelund bedside table.
  8. How will the Economic Crisis affect Wine — one of many posts on wine and the recession. Can you believe that some people said that wine sales would rise?
  9. Wine Distribution Bottleneck — damned three tier system!
  10. Curse of the Blue Nun or the rise and fall and rise again of German wine.

As you can see, it is a pretty eclectic mix of topics reflecting, I think, both the quite diverse interests of wine enthusiasts and wine’s inherently complex nature.

My Back Pages

What are my favorite posts? Unsurprisingly, they are columns that connected most directly to people. Wine is a relationship business; building and honoring relationships is what it is all about.

KW’s report on the wine scene in Kabul, Afghanistan has to be near the top of my personal list, for example. I am looking forward to following this friend’s exploits in and out of wine for many years to come. (Afghan authorities found KW’s report so threatening that they blocked access to The Wine Economist in that country!)

Matt Ferchen and Steve Burkhalter (both former students of mine now based in China) reported on Portugal’s efforts to break into the wine market there. The commentaries by Matt, Steve and KW received a lot of attention inside the wine trade, but their thoughtful, fresh approaches also drew links, re-posts and readers from the far corners of the web world.

Looking back, I think my favorite post was probably the very first one, a report on my experiences working with the all-volunteer  bottling crew at Fielding Hills winery. I learned a lot that day about the real world of wine and I continue to benefit from my association with Mike and Karen Wade (and their daughter, Robin, another former student) who have taught me a lot about wine, wine making and wine markets.

Look for another report like this when The Wine Economist turns 300. Cheers!

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Thanks to everyone who’s helped me in various ways with these first 200 posts. I couldn’t have done it without you! (Special thanks to Sue, my #1 research assistant!)

Restaurant Wine: A Double-Sided Puzzle

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

The Confidence Game

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

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

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

Putting the Pieces Together

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

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

Constantly Disappointed?

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

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

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

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

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

Wine-by-the Keg?

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

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

Someone should tell Lettie Teague the good news.

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

The {Wine Economics} Magnification Effect

One of my pet theories about globalization could be called “the magnification effect.” Although global markets change things for sure, often their biggest effect is to magnify or exaggerate existing trends and conditions. A Decanter report from Bordeaux provides a good example of how the Magnification Effect works.

The Law of One Price

Although people talk about “Bordeaux wine,” there has never been a “Bordeaux wine market.” The Law of One Price holds that if there is a single market there will be a single price. But it is the difference in prices that is Bordeaux’s most notable feature. Some wines from the region sell for thousands of dollars, others for a few bucks and some … well they go to the distillery for mere pennies.

This market segmentation occurs in all wine regions, but it is more noticeable in Bordeaux because these wines have always been targeted for export (the globalization element) and so price stratification is more pronounced.

Students of wine history know that Bordeaux is in fact defined by these differences. The Classification of 1855, which established a strict hierarchy of Medoc wine producers that persists to this day, was not based upon sensory evaluation, as you might expect, or critical analysis but simply on market price.

The gold's at the top ...

The Twilight Zone

Over the years, as global markets expanded, the price differentials recognized in 1855 became embedded in the market and magnified. The Decanter article illustrates the current extreme. Announced prices for 2009 are substantially higher for the 400 top-tier Bordeaux wines that are sold en primeur: up an average of 18.6% over the 2005 “vintage of the century” and 48.7% above the recession-plagued 2008 market. Good times for the top names, as Orley Ashenfelter pointed out on two occasions during the recent American Association of Wine Economists meeting at UC Davis.

But there are thousands of wine producers in Bordeaux and times are very hard for many who are not in the top tier. Decanter reports that

…  the official price paid by merchants for a tonneau (900 litres, or the equivalent of 1,200 bottles sold in bulk) of AOC Bordeaux red has dropped to around €600 per barrel – less than the ex-chateau price for a single bottle of any of the top wines.  Most producers report that actual transaction fees are dropping as low as €500 per tonneau. Bernard Fargues, president of Syndicate of Bordeaux (which represents over half of the regions’ 8,000 winemakers, all producing AOC Bordeaux and AOC Bordeaux Superieur) told decanter.com that around 90% of his members were in difficulty, with at least 50% suffering serious financial problems.

If my math is right, some Bordeaux wines have fallen into the Two Buck Chuck danger zone while others have risen to … to what? The Twilight Zone!

This magnification effect has become global, as was readily apparent at a symposium on “Outlook and Issues for the World Wine Market” held in association with the Davis meetings. Speakers emphasized the widening market segmentation. Bulk wines (wines that sell for less than $5 per bottle equivalent and often for much less) have developed a truly global market in part, as several speakers noted, because bulk wine buyers aren’t particularly interested in terroir — they basically don’t care where their wine comes from, only what that it has a familiar taste and doesn’t cost very much.

Somewhere vs. Nowhere at Trader Joe’s

I noticed this on a recent visit to Trader Joe’s where a new line of Two Buck Chuck has appeared — Charles Shaw International wines, sourced from Australia’s surplus wine lake and selling for the same low price as the original product. I don’t imagine that anyone will refuse to buy it because it is “international” rather than from the San Joaquin Valley like the rest of the Two Buck Chuck lineup.

Bulk wine prices are deeply depressed because of this mass global market, squeezing out inefficient producers (or those who don’t benefit from government subsidies of one sort or another). Profits per acre in the San Joaquin Valley (where most of California’s bulk winegrapes are grown) is down to $200 acre — an amount so low that growers are switching to other crops such as walnuts and almonds where the global competition situation is more favorable. One grower who attended the symposium talked of leaving fruit on the vine for the first time in 25 years.

If the market for bulk wines is global, I guess you could say that the premium wine market is “international.” Buyers do care about where these wines come from and so global sourcing is not an option. This exposes producers to a different set of risks and rewards. Australian winemakers, for example, find themselves victim of the strong Australian dollar. China’s huge needs for Australian minerals has driven the currency up and helped price Australian premium wines out of their traditional market niches.

The Law of Yuan Price

(The exchange rate obviously affects the bulk wine market, too, and is one factor in Australia’s excess capacity in that market segment. The exchange rate depresses price both directly, by raising export costs, and indirectly as unsold premium wines are diverted to low-price bulk wine markets.)

Wines at the very top of the pyramid also face challenges, but they are different from those of bulk wine and premium wine. Globalization is a positive benefit to top-flight Bordeaux, for example, because it means that Hong Kong and Chinese buyers can be found to replace (or apparently more than replace) declining buyer interest elsewhere.

Decanter recently published their first Chinese language Bordeaux report — a clear indication of the expanding global market and a suggestion that the Magnification Effect has not yet reached its peak.

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