Wine, Stagflation, and the Risks of the Bottleneck Economy

The New York Times headline warned of fears of a bottleneck recession in Germany. Other headlines in  the Wall Street Journal, the Financial Times, and elsewhere noted the impacts of production and distribution bottlenecks on specific industries.

Although the parallel is flawed, it is impossible for those of  us of a certain age not to think back to the 1970s when shortages and bottlenecks created the unwelcome phenomenon of “stagflation” — a stagnant but inflationary economy.

Last  week I wrote about the many bottlenecks inside the wine sector that make this a particularly interesting and difficult business. Today’s column steps back a few paces to look at the bottleneck economy itself and how its outside force impacts wine.

Yes, We Have No Bananas

The most obvious effect of bottlenecks is scarcity and higher cost.  As I noted last week, ocean shipping bottlenecks both push up the cost of container shipments and result in shortages of the relevant products. Some shortages are transitory — the goods are delayed but they still eventually arrive — but other times the rising shipping cost makes delivery of the products uneconomic.

Long lines at petrol stations were a bottleneck result in the UK recently. The problem was a shortage of tanker truck drivers. There was enough gas I understand it, but too few drivers to get it where it needed to be. As soon as consumers caught a whiff of a theoretical shortage, of course, they all rushed to fill up their tanks at once, creating an actual shortage. The government has plans to mobilize some army drivers to help deal with the situation if it persists.

Boris Johnson’s administration advises that rumors that Christmas will not arrive this year due to a general shortage of lorry drivers are exaggerated. Good to know.

Domino Effects

Bottlenecks in one sector often spread to related markets like a row of dominos falling one by one. A noteworthy case of this has happened in the UK, for example. Unseasonably slack off-shore winds this summer resulted in lower than expected electricity production from wind turbines, which shifted demand to generation plants fired by natural gas. This pushed the spot price of gas to very high levels, making the production of fertilizer suddenly uneconomic and forcing some fertilizer plants to shut down. Wind-gas-fertilizer. Got that?

Carbon dioxide is a by-product of the production of fertilizer from natural gas, so CO2 supplies fell. CO2, in turn, is important in the food industry and in wine production, too, so shortages and disruptions appear there. Thus did calm winds plus natural gas bottlenecks cause British food security to diminish.

Changing Commodity Composition

Have you been out shopping for a new or used car recently? Cars today are really computers that happen to have wheels and can haul people and their stuff. The current very serious shortage of microchips is therefore a limiting factor on the production of both autos and all other the equipment and gadgets where computer chips are needed.

Shakespeare warned that for want of a nail a kingdom was lost. If he were writing today, he might pivot to microchips and car sales. With new cars in short supply, the prices of used cars have sky-rocketed.

One side-effect of such bottlenecks is a change in the commodity composition of production. If you don’t have enough chips to produce all the cars you’d like, how do you handle it? It make sense to reduce production of low profit vehicles and reserve the chips for high profit sales, which means pickup trucks and some SUVs in the US.

Another strategy is to reserve production for key customers where there is a long term commitment and cut back on other sales. In short, the bottlenecks affect what is produced, how much, who gets it, and at what price.

The Price Also Rises

Inflation is always a concern in the bottleneck economy and you can sense how nervous economic leaders around the world are as they sort through different measures of inflation and ponder whether specific price spikes will moderate as time passes or form a critical inflationary mass that, by altering expectations, becomes self-sustaining. If economic policy-makers react to inflation fears by jamming on the brakes, stagflation could result. That’s what happened 40 years ago and there is concern that history could repeat.

Should the short-term inflation burst endure, we would normally expect higher interest rates and changing foreign exchange rates to follow. Interest rates might rise as central banks act to push prices back down, but it seems more likely to me that the market will first push interest rates higher and then central banks will follow along. Just a guess.

A combination of higher interest rates (which tend to increase currency value) and higher inflation rates (which push in the opposite direction) make forecasting exchange rate movements even more problematic than usual.  The US dollar’s value has risen recently, for example, as higher interest returns seem to have overcome concerns about higher inflation. Stay tuned.

Just in Time vs Just in Case

How should wine producers react to all this news? Many will simply tune it out but, as I like to say, denial isn’t just a river in Egypt. Ignore the shifting economic sands at your own risk.

One bit of practical advice is obvious: give serious thought to how exposed your business is to the various direct and indirect bottlenecks in your sector and take appropriate action. At the very least, starting moving from just in time to just in case sourcing if you can.

Beyond that, it would be a good idea to do a quick bottleneck risk audit. How much are you exposed to potential problems? And what about your customers and suppliers? One lesson this situation teaches us is that risk anywhere in the product chain is a potential problem everywhere in the product chain.

What about the big macro risk of stagflation? I don’t see things getting that bad yet, but stagflation puts economic policymakers in a bind and none of them really has a lot of room to maneuver right now. That’s why everyone is so jumpy about the inflation threat and why the recent IMF warnings are taken seriously. As Bette Davis said, fasten your seatbelts.

Wine Business Bottlenecks

Everyone in the wine business knows about the problem of bottlenecks — and I am not just talking about the kind you see in this photo. Bottlenecks or choke-points are found throughout the wine product chain and any one of them can make life difficult.

Wine’s Many Bottlenecks

Growing grapes can sometimes be a bottleneck since winegrowers get just one crop a year (apart from tropical viticulture, where multiple harvests are possible), so bad weather, smoke exposure, or labor supply problems can really mess things up. Wine production has its bottlenecks, too. Tank capacity is limited in the short run, for example, and after a couple of abundant harvests in a row there can be problems making new wine because there’s no place to put it.

Distribution is another bottleneck of the classic kind you see on the highway. Thousands of wine producers channel their products through a much smaller number of distributors — it’s like losing three lanes on a busy freeway! In my experience every industry tends to organize itself around its most severe bottleneck or inefficiency and here in the US distribution and the three tier system shapes much of the rest of the industry to a certain extent.

Logistical Bottlenecks

These days we are all coping with logistical bottlenecks. The old “just in time” system with hyper-efficient logistics has yielded to a “just in case” system, where we stock up on vital commodities when we can get them because bottleneck delays are so common. It is like the toilet paper situation at Costco on steroids.

I know a couple of wine importers, for example, that received the last of their French Rosé wines only in the last few weeks, just as the summer pink wine season was drawing to a close. The wines were caught in the international shipping bottleneck — not enough containers or port capacity to get product to market as per plan, plus of course higher cost. You know the story. Reports suggest that the ocean shipping problems that are in the news every day will not be resolved soon.

On a  trivial personal level, we waited an extra four days for a wine shipment from California that was stuck in the dreaded “Troutdale Triangle” near Portland. Don’t know if the bottleneck was driver availability, trailer space limits, or processing capacity. Maybe all three! At least the wine arrived in good shape. I suspect you have a similar story to tell and perhaps without the happy ending.

Rising Transportation Costs

The cost of shipping a container, when you can book space on a ship, has sky-rocketed. The Drewry World Container Index average cost has increased from less than $2000 per standard container in 2019 to more than $10,000 this summer! The actual cost depends on timing and the specific route desired — it is a supply and demand thing.

The rising ocean shipping costs have an uneven impact on product categories depending on the value of the goods involved. The higher rates have a relatively small impact on the final price of high-value goods such as electronics. But bulky, lower-value products can be hit pretty hard and there are stories circulated about items, such as cheap garden furniture from China, where the new shipping rates are higher than the value of the goods themselves.

Higher shipping rates act like a $8000 per container tax on imported wine, with the proportionate burden falling hardest on less-expensive wines. The higher cost combined with less dependable delivery schedules creates real problems for anyone with business interests in imported wine.

In the past such ocean shipping disruptions have been both smaller and relatively brief. The magnitude of this situation is unprecedented, however, and there are indications that higher costs will not as quickly disappear. Ocean shipping is a boom-bust industry. When ocean rates have been high as they are now, shipping companies have invested heavily in extra capacity that, when it came on-line all at once, pushed rates and profits down. The big shipping firms today intend to be conservative in their orders for new ships to prevent a collapse in rates a few years down the road.

The Big Bottleneck

The bottlenecks within the wine industry directly affect the wine trade, but they are not the only impacts to consider. Micro-bottlenecks within industries like wine aggregate into macro-bottleneck problems and risks that affect national and the global economy.

Come back next week for thoughts about how this big bottleneck issue might affect the economy overall and the implications for wine.

Politics and Wine Trade: Wine2Wine Business Forum

Wine is no stranger to politics and, since everything seems to be political these days, wine trade must be political, too. What’s different about wine politics today? Why is it important? What should wine industry professionals know and do?

Wine2Wine Business Forum 2021

These are some of the questions that I’m thinking about as I prepare my presentation, “Politics and Wine Trade,” for the upcoming Wine2Wine Business Forum 2021, which is being held in hybrid (online/in-person) form in Verona Italy on October 18-19. My presentation will be a virtual seminar on October 18 at 3:45 pm Verona time (6:45 am Seattle time).

The list of speakers and sessions is long and impressive. The emphasis on useful practical information to help guide wine businesses in these turbulent times is clear and welcome. Looks like a great conference. Wish I could be there in person, but happy to contribute virtually.

Thinking About Wine Politics

Politics is so much a part of the wine industry story that you could probably fill a book with examples and analysis. But you don’t have to do that because the book already exists: Tyler Colman’s 2008 Wine Politicswhich I admire and recommend.

Politics and wine trade take several forms that I want to discuss at Wine2Wine. Some of it is what I call inside politics — passions and interests inside the wine sector that take political form. There is also what I call outside politics, which is how wine ends up caught in the crossfire of political squabbles between and among nation-states. Inside, outside — politics is everywhere you look!

Politics Happens

Australia — the lucky country — provides a good example. The Aussies worked very hard to develop the China market for wine exports. And they succeeded — China became the #1 export market for Australian wines, larger than the UK, larger than the US, and at good prices, too.

And then, well, politics happened. The Australian government has been trying to show China that it is more than just an iron ore vending machine (see AUKUS agreement for example) and this backfired. China retaliated for inconvenient comments directed its way, imposing prohibitive tariffs on Australian wine and suddenly the #1 market disappeared. Wine gets  caught in the crossfire in political disagreements that have nothing whatsoever to do with wine.

What does the future look like? What can/should wine industry leaders do? I’ll try to have some answers to these questions by the time Wine2Wine kicks off.

Thinking About Laura Catena’s Grand Cru Project

Laura Catena believes we need to think about the concept of Grand Cru vineyards and wines, so she organized a series of Zoom events for trade and media participants built around the idea of the Grand Cru.

Sue and I recently participated in one of the sessions and it provided food for thought as well as some delicious wine to sample — Catena Zapata and Winebow generously provided a line-up of wine samples to help us think about Grand Cru-class wines in practice as well as theory. I will paste our wine lineup at the end of this column.

The idea wasn’t to do a blind tasting (can you tell Old World from New World, recognized  Grand Cru from an ambitious pretender?)  or stage a sort of “Judgement of Tupungato” competition, but rather to appreciate some really excellent wines and use them to stimulate thought and discussion.

It took me a while to begin to figure out the point of the discussion. Why talk about Grand Cru now? According to the Oxford Companion to Wine, the concept of a Grand Cru wine is a bit of a moving target. The term, French of course, has a different meaning in Burgundy (where it applies to specific vineyards), in Alsace (where there are Grand Cru appellations), and Bordeaux (it is all about the producers).

New World Grand Crus?

Can (or should) the Grand Cru concept be applied to the New World? And if so, how and where? Much of the discussion focused on practical problems. Grand Cru is a French idea (or ideas) that would seem difficult to translate to foreign soil. Would consumers understand it? Would producers unite around the concept? And could they ever agree on a Grand Cru league table — who’s in and who’s out? Doubtful on all counts, participants suggested.

In any case, several pointed out, there is already a quality-assessing system in place and it is called the market. If you want to know the best vineyards look at grape prices (and the resulting wine prices). The Bordeaux Classification of 1855 was based on price and the market measure endures.

As an economist, I appreciate the power of price to establish hierarchies and find it interesting that the Bordeaux classification is still relevant. But I also understand that markets are very imperfect measures of quality.  It is not for nothing that Oscar Wilde complained of people who know “the price of everything and the value of nothing!”

I am more interested in the way what we say conditions how we think. Language doesn’t simply transmit thought, it also shapes it. Talking about Grand Cru means thinking about wine in a particular subjective way that reflects respect and admiration for the very best that I’d argue is different from measures such as extremely high prices or 100 point scores.

So talking Grand Cru may help us think about wine in a certain way. But American wine history suggests that as difficult as Grand Cru is to achieve, it may sometimes be even harder to maintain. I am thinking about the story of Martin Ray, which I recounted in my book 2011 Wine Wars (and also in the revised new edition that will be released next year) in the chapter titled “Martians vs Wagnerians.”

The Sad Tale of Martin Ray

Martians — a term I borrowed from wine historian Thomas Pinney — are inspired by Martin Ray’s idea of wine. Ray was upset that the standard of US wine was so low in the years following the repeal of Prohibition. He persuaded Paul Masson to sell him his once great winery in 1935 and proceeded to try to restore its quality with a personal drive that Pinney terms fanatical.

He did it, too, making wines of true distinction—wines that earned the highest prices in California at the time. His achievement was short-lived, however. A winery fire slowed Ray’s momentum and he finally sold out to Seagram’s, which used a loophole in wartime price control regulations to make a fortune from the Paul Masson brand and its premium price points, starting a trend of destructive corporate exploitation that forms a central theme in Pinney’s book on American wine history.

Ray’s history is therefore especially tragic since his attempt to take California wine to the heights through Paul Masson ended so badly. Paul Masson degenerated into an undistinguished mass-market wine brand that was sold to Constellation Brands, which eventually passed it along to The Wine Group (makers of Franzia bag-in-box wines among other products), which quietly withdrew the spent brand from the market. Paul Masson brandy still exists as part of the Gallo portfolio.

So in the end Martin Ray’s high Grand Cru values degenerated into the market prices they yielded and then degenerated again and again until nothing was left of them. How sad!

Gold in the Vineyards?

Laura Catena’s interest in Grand Cru vineyards isn’t a new thing. Her 2018 illustrated book Gold in the Vineyards surveyed the world of wine through stories of great wines, the families (and especially the women) behind them, and the great vineyards that are their source. The finally chapter is personal, focusing on Catena Zapata’s “Adrianna Vineyard: the Grand Cru of South America,” which is the source of the quote at the top of this column.

As Laura Catena tells the story, her father Nicholas Catena was determined to create a Grand Cru vineyard in Argentina. Scouring the Uco Valley countryside, he came across a cold, dry area with stony soils high up in the Andean foothills at 1500 meters elevation. The winery viticulturalist said it would be impossible to make anything except perhaps sparkling wines from vines planted in such a unfriendly site. But Catena stubbornly forged ahead with what we now call the Adrianna Vineyard, which produced four of the eight wines in our sample pack.

Re-reading Gold in the Vineyard and connecting the dots, I realized the unstated question at the heart of the Zoom events. Did Nicholas Catena and his Catena Zapata colleagues really do it? Is the Adrianna vineyard what he meant for it to be: Argentina’s Grand Cru vineyard? That’s what will be on my mind as Sue and I work our way through these wines in the coming weeks.

We’ve started with the White Stones and White Bones Chardonnay wines, which I have wanted to taste for a long time. They are fantastic — balanced, elegant, complex. The two Catena wines are very different from each other and different, too, from the Chablis wines including in the tasting, which is important since imitation may be the sincerest form of flattery, but it’s not what great wine is all about. Grand Cru? Gotta think about it some more before I make up my mind. World-class? Absolutely!

The question of what does Grand Cru mean today is thought-provoking and considering what it might mean in a New World context provokes debate. For me, the idea of the Grand Cru is worth holding on to and using as a source of inspiration — I am on board with Laura Catena’s project — even if the practical realities are messy and problematic.

In the meantime, perhaps it would help if you poured yourself a glass of wine from  your favorite maker or region and pondered  the notion of the Grand Cru.

>>><<<

WINES

  • Alain Chavy Puligny-Montrachet Les Folatières Premier Cru 2018

Catena Zapata Adrianna Vineyard White Stones Chardonnay 2018

Louis Moreau Les Clos 2017

Catena Zapata Adrianna Vineyard White Bones Chardonnay 2018

Lingua Franca The Plow Pinot Noir 2019

Catena Zapata Adrianna Vineyard Fortuna Terrae Malbec 2017

Grattamacco Bolgheri Superiore 2016

Nicolás Catena Zapata 2017

Three Faces of Wine Strategy: Porto Perspectives

If you walk along the river in Vila Nova de Gaia, just across the Douro from beautiful Porto, you are in the right place to visit the famous Port lodges and sample different types and styles of Port wine. If you dig a little deeper, you can also learn something about the diversity of successful wine industry strategies that these historic firms have deployed.

I’m interested in Portuguese wine because it has experienced rising sales here in the US market while some other countries have struggled and lost market share. And I am interested in wine industry strategies because, as I wrote here last week, the global wine market seems to have plateaued and so everyone wants to know the secret to growth in a stagnant market.

Herewith, for your consideration, three case studies inspired by an imaginary Vila Nova de Gaia excursion.

Taylor’s: Tradition and Innovation

Our first stop is Taylor’s, one of the most famous names in Port wine. Fortified wines, including Port wines, are not the easiest products to sell these days, but Taylor Fladgate, which has been in this business since 1692, is committed to Port and Porto. The Fladgate Partnership’s portfolio of Port brads is broad and deep, including Taylor’s, Fonseca, Croft, and Krohn.  No unfortified wines are produced. This focus on its traditional business, however, doesn’t rule out innovation and entrepreneurial endeavors.

Late Bottled Vintage (LBV) Port was a Taylor innovation, for example. I have argued that LBV Port helped rescue and revive the Port trade in the 1970s by giving consumers the experience of Vintage Port without the expense and bother. Taylor’s innovation continues today with its canned White Port spritz, Chip Dry & Tonic, a delicious and refreshing addition to the RTD market that may help consumers see Port wine in a new light.

Taylor’s commitment to Port and Porto is also expressed through its investment in the region’s wine tourism industry. First came the fantastic Yeatman Hotel high on the hill overlooking the Douro next door to the Taylor’s Port lodge. The hospitality investment continued with the redevelopment of luxury Hotel Infante Sagres in central Porto and the Vintage House Hotel in the Douro Valley at Pinhão.

That’s really himpressive … but wait, there is more! The the area of warehouses reaching down to the Douro from Taylor’s were developed into Porto’s new wine tourism destination — the incredibly ambitious World of Wine. Sue and I haven’t visited WoW yet, but we look forward to exploring its many varied experiences when we get back on the road again.

Bravo to Adrian Bridge and The Fladgate Partnership for their bold strategy of doubling down on Porto and Port wine.

Symington: Porto and the Douro

If you continue down the pathway along the Douro and up the hillside a few blocks you will come to Graham’s, part of the Symington Family Estates, with its historic Port lodge and destination restaurant, Vinum.

Symington represents a second face of wine industry strategy here in Porto. They are all-in on Port wine, of course, with four famous brands: Graham’s,  Dow’s, Warre’s, and Cockburn’s. But Symington’s reach extends beyond Port to Portuguese table wines including Quinta do Vesuvio, Quinta do Ataíde, Quinta da Fonte Souto, Altano, and Prats + Symington, a partnership with Bordeaux’s Bruno Prats. All the wines but one come from the Douro Valley. Quinta da Fonte Souto is in Alto Alentejo, which is Symington’s first foray outside of its home region.

Sue and I recently enjoyed a bottle of P+S Prazo de Roriz, a red wine made from younger Douro Valley vines that harmoniously balances fruit and minerality — a seriously attractive wine that punches above its  $20 price point.

Although the Fladgate Partnership and Symington Family Estates have taken different pathways in wine industry strategy, they share a strong commitment to sustainability. Adrian Bridge is a driving force for climate change action in the wine industry and beyond, for example, and Symington is one of the wine world’s most recognized Certified B Corporations.

Sogrape: Portugal Goes Global

As you walked from Taylor’s to Graham’s along the Douro you passed two noteworthy Port lodges that are part of the Sogrape family, Sandeman’s and Porto Ferreira (Offley Port is also a Sogrape brand). Sogrape, Portugal’s largest wine producer, is an important force in Port wines and in wine generally. It is the producer, for example, of Mateus Rosé, which was once the best-selling imported wine in the US market and remains incredibly popular around the world.

Sogrape’s strategy extends across Portugal’s wine regions from the Douro north to Vinho Verde and south to the Dao and Alentejo. Sue and I are fans of the Casa Ferreirinha Douro Valley wines, including especially the Quinta da Leda, which we love to pair with duck rice.

Sogrape’s strategy differs from both the Fladgate Partnership and Symington family models in that, while its base in Porto and Port is strong, its vision extends far beyond the Douro. It is, in fact, a global vision, as Sogrape’s extensive portfolio extends to Spain (including the famous LAN wines among others), Argentina (Finca Flichman), Chile (Chateau Los Boldos) and New Zealand (Framingham).

It may be surprising that a wine company from a relatively small country should have such a global reach, but remember that this is Portugal and globalization is in its DNA. The Portuguese practically invented globalization and their Port wines are a global icons. Sogrape, with its Mateus Rosé history, seems well prepared to ride the global wave.

Three Faces of Wine Strategy

So what are the take-aways from this wine strategy tour of Vila Nova de Gaia? The first is that there is a lot going on in Portuguese wine these days. If you haven’t thought seriously about Portugal and its wine recently, it is time to give it some attention.

The second point is that there are many routes to success in today’s market, something that is true in Portugal and elsewhere, too. A key seems to be to identify a comparative advantage and make the long-term investments needed to realize potential gains. Taylor’s has invested in expanding Port wine’s reach while investing in Porto and the Douro as a destination –leveraging the power of place. Port and Porto are inseparable — expanding the appeal of one necessarily raises the profile of the other.

The Symington family have adopted a strategy that focuses on the vineyards and communities — the social and physical terroir, with wines that reflect the region and investments that promote social welfare.

Finally, Sogrape leverages the local-global nexus, thinking global and acting local in a very Portuguese tradition.

What do these firms have in common besides Port and Porto? Well, they are all three family businesses that think in generational terms.  That long-term perspective makes it possible for the sort of strategies we see here to succeed.

Finding Growth in a Stagnant Market: What Can Wine Learn from Beer?

Although it is hard to pick out trends with confidence in the current topsy-turvy wine market environment, it is fair to say that there is growing concern that global wine consumption has reached a plateau. This is not a new phenomenon, as I wrote back in January 2019, when I pointed out “global wine’s lost decade.”

Where do you find growth in a stagnant market? One strategy, which I pointed out in a March 2019 column about Precept Brands success, is to take advantage of the fact that there are always some growing market  segments. Flexible producers will follow the money, investing where the growth is. Trying to take market share from other beverage alcohol categories in another strategy, of course, but wine suffers a cost disadvantage here. Wine’s per-serving cost is higher in general that either beer or spirits.

So what is to be done? A recent Rabobank report about global beer provides food for thought about what’s ahead for global wine. Beer? What can wine learn from beer? Well, beer hit a global sales plateau first and so has had more time to develop strategies.

Rabobank’s Beer Quarterly Q3 2021: The Beer Wars analyzes the beer industry’s response to stagnant demand in terms of the different strategies adopted in Japan, the US, and Europe.

Japanese Beer’s Diversification Strategy

The Japanese beer industry faced a crisis earlier than brewers in the US and Europe according to the Rabobank report, and so have had more time to find new growth strategies. Starting in the 1980s the beer market was disrupted by a combination of generational transitions (younger drinkers turned off by what they saw as grandfather’s beer), shifts in path to market (the rise of convenience stores and vending machine sales), and the advent of new competition in the form of chul-hai, an easy-drinking RTD cocktail.

Japanese brewers responded in many ways, including the innovation success of Asahi Super Dry, but the main strategy that the Rabobank report identifies is diversification into other product lines. Japanese brewers compensated for stagnant or falling per-capita beer sales by expanding into other markets from production technology to pharmaceuticals to nutritional supplements where existing strengths could be exploited. The process was slow, the report suggests, and required considerable investment.

It is easy to see wine industry parallels in the problems that Japanese beer faced. Generational transition? Shifting market pathways? Easy-drinking alternatives (think hard seltzer today). Constellation Brands has diversified within the beverage alcohol space through its Mexican beer business and made initial moves into cannabis, too. LVMH has long pursued a diversification strategy — its wine business is part of a diversified portfolio of luxury brands.

US Beer Follows the Money

A second strategy, which the Rabobank report associates with the US beer market, is diversification into other beverage categories such as ready-to-drink coffee and tea, energy drinks, sports drinks, hard seltzer, and so forth. Part of the logic, I think, is to exploit scale economies in beverage distribution and the name recognition derived from established brands and part is simply following market growth wherever it takes you. MolsonCoors changed its name to MolsonCoors Beverage to signal that it isn’t just a beer company any more.

I admit that I was stunned to see Pabst Blue Ribbon hard coffee on beer aisle of the local Safeway, but it fits with this strategy and reminds me of the time a few years ago when Coca Cola decided that it could leverage its distribution network  comparative advantage to enter the wine business by purchasing Taylors wine company (transforming it into Taylors California Cellars) as well as Napa Valley’s Sterling Vineyards. Coca Cola lost interest in their wine diversification strategy after a few years, however, as the margins on wine couldn’t match its soft drink profits and sold the brans to Seagrams.

It is easy to see some wine producers adopting this strategy in the US, too, especially in the canned segment where wine, various wine spritz drinks, and hard seltzer products fill the shelves.

European Beer M&A and Internationalization

Finally, the Rabobank report identifies an M&A and internationalization strategy that it associated with European beer producers. This is the “go big” part of “go big or go home.” European brewers such as Heineken and Carlsberg have evolved into firms with both multinational markets and multinational production networks, too.

Heineken is currently negotiating purchase of control of South Africa’s Distell, the world’s second largest (after Heineken itself) cider maker as well as an important spirits and wine producer. This transaction would further expand Heineken’s footprint in Africa, a market with substantial potential for growth.

Consolidation has been an important recent theme in the wine business, too. Gallo’s scale after the Constellation Brands deal is quite incredible. And I think this trend will continue both in wine production and distribution. But the global wine is still quite fragmented compared with global beer.

What Can Wine Learn?

Beer has had to face a stagnant global market for longer than wine and has developed a number of strategies to expand volume or grow margins. Very large wine companies have learned the lessons of their beer industry colleagues and pursued similar approaches, but it is still early days for wine compared to beer.

Can beer provide insights for medium sized wine producers, of which there are many around the world? This is less clear simply because consolidation in the beer industry has hollowed out this market segment

Sparkling Wine Surprises from England to Bali

Many of our friends are surprised when we mention English sparkling wine and it is easy to understand why. England isn’t exactly best known for its sunny weather. When economist David Ricardo wanted to illustrate his famous Law of Comparative Advantage, he used the example of England importing wine from sunny Portugal in exchange for warm wool cloth. English wine exports? Who’d have believed it?

English Sparkling Wine is a Thing

And yet English wine is not just a thing, it is a popular thing. But it takes some time for the word to get out. I hosted a virtual wine event for a UK group earlier this year that featured a wine from Nyetimber, a winery that helped put English sparkling wine on the map. About half the participants were familiar with the wine while the other half were taken by surprise. Everyone enjoyed it.

Sue and I were recently invited to sample wines from a leading English producer, Chapel Down. Chapel Down, as the 2015 video above explains,  is one of the largest and best-known wine producers in the UK with an expanding network of vineyard holdings and plans to further increase production. The wines are now available in the U.S. market through retailers in several states and via on-line sellers, too.

We sampled two Chapel Down wines: a Rosé Brut blanc de noir made with 100 percent Pinot Noir grapes and a Brut NV made with the three standard Champagne grape varieties with the addition of 5 percent Pinot Blanc. We all agreed that the Rosé was a great aperitif wine while the Brut NV was better with our meal of tuna and grilled vegetables. Both wines were easy to drink and enjoy — welcome additions to the sparkling wine category.

Chapel Down’s wines and those of other English makers benefit from a combination of factors starting with the vineyard terroir, which bears a resemblance to the chalky soils of the Champagne region (what do you think those white cliffs of Dover are made of?). Climate change has benefited English vineyards, both by providing more favorable growing conditions generally and by enabling a shift to classic grape varieties including especially Chardonnay and Pinot Noir and away from “usual suspect” cool-climate varieties such as Bacchus, Muller-Thurgau, and Reichensteiner. Add ambitious investment and mix with professional winemaking knowledge and technology and you have world-class sparkling wines.

Bali Sparkling Wine is Also a Thing

Prosecco, as I noted in last week’s Wine Economist column, has re-defined the sparkling wine category. Bubbles are not just for special occasions any more and they don’t just come from France, either. There is a world of sparkling wine out there and Champagne producers had a hand in creating it. Did you know that French producer Chandon also makes traditional method sparkling wines in Argentina, Brazil, California, Australia, China, and India?

Sue and I have been saving a bottle of sparkling wine from Bali, Indonesia to share with our friend Janice, who carried it back from a South Pacific trip in the pre-covid days. Ascaro, made by Sababay Winery, is a “Prosecco-style” sparkling wine made from Pinot Grigio and Muscat Saint Valier,  a cross between Seyve Villard 12 and Muscat Hamburg, which is generally grown as a table grape but has been used successfully to make wine in Bali for more than two decades.

We shared the wine with Janice and it was fantastic. Fizzy, fruity but not sweet, nicely balanced, with enough complexity to make things interesting — it was everything you would want from a sparkling wine on a warm summer evening. It would stand out in any line-up of similar wines from around the world.

Sababay Winery is an interesting project as my former student Ali Hoover reported in a 2014 Wine Economist guest column. The mother-daughter team of Mulyati and Evy Gozali founded Sababay because they were concerned about the economic circumstances of grape farmers in North Bali. The local table grape market had boomed and then came the bust, which left the farmers with high debt. The Gozali family  offered to help the farmers get out from under their debts and move toward economic stability by creating a market for quality wine grapes, which promised to yield more value to the farmers than commodity table grapes.

The project has been a success, as the video below suggests and a distillery has been added to the project. I have a bottle of award-winning Saba grappa spirits waiting for the right occasion.  When that time comes we’ll toast the Gozali family or their grace and determination.

The sparkling wine category is full of surprises. Glad to see consumers embracing the diverse pleasures that this part of the wine wall offers.

Anatomy of the Prosecco DOC Boom

Prosecco sales have boomed in the last decade, with the volume of Prosecco DOC global sales more than doubling. And, with the advent of Prosecco Rosé, they promise to continue their upward trend.

Booming Sales in a Stagnant Market

Sue and I had an opportunity to reflect on Prosecco’s surging popularity recently when the Prosecco DOC consortio invited us to participate in an online tasting timed to celebrate National Prosecco Week. The program included a webinar hosted by Mike DeSimone and Jeff Jenssen (aka the World Wine Guys)  and a tasting of Prosecco DOC and Prosecco Rosé DOC wines from Ruggeri, Anna Spinato, Pitars, Domus Picta, and Zardetto. The program was fun and informative. Many thanks to everyone involved.

The Prosecco boom is impressive, even more so when you consider that global wine consumption has been stagnant during the period shown in the table above. About the only wine market segments that have shown sustained growth have been sparkling wines (especially Prosecco), Rosé wines, and Sauvignon Blanc from New Zealand. Almost all other segments have been relatively flat or down.

The obvious questions to ask are why Prosecco and why now, but the a better question might be what took consumers in the US, UK, and elsewhere so long to embrace Prosecco’s many charms?

I Blame Champagne

I blame Champagne. Champagne has defined the sparkling wine segment for decades as a luxury product, which for most consumers means something to be saved for a special occasion. Weddings, birthdays, anniversaries, graduations. These were the times to uncork Champagne.  The substantial niche for sparkling wines at other times was largely unfiled. Prosecco — less expensive and easy to like — filled that niche, powered by a general willingness of consumers to embrace anything and everything associated with Italy.

I like to say that Prosecco is the Mark Twain of sparkling wine. The works of the great authors, according to Mark Twain, are like fine wine. Mine, he said with a certain false modesty, are like water. Everyone drinks water. And now everyone drinks Prosecco, too, and it doesn’t take a Hallmark greeting card occasion to pop a cork.

You can make Prosecco as simple or as complicated as you like. A large majority of the wines are Prosecco DOC (and most of those are quaffable Extra Dry wines), which forms the base of the Prosecco pyramid. Enthusiasts can explore higher elevations: Prosecco DOCG, wines from the Rive (designated vineyard areas), and finally Prosecco from Cartizze, a legendary hilltop vineyard area.  A Prosecco Pyramid tasting  expedition is fun, informative, and doesn’t cost an arm and a leg. You should try it!

 

The Rise of Prosecco Rosé DOC

Have you seen the new pink Prosecco? Prosecco Rosé DOC came into the market with the 2020 vintage. It is a blend of Glera, the Prosecco grape variety, with up to 15% Pinot Noir. We have started to see the wines on local store shelves in the past month or so — I think some shipments were held up a bit by the logistics problems that plague international trade.

Pink sparkling wines from the Veneto are not a new thing, but the wines couldn’t be called Prosecco until the DOC rules were modified to allow this use. Prosecco Rosé is a DOC wine — the DOCG rules haven’t changed.

Will Prosecco Rosé be a hit? As you can see from the graphic above, the Prosecco producers expect sales to more than double between 2020 and 2021. Demand might in fact be even higher — there is actually a supply-side constraint until new plantings of Pinot Noir come into production.

Sue said that she’s not sure there really needs to be a pink Prosecco. The traditional wine — such as the delicious Anna Spinato Extra Dry DOC included in our samples — is plenty good enough. But she enjoyed the pink wines, especially the pale and well-balanced Zardetto Rosè  Prosecco Extra Dry,  All the Prosecco Rosè DOC wines benefit from an extra month on their lees, which gives them a richer mouth-feel.

Is Prosecco Rosè DOC the next big thing? Too soon to tell, but the wines we sampled make a good case for a pink Prosecco boom that’s an echo of the boom that’s already here.

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I enjoy drinking Prosecco so much that I’ve never thought about cooking with it. Until now. I was pleased to receive a book called The 100 Prosecco Recipes by Italian winemaker Sandro Bottega, which highlights both Prosecco and many of the indigenous food products of the Veneto. A beautiful volume, it has given me lots of new ideas.

There is one recipe in particular that I can’t wait to try once the summer heat wave has passed. It is a very different idea of risotto. You make a broth from water flavored with thyme and herbs. You cook the risotto in the usual way using the herb broth and  at the end, you mix in a bit of olive oil instead of butter and cheese.

Where does the Prosecco come in? At service! You pour a little Prosecco into a pool you have made in the risotto (and then, I think, you pour some more into yourself). It seems to me that this last-minute addition could be spectacular and set off the other flavors. Worth a try, don’t you think?  Many thanks to Bottega for the book and great ideas.

Scratching the Surface of Croatian Wine

We finally pulled the cork on that bottle of Croatian wine we’ve been saving. It was a Babić from Rak winery — a gift from Dr. Matt Horkey that we set aside to share with a particular Croatian-American friend and then, well, covid happened and lots of things, including this wine, were put on hold.

Croatian Wine Uncorked

The wine was terrific. Babić is a medium-bodied red wine with nice fruit and good balance and acidity, and a certain distinctive character. It matched up well with the sausages we served that night.

Babić is a common family name in Croatia, I’m told, but the wine less so both because Croatia produces more white than red and because another red grape, Plavac Mali, is more famous and readily available. The sources I consulted all talked about the potential of this wine when the vines are not over-cropped and the Rak wine we tasted makes a strong case. Croatia is blessed with dozens of indigenous grape varieties. Our first taste of this Croatian wine makes us thirsty to learn more about them.

Croatian Wine in Context

Croatian wines have yet to make a big dent in the U.S. wine market. A search of Total Wine’s national online inventory turned up just 9 wines in total including two Plavac Mali and a cheery cherry wine, which I think  we found at a local store a few years ago and enjoyed.

When Croatian wine comes up in conversation it is often in an unusual context. The famous California winemaker Mike Grgich, for example, was born in Croatia and many fans of his  Napa wines know that he has established a winery called Grgić Vina in his native region of Croatia.

Croatian wine also comes up in discussions of international economic relations. You probably know how protective some European regions are about their appellation designations. Don’t even think about calling your local sparkling wine a Champagne, for example. It’s a big deal because that designation is very valuable.

Prosecco is a valuable name, too, and Prosecco producers are doing their best to keep others from using it. Australia and the European Union, for example, have had fairly high-level discussions about the fact that the sparkling wines the Aussies make in the King Valley are called Prosecco. The Italians object on both principle and economic interest, as you might expect.

They have also objected to the name of a Croatian dessert wine called Prošek. It isn’t hard to tell the wines apart. Prosecco is light and sparkling, produced in vast quantities for a global market. Prošek, made from dried grapes, is sweet with a tiny total output.  The similarity in names has been a sticking point in relations between Italy and Croatia before and, as The Guardian reported last month, has become an issue once again.

Croatian Wine Touring Guides

The idea of visiting Croatia and exploring the wines in person at some point is very appealing and I already have two guide books to help me navigate the complicated wine scene. The first, which we reviewed back  in 2017, is Crackling Croatian Wine: a Visitor-Friendly Guide by Dr Matthew Horkey and Charine Tan, written as part of their Exotic Wine Travel collection.

The  second book, which was published just a few months ago, is Croatian Wine: Regions, Grapes, and History by Greg Viola. Viola is a U.S. Foreign Service Office who obviously used his time assigned to the Croatian embassy to learn as much as he could about the country and its wine scene.

First glance at these two slender paperbacks (or handy e-books) suggests that they cover much the same territory: regions, grape varieties, wineries, and so forth. Both provide tips for wine tourism in Croatia, which was a growing activity before the pandemic and is sure to return as travel opportunities re-emerge.

Having spent a little time with the books, however, I’ve come to think of them as complements, not substitutes. The authors may write about many of the same topics, but they come to Croatia from different places and look for (and see) different things.

Viola admits that he’s not a expert wine taster, for example, so his tasting notes aren’t quite as rich as those of Horkey and Tan, who have served on professional tasting juries and offer more information about particular wines and winemakers.

On the other hand, Viola provides a really strong sense of place and seems particular good at giving the local knowledge that wine tourists typically crave.  When we read Viola’s description of Brac to our friend he said “that’s it!” That’s where his family came from. There are lots of travel tips and I admit that my favorite appears in an endnote, where he advises that the island of Vis, like most of the Croatian islands,  is free of the roughly 31,000 unexploded landmines left over from the Homeland War. Good to know.

Both books are well written and interesting and, together, are offer a fun and informative introduction to Croatian wine and wine tourism. A good place to begin if, like me, you want to scratch the surface of Croatian wine.

What Can Wine Learn from the Cruise Ship Industry?

Here is a “flashback” column from pre-covid 2017 that asks what wine can learn from the cruise ship industry? That’s an  unexpected question but, as you will see below, I think there are some potential insights.

What does wine have in common with cruise ships? As we have seen, both on-premise wine sales and cruise ship revenues have been badly affected by pandemic restrictions. But there is more to it than that. Package tours are a bit like the “mystery box” wine promotions that I wrote about in May 2021.  Mystery boxes are popular in China these days because they allow wine companies to sell off surplus products without cutting individual product prices in a way that can undermine brand positioning. Very clever, don’t you think?

Cruise packages and proprietary wine clubs (like those sponsored by the New York Times and Wall Street Journal, for example), have more in common than you might think and provide potential insights into the psychology and economics of wine consumer behavior. Enjoy!

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I keep finding cruise brochures folded into the weekend newspapers that arrive here at Wine Economist world headquarters. Ads of various sorts for wine clubs associated with those same papers show up frequently, too. That got me thinking, which is usually a mistake. What do ocean or river cruises and those wine clubs have in common? Intrigued? Read on.

They come in the mail and stuffed in weekend papers — brochures for ocean and river cruises and barge-and-bike tours. It is hard to resist the temptation to thumb through them and imagine visiting all these far-away places. You’ve done it, haven’t you?

Thousands and thousands of full-color printed brochures — this seems like a pretty expensive way to solicit customers. There must be something about having those pages and pictures in your hands that is especially important. Or maybe it is that the demographic that still reads a physical weekend paper and can afford to pay for it is a juicy target.

Experience Deficit Disorder

Several things about the tours strike me as important and relevant to wine. The first is that tours are “experience goods” — you cannot really know if you will like river touring, for example, until you actually try it. And then, if your experience is a good one, the odds of a second trip go way up (and the cost of customer acquisition way down).

The most important thing in marketing an experience good is to get people to try it the first time. The cruise industry seems to be good at this, so perhaps there is something to be learned by studying their strategies.

Wine is obviously also an experience good. Hard to know if you will enjoy a wine (or how much) before you pay the bill and open the bottle. If you like it, you are likely to come back for more. No wonder winemakers go to so much effort and expense to hold tastings of their wines.

The Olive Garden restaurant chain has a very successful wine program that is built around their practice of offering free tastes (as allowed by local law). One taste makes a customer more often than not.

Those colorful cruise brochures and television videos (think  PBS’s “Masterpiece Theater” sponsorship) try do the same — they give potential customers a “taste” of what cruise life is like. But for the most part neither wine now cruise ships can entirely overcome the obvious experience deficit disorder. So they need a strategy around it to give buyers confidence to take the plunge.

A Little of What You Fancy

Since cruise lines and independent “professionally curated” wine clubs of the sort that are often associated with newspapers and airline mileage programs cannot give all their potential customers actual samples of their products, they both seem to sell the glamour and exotic nature of the experience and hedge their bets in an interesting way.

Cruise tours seldom spend more than a few hours in any single port of call. If you love today’s stop, you can always come return on your own, but if you find you hate Venice (is this even possible?), don’t worry. You’ll be back on the boat and headed for another destination before you know it.

Some of the wine clubs that advertise in the weekend papers seem to work in the same way. Don’t worry about getting a case or even a six-pack of a particular wine you don’t like. Each case has at least six and sometimes twelve different wines. Don’t like this wine — don’t worry, because it is gone just like that. But you can order more of anything you fall in love with.

The fact that the details of the experience — the particular wines, the particular travel route — are made by experts, not the buyer, seems important, too. You buy the package and leave the rest to the experts. The modest commitment comes with relatively modest effort and emotional investment.

The low commitment strategy doesn’t appeal to everyone among either tourists or wine buyers, but its persistence in both spaces suggests that there is a market for it. Especially when there is a big discount involved.

Affordable Luxury

Nice wine and ocean and river cruises are luxuries from an economic point of view. No one has to buy them and there are always cheaper alternatives. The trick to getting the weekend newspaper-reading public to try them seems to be to make them simultaneously very luxurious and a tremendous bargain.

Thus the cruise lines advertise stratospheric rack rates for their services, which are then deeply discounted. The “full brochure fare” for the cheapest stateroom on a 10-day Mediterranean cruise in the flyer that arrived a few weeks ago is $9,999 (including economy airfare from certain gateway US airports). Wow, that’s a lot of money. Must be quite a cruise.

But wait, if you act now this wonderful experience can be yours for just $2,999 (airfare included) or $1,999 if you book your own flight. Lifestyles of the rich and famous at a fraction of the list price. Who can resist?

For the record the full brochure price of the most expensive cabin for this 10-day cruise is … wait for it … $33,998! But your price is just $14,999 or $13,999 if you pay your own airfare. Needless to say, this top-of-the-line listing makes the $2,999 of that bottom-tier inside stateroom seem an even better deal than before. Or maybe you would like to upgrade to the $4,599 veranda stateroom?

Wine club ads (and most supermarkets) adopt a similar strategies. Wine club ads seem to stress both the high retail value of the wines and the low low price that you will pay. Sometimes the introductory offer prices are so low that they must be intended solely to entice buyers into the first “experience” purchase, counting on repeat order for profits.

Foot in the Door?

I don’t see anything wrong with how cruise lines and wine clubs market their services. If this low-commitment affordable luxury strategy is successful in introducing people to wine and travel — and if they enjoy themselves — then that’s a plus.

Remember this. Most consumers don’t drink wine (here in the U.S. about 40% of adults don’t consume any alcohol at all). And most of those who do drink wine do it only a couple of times each month. There is much work to be done to introduce these consumers to the pleasures of wine and if thinking about wine as if it were a luxury river cruise can help, I am all for it.

The point of this that sometimes those of us in the wine space think that wine is so special that we fail to see how it relates to other products and experiences. It’s a good idea to pay attention to how other  experience goods present themselves to consumers and to note how those consumers react.