The Big Squeeze: Stagflation and Shrinking Wine Margins

Sue and I are in Santa Rosa this week where I will be speaking to a meeting of Allied Grape Growers, a 500-member grape grower marketing association that sells more than $100 million worth of grapes each year. I am looking forward to learning as much as I can from the growers about what they are seeing in the grape markets today and how they plan to react.

Optimists and Pessimists

There are two schools of thought about what is happening to the economy, both here in the US and around the world. One school holds that we will soon face the most serious case of stagflation — inflation with slow or no growth– that we’ve seen in 40 years. These are the optimists!

The opposing school — call them pessimists or realists — holds that stagflation is already here (have you seen some corporate earnings reports?) but maybe we just don’t fully appreciate it yet. And it will get worse before it gets better.

Either way the near future promises to present challenges to everyone in the wine product chain with costs rising, consumer budgets getting squeezed, and a strong dollar disrupting international trade flows.

Waiting for Wine Prices to Rise

So far wine prices have not risen as fast as consumer prices generally, which have been up more than 8% on an annual basis in recent months. Wine prices (and beer prices, too) have risen less than half that, which means they have fallen in real (inflation adjusted) terms.

A recent Wine Economist column tried to think through what might happen (and why) if wine prices do eventually start to increase. But I am having real doubts that this will happen generally. Some wineries and retailers are likely to be able to raise price, but I am not so sure about the broader market.

The “Stag” in Stagflation

Why? Well, because this isn’t inflation that we are looking at, it is stagflation and distressed consumers (and the retailers who market to them) are likely to push back against price increases even more firmly than in the past. Yes, I know that premiumization has been one of the big trends on recently years, but premiumization is about buyers moving up to higher priced products, not paying more for the stuff they already buy. Rising wine prices? They still hate that.

Big box retailers like Walmart and Target are already feeling the squeeze as costs rise but prices don’t or don’t as much. Some reports suggest they are trying to protect margins by shifting even more to private label brands, for example. In any case the push back seems to be as strong as the cost push itself in many cases.

Retailers are feeling the squeeze. Will wine margins experience a big squeeze, too? That’s what I suggested in a presentation to the Wine Industry Leadership Conference. earlier this year and, with the ability to raise price in even more in question today, it seems to be a likely scenario.

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Here is a link to my presentation on “The Big Squeeze” on wine margins at the Wine Industry Leadership Conference in February 2022. My presentation begins at about minute 38 in the video.

 

Flashback: What’s Up with Italian Wine in the U.S. Market?

Sue and I have just returned from a very quick trip to Italy to explore the wines of Abruzzo, a region that, as I wrote on this page a few weeks ago, doesn’t get the attention it deserves either in the wine world or more generally. This is changing and our multi-part report, which you will find here in a few weeks, will explain how and why.

In the meantime, here is an abridged “flashback” column from 2019 that examines some of the challenges and opportunities that the regional wines of Italy faced then and, to a considerable degree, face today.

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Wine Economist (November 19, 2019). Italian wine has a lot going for it in the U.S. market. Wines from Italy are by far the largest category of imported wines. Recent Nielsen figures (reported in Wine Business Monthly) show almost $1.2 billion in 52-week sales of Italian wines in the channels that Nielsen surveys — that is almost a third of all spending on wine imports and far more than #2 Australia ($720 million) and #3 New Zealand  ($496 million). France is #4 at $462 million.

Italy has benefited from the hot market for sparkling wines in general and Prosecco in particular. …

It would be a mistake to take these advantages for granted and the Italians are working hard to consolidate their market base and move forward. Or at least that’s what we think after attending the Seattle stop on the “Simply Italian Great Wines US Tour 2019.” We spent the day attending seminars sponsored by the European Union and wine region groups and meeting producers (many of whom were seeking local distribution) at a walk-around tasting.

[Two favorites from the walk-around tasting were Societa Agricola Sturm from Collio — fantastic Ribolla Gialla — and Cannonau di Sardegna from Sardina’s Cantina Giampietro Puggioni.]

Out of the Shadow

The Seattle event reminded us of how much we love the wines of Italy. But it also highlighted some of the challenges that Italy faces.

Italy is a complex mosaic of wine regions, styles, and brands. Although an amazing array of Italian wines can be found in the U.S. market, there are a few names that dominate the conversation: Chianti, for example, and Prosecco. It is easy for other wines from other regions to be over-shadowed. Sue and I saw the shadow effect when we stopped at a nearby Total Wine, which has a big selection of Italian wines. We were looking for wines from Friuli and we found just a hand-full  — mainly Pinot Grigio. The big regions crowd out the smaller ones on store shelves.

This is the challenge facing Vino Nobile di Montepulciano DOCG, for example.  Vino Nobile is a small and distinctive appellation located about 65 km south-east of Siena. The four wines we tasted at the seminar were terrific and made me think about this region as a sort of Tuscan Stags Leap District — one of my favorite U.S. wine appellations.

But excellent wines are not necessarily enough when you need to compete with famous Chianti Classico. You need to get glasses in consumer hands and give the wine and region a distinct identity. Tourism (and not simply wine tourism) is one way to do this. Come for the history, food, and culture and learn about the wonderful wines. This seems to be part of Vino Nobile’s strategy to get out from under the shadow of its more famous neighbor and to tell a distinctive story about the region and the wines.

Italians love to drink sparkling wines and they make some terrific ones. And although my friends in Conegliano hate to hear me say it, it is a shame that the only Italian sparkler that most Americans can name is Prosecco.

I wish they’d give more attention to Francicorta DOCG, which faces a similar challenge to Vino Nobile. Franciacorta is often said to be the “Champagne” of Italy. It is made using the classic method from mainly but not exclusively the traditional Chardonnay and Pinot Noir grapes . The comparison to Champagne is understandable and the wines stand up well compared to their French cousins.

But it is not always helpful to think of Franciacorta this way because if you want Champagne you want Champagne and not necessarily something else. Franciacorta needs to more clearly develop a distinctly Italian identity that positions it apart from French wines and also Prosecco. The two Franciacorta DOCG wines were tasted were delicious — and I don’t think the skilled presenter ever called them Italy’s Champagne. I know producers are working hard to build their market category because the current interest in sparkling wines presents a great opportunity.

A Grape or a Region?

One of the sessions focused on DOC Pinot Grigo delle Venezie. Pinot Grigio is one of white wine’s big success stories in the U.S. market. Pinot Grigio/Pinot Gris is the second largest selling white wine category in the U.S. market, according to Nielsen figures, far behind #1 Chardonnay but well ahead of #3 Sauvignon Blanc.

Some of the Italians I have met like to imagine that all the Pinot Grigio sold in the U.S. comes from Italy — and Italy might have dominated this category a few years ago — but now Pinot Grigio is grown just about everywhere. I made risotto a few nights ago with a nice little Pinot Grigio from Washington state. That is the problem with the “signature wine grape variety” strategy. The category may start associated with a particular place, but often the place fades and it is just about the grape and then it is anyone’s game.

Italian producers hope to stake a territorial claim to the Pinot Grigio market with DOC Pinot Grigio delle Venezie — Pinot Grigio from a specific region subject to DOC rules and regulations. The consorzio logo above is meant to establish the identity. Italy first — can you miss the green-white-red stripes? And then Venice and Venezie as symbolized by the stylized prow of a Venetian gondola. Italy, Venice, Gondolas. Get it? That’s Pinot Grigio.

It is easy to be a little skeptical about the effort to re-brand Pinot Grigio this way since Americans generally know little about DOC and DOCG designations, but in this case there is reason for cautious optimism because many of the DOC Pinot Grigio wines have big marketing and distribution muscle behind them. The list of wines that were tasted in Seattle, for example, includes DOC wines from Lumina by Ruffino (Constellation Brands), Prophecy by Cantine di Mezzacorona (Gallo), Montresor (Total Wine & More), and Cupcake (The Wine Group).

Pinot Grigio won’t stop being a grape variety that could come from anywhere, but with some effort it can  also be a regional wine of Italy once again.

Italian wine makers are luckier than most. They face challenges, some of which are the product of their own success, but there is a tremendous reservoir of good will and affection for Italy and its wines.  The struggle for market attention is therefore not easy but still possible.  The Seattle event has inspired us to look more closely at the Italian wine mosaic and to try to appreciate a bit more its many shapes, colors, and styles.

Italy Strikes Back: Wine Diversity in Theory and Practice

In theory wine is an enormously diverse product. There are hundreds and hundreds of wine grape varieties grown all around the world. You could drink a different kind or style of wine from a different place every night of the year and not more than scratch the surface. What fun!

Disappearing Diversity

In practice, however, wine as it is actually experienced often ends up being far less interesting than it could be. Global vineyards are increasingly planted to just a couple of dozen grape varieties out of the roughly 1500 available, for example. A handful of “international” wine grape varieties make up an increasing proportion of the global vineyard area, squeezing out space for other grape varieties.

As Kym Anderson and team note in their excellent Which Wine Grape Varieties Are Grown Where?

The extent of varietal concentration in the world’s vineyard has increased non-trivially between 2000 and 2016. Half the world’s plantings were accounted for by 21 varieties in 2000 but, by 2010, that total had dropped to 15 varieties and it rose only by one, to 16, in 2016.  …

Other ways to explore the varietal diversity issue involve examining how internationalized varieties have become. One way is to look at what share of the global area is devoted to varieties by their country of origin. In 2000, French and Spanish varieties dominated the global landscape, accounting for almost three-fifths of the world’s winegrape vineyard area, with Italian varieties boosting that share to 70%. By 2016 that share had risen slightly to 72%, but France now dominates much more at the expense of Spain

You see the loss in diversity almost everywhere if you look for it. In the Napa Valley, for example, historically significant Zinfandel is replaced by Cabernet Sauvignon. Tempranillo is taking over Spanish vineyards in the same way. This trend is not always a bad thing, it must be said, because sometimes the vanishing grapes were grown for their high yields not good quality. But it isn’t always a good thing either.

As distributors have consolidated in response to the covid pandemic and now the prospect of stagflation’s unwelcome return, they have also tended to focus on a smaller selection of wine products. And, as I argued here a few weeks ago, some consumers are likely to react to stagflation’s impacts through “risk management” strategies that focus on a few trusted wine brands or types with fewer experimental purchases.

The Case of Sauvignon Blanc

Have wine styles (not just the grape varieties) become less diverse, too? This is an economics newsletter, not a tasting report, so I will ask you to think about this question and answer it yourself. It does seem to me that at least some of the diversity in regional and personal styles has disappeared (with the rise of natural wine being the obvious counter-point).  And I am not  just talking about “Parkerization.”

It used to be that Marlborough Sauvignon Blanc stood out as a really distinctive wine, for example. Nothing else really like it. I remember when Sue and I were visiting Norcia, Italy about 20 years ago when the first few bottles of Kiwi Sauvignon Blanc came to town. Our local friends were very excited — this was something completely new to them.

Now, however, when we taste Sauvignon Blanc wines from around the world, we often find products made in the Kiwi style. Lately we have been surprised when we taste something different, something with a sense of itself. They say that imitation is the sincerest form of flattery, so I guess the Marlborough producers should be flattered, indeed.

Support Your Local Grape

All of this is a way of saying that if we value wine’s diversity we need to seek out and support producers who make it their business to fill in the gaps between the big-name international grape varieties and wines. The niches may not be large in market terms, but they can be important. And valuable in the long run, as well. It was not so long ago, for example, that Touriga National seemed to be fading away in Portugal.  Now, of course, it is the basis of many excellent wines.

Italy is a place to look if you want to see wine’s diverse mosaic (see Ian D’Agata’s book, Native Wine Grapes of Italy. for details) and two wines that we recently received as samples from dynamic Piemonte producer Colle Manora provide food for thought The first was the Colle Manora “Ray,” made from 100% Albarossa, a grape variety I’ve never tasted before. The second was the Colle Manora “Palo Alto,” 100% Pinot Nero (Pinot Noir). Pinot Noir from the land of Nebbiolo?

First Taste of Albarossa

The “Ray” Albarossa caught my attention right away. Albarossa? Well, it is a little-known and relatively rare Piemonte grape variety — the result of a cross between Barbera and Nebbiolo from the same experimental vineyard in Conegliano that produced the important Mansoni Blanc variety. Barbera — Piemonte’s most productive grape variety — crossed with noble Nebbiolo. You can see the attraction. Wine Grapes reports that there were only about 25 acres of Albarossa in Italy (and the world) in 2000 — a figure that has probably grown but is still tiny by any standard.

But there is a twist. The Nebbiolo in question was Nebbiolo di Dronero, a.k.a. Chatus,  Chatus? Another grape variety to add to the list. In any case the cross was a good one. Ian D’Agata calls Albarossa “one of Italy’s most successful crossings ever.”

We paired the wine with asparagus risotto with prosciutto and the acidity, herbs, and spices of this medium-bodied wine worked very well. A success and something I will look for on future trips to the Italian northwest.

And Now for Something Completely Different

As much as we enjoyed the “Ray” Albarossa, I have to say the Pinot Nero was the big surprise. Tasting this wine from a familiar international grape variety I sensed what our Norcia friends must have felt when they sipped their first glass of Marlborough Sauvignon Bland. Pinot Noir? This wine didn’t have any of the subtle nuances that made Miles wax all poetic in Sideways. This Pinot Noir was big and bold. And different in an interesting way. If I had tasted it blind I might have guessed a Syrah — Sue said she would have guessed  Merlot perhaps.

But of course it wasn’t Merlot or Syrah, it was a really different vision of Pinot Noir that made me think and re-think. I’ll bet it would be interesting with a few years of bottle age. But I couldn’t wait to pull the cork.

Life is Too Short …

Pinot from Piemonte? Pinot is grown in this region but is most often a blending grape according to my notes. But Pinot Noir has a tendency to inspire winemaker devotion, even in the “wrong” places. When Sue and I visited Braida, the famous Piemonte producer, we learned that Pinot is Giuseppe Bologna’s passion, too, and enjoyed the unique experimental barrel samples he provided.

I still haven’t tasted what is probably the most extreme Pinot Noir, at least from the standpoint of location. I’m talking about Il Masin, the Pinot Noir that the famous paleoanthropologist Richard Leakey made on from grapes grown on his hillside vineyards in … Keyna!

But I am determined to keep trying wines that celebrate the diverse potential of the grape. Life is too short to drink boring wine, don’t you think?

Flashback: Spanish Wine Challenges & Opportunities

I am in virtual Madrid today to talk about the changing global wine market on a program that also includes OIV director general Pau Roca and Dorian Tang of ASC Fine Wine in China. Zoom brings the three of us together from across the global wine map to talk with our on-line audience in Spain, Portugal, and many other places.

Preparing for this talk got me thinking about the lessons I took away from a trip to Spain five years ago for an in-person wine industry meeting in Valladolid. I think the message is still relevant, so I reprint it here in a “flashback” column.

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Wine Economist (April 25, 2017). Sketches of Spain is the title of the 1960 Miles Davis/Gil Evans album that deftly walks the line between classical and jazz genres, with Davis’s virtuosity shining throughout.

Sue and I have recently returned from a visit to Spain, where I spoke at the General Assembly of the Spanish Wine Federation (Federación Española del Vino or FEV), so Spain and Spanish wine are on my mind and I have been puzzling over how to write about our experiences and all that we learned. Such a big country! So many impressions! The Miles Davis album solved the puzzle.

Davis and Evans gave us a few powerful sketches of Spain and its music, not a detailed musical portrait, which would be impossible in the context of a ’60s-era 33-rpm vinyl recording. A perfect choice! In this and the next several weekly columns I will try to provide sketches of the Spanish wine industry, which I hope you will find useful, leaving a more detailed portrait for another time and place.

Sketch 1: The Spanish Wine Supertanker

They say that it is not easy to turn around a big ship because of all the momentum it has to continue on its path and this might be a good metaphor for Spain. Spain is certainly big when it comes to wine. Spain has the largest area of vineyards of any country in the world and is the third largest wine-producing nation (after Italy and France). Spain produces nearly 70 percent more wine by volume than the United States, which is number four in the global wine table.

The Spanish wine industry has devoted enormous effort to changing wine market direction, investing in more productive vineyards planted to grape varieties like Tempranillo that are more attractive to global wine buyers, and in new or updated production facilities.

The wineries we visited have made the transition and are now sailing in the right direction. As I said to the General Assembly audience, it seems to me that Spain has all the pieces in place to succeed in the new global wine market environment that has emerged, where value matters much more than sheer volume. I am an optimist about Spanish wine. But I am also a realist …

Sketch 2: Breaking the Glass CeilingFEV2

Improving Spanish wine is one thing (a good thing!), but achieving greater success in the global market is another because of reputational momentum.  Spain’s wine reputation has not caught up with its reality in many markets. Citing data from a Nielsen Company survey of U.S. on-premises wine drinkers (thanks to Danny Brager for his help), I noted that Spain was stuck under a “glass ceiling” in terms of consumer perception.

Italy and France — these are the countries that American diners think of first when they consider imported wines. Spain, despite its status as the third largest producer, ranks far below with perception roughly on a par with Australia, Argentina, and Chile and only a bit above tiny New Zealand, which is number 14 on the world wine production table, lodged between Romania and Hungary.

Spanish producers would love to break through the glass ceiling to achieve market status of Italy and France, but — let’s face it — everyone wants to do that.

A more interesting question for Spain, I proposed, is why it does not rank higher above Argentina, Chile, and New Zealand. Do they make more wine than Spain? Better wine? Do they have better generic market promotion programs? The answer is no in each case. What do these much smaller countries have that Spain does not that allows them to punch so far above their weight? This got my audience thinking, which is always my intent.

Sketch 3: Spain at the Crossroads

Hard thinking is necessary because Spain’s wine industry is at a cross roads of sorts. A graph of domestic vs export sales of Spanish wine shows that an important line has been crossed. Domestic wine consumption continues to fall in Spain as in other Old World producer countries. The opponent is not so much France and Italy as spirits and beer and changing consumer habits generally.

Wine exports are rising and now exceed domestic sales. This is important since the industry would be in crisis if exports did not replace lost domestic purchases, but that doesn’t mean that slowly losing your most biggest market is not a cause for concern. It was rare for us to meet a wine producer in Spain who had as much as 50 percent domestic sales.

Global markets are congested and competition for high value sales will only increase when Brexit’s full impacts are finally felt.  Reversing the decline of the domestic wine market is Spain’s next big challenge.

Fortunately, I think there is an realistic opportunity for domestic wine sales growth. Spain was hit very hard by the global financial crisis and the austerity policies that followed in Europe. Only now, ten years after the crisis, is Spain’s gross domestic product approaching its pre-crisis level. A lost decade! No wonder exports have been the focus.

But growth has picked up in the Spanish economy and optimism is in the air, something Sue and I could feel on the streets of big cities and small towns alike. Beer is a tough opponent, but perhaps this is Spanish wine’s moment at home as well as abroad! More to follow in the weeks ahead.

Thank You Notes

Sue and I would like to send out big “thank you” notes to Pau, Susana, José Luis, and Eduardo and everyone else at FEV and to all the people we met at the General Assembly in Valladolid.

FEV organized a series of winery visits for us in the two weeks following the General Assembly (I will report on this fieldwork in future columns) and we would like to thank everyone who took the time to meet with us and share their stories. Here is a list of the wineries we visited:

Wine, Stagflation, and the Strong Dollar Syndrome

The U.S. dollar has surged in value on foreign exchange markets in the last year and especially the last few weeks, as this graph of the dollar versus the euro makes clear. It once took about $1.30 to purchase a euro, but some analysts believe that USD-EUR parity — a dollar per euro — is on the cards for later this year.

The story differs country-by-country, but the overall trend is clear. Just as in the 1980s, when the Federal Reserve tightened monetary policy to fight inflation, the dollar has soared on foreign exchange markets. Exchange rate movements are not generally either good or bad, they create winners and losers like any other change in price. But a sustained spike in the U.S. dollar can be a global problem. The strong dollar of the early 1980s created a global crisis that came to an end through the Plaza Accord, an international agreement to re-align exchange rates.

I don’t think the strong dollar syndrome will go away soon because, as I explain below, it is very useful to U.S. policymakers just now. It is too soon to know how this strong dollar episode will end, but not too soon to think about the implications in light of the 1980s experience, with special emphasis on the wine industry. Herewith three factors to consider.

Trade, the Dollar, and Wine

The conventional wisdom is that a strong currency encourages a country to import and discourages exports because each dollar (in this case) buys more foreign currency, and it takes more euro (for example) to buy a dollar. So it would seem like the super-strong dollar, by encouraging imports and discouraging exports,  would be counter-productive if you are interested in jump-starting growth. But there are other factors to consider (see next point below) and these are unusual circumstances.

International trade is all fouled up with logistics costs and bottlenecks, for one thing, and the pattern of trade in many commodities is distorted by covid closures in China and commodity trading shifts due to the Russia-Ukraine war. In other words, a strong dollar may have less impact on trade today than in other situations.

This is true in the wine trade as well. The strong dollar may push wine import prices down, but logistics issues and the impact of some protectionism policies pushes in the other direct. The exchange rate still matters a lot in the international wine trade, but other factors are more important right now. The dollar’s impact will be felt, however, if the strong dollar can be sustained (as it was in the 1980s).

Inflation, the Dollar, and Wine

The reason why the strong dollar is suddenly a stealth national economic policy is inflation. By making imports cheaper, a strong dollar puts a limit on the ability of domestic firms to raise prices. It is harder to raise the price for generic California wine if the price of imports is stable or declining. This is one factor (not the only one) that has kept U.S. wine prices from rising along with the overall inflation rate.

The strong dollar also makes imported production inputs cheaper for U.S. firms, a significant advantage in the global product chain.

For the Federal Reserve, a strong dollar means that they can be less aggressive in their domestic contractionary policies designed to squeeze inflation out of the economy. The dollar, by putting a limit on price increases through foreign competition, will do some of the dirty work for them.

Unintended Consequences

But not everyone will be happy with this situation. Our trading partners will be justified in their belief that the U.S. is exporting some of its inflation to them though higher prices for imports from the U.S. and other commodities that are priced in dollars rather than local currency. Their domestic firms will find it easier rather than harder to raise prices with the cost of imports rising, too.

There are also international debt issues to consider since many countries borrow (and must repay) in dollars. An increase in the dollar’s value can have more impact on debt servicing costs than a rise in interest rates, for example.

As a result of these unintended consequences there is now talk of a sort of inverted currency war. Usually currencies wars take the form of competitive devaluations, as everyone tries to have the cheapest currency to encourage exports.

Now, however, several factors but especially inflation is causing policy-makers to re-think this strategy and consider a sort of arms race to increase currency values. The instability that results from such a situation can be serious and lead to conflict, which is what produced the Plaza Accord in 1985.

And in the Long Run …

So the direct effects of the strong dollar syndrome are worth your consideration, but the indirect effects — the inflation lid, the international currency war, a potential debt crisis, etc. — are perhaps even more important.

In the long run, however, the impact on the U.S. wine industry is likely to be more severe both through the direct effects on input and domestic labor cost factors and through the classic Econ 101 impacts once the logistics issues have time to settle out.

But there is one more long term factor to take into account. As the Plaza Accord demonstrated, a very strong dollar is not sustainable from a global financial standpoint. When the market turns it is likely to be sudden. A soft landing can change abruptly. Buckle up.

Wine & Stagflation: What Will Happen When Wine Prices Rise?

The conventional wisdom is that we are likely entering the first significant period of stagflation — inflation + stagnant economic growth — in several decades.  We have experienced recessions in the recent past, but not rising inflation, and not the two of them at once.

Inflation is in the headlines every day, but unemployment is very low — so why worry about slow growth or a recession? The answer is that while Federal Reserve policies will try to finesse the situation and bring inflation down to a “soft landing,” most observers think that a sharp contraction will be necessary to bring inflationary expectations down. Growth will fall while inflation still runs high, at least for a while.

So, these are uncharted waters for business and government leaders, especially since it comes on the heels of the covid crisis, which has shaken so many economic and social structures. It is, as I have argued here, uncharted territory for the wine business, too.

So far, as I suggest in last week’s Wine Economist newsletter, wine prices overall have not risen to the degree you might expect given the many cost pressures the industry confronts. Average wine prices seem to have actually fallen in real terms so far according to the data I have surveyed.

It may be premature to begin worrying about how wine consumers will react to higher prices in the stagflation context if and when they arrive.  Or — and this is my point — it might be strategic to consider possible scenarios in order to prepare for the eventuality. Because this is uncharted territory — and because, as Jon Fredrikson says, there are no one-liners in wine — it makes sense to consider the range of consumers responses rather than to look for a single silver bullet answer.

Herewith, therefore, a brief and incomplete list of possible consumer responses to rising wine prices in the context of stagflation.

Econ 101: substitution, income, and wealth effects. 

We begin with Econ 101 basics. An increase in the relative price of wine would create a substitution effect to some extent. It might be to substitute other beverage alcohol products for wine or — the trading down effect — to substitute less expensive types of wine for previous purchases.  How this plays out depends on a number of factors. Younger drinkers, for example, are known to be less loyal to wine and more prone to dividing their purchases among many beverage types, so the substitution effect may be stronger for them than for boomers, for example.

Of these three effects the substitution effect is the most interesting to me because we don’t have much recent experience of supply-driven price increases in wine (versus demand-driven “premiumization”.

The income effect, driven by both higher wine prices and higher prices in general, points towards lower consumption of wine overall. Wine is already more expensive than most beer and spirits on a per-serving basis, and so vulnerable to income-driven consumption adjustments.

There is also likely to be a wealth effect, with wine consumption falling as consumers (mainly but not exclusively boomers) re-assessing buying decisions in light of changing net worth. Rising interest rates implemented to fight the inflation tend to reduce the value of bond holdings directly and equity values indirectly through their impact of the present value of corporate cash flows. Substantial interest rate rises are likely to affect portfolio balances and 401k holdings. If you have been watching the way that equity markets have reacted to the Federal Reserve’s initial 1/2 percent interest rate increase you know what I am talking about.

Stalking the Illusive Wine Bargain

In a perfectly competitive market the “Law of One Price” rules, but the wine market has many quirks and peculiarities, so similar products can sell for very different prices. Rising wine prices are likely to push price-sensitive buyers to even more aggressive bargain hunting efforts. Expect your local Grocery Outlet store to do even more wine business.

But bargain hunting doesn’t necessarily mean searching for rock bottom prices. We recently received samples of two wines that represent good value in their respective categories. The pitch that came with the wines was that these are inflation-fighters. The first wine was Villa Maria Marlborough Pinot Noir Private Bin, which retails for about $19.00. It is an excellent wine that sells for less that many comparable products from, say, Oregon or France.

The second wine was Le Volte dell’Ornellaia, a “Super-Tuscan” from the Bolgheri region that, at around $29, represents a way for many consumers to raise a glass in high style without breaking the bank. How do you find inflation-fighter wines like these? Start by asking whoever sells you wine to solve a puzzle — I’d like a wine like this, but I want to pay something more like that. A good wine seller will appreciate the challenge.

Risk Management

Buying wine is not easy because it is what economists call an “experience good.” You won’t really know if you will like a particular bottle of wine until you buy it and pour yourself a glass.  Reviews and so forth help, of course, but the taste of wine is ultimately very subjective and the risk of disappointment almost inevitable.

As inflation pushes wine prices higher, the disappointment risk becomes more of an issue. One strategy that consumers are likely to adopt in this circumstance is to concentrate their purchases on a few tried-and-true brands or grape varieties that they trust to consistently please. Trying new wines from different regions and brands made from different grape varieties is great fun, but the high reward when you find an exceptionally pleasing wine comes with high risk of disappointment.

So don’t be surprised if consumers — and the stores and shops who sell them wine — react to wine inflation by doubling down on tried-and-true wines. This reinforces a trend that emerged during the pandemic wine surge.

But don’t forget that all this is predicated on wine prices finally rising as fast or faster than the general inflation rates. This hasn’t happened yet … and it might not happen at all. Stay tuned.

Wine and Inflation: Will the Rising Tide Lift Wine’s Boat?

The U.S. is experiencing the highest inflation rates since the 1980s and cost-of-living increases are on everyone’s mind here and around the world. The Federal Reserve has signaled that it will speed up monetary tightening to try to reverse rising inflationary expectations — too little and too late, according to   the Economist newspaper (The Federal Reserve Has Made a Historic Mistake on Inflation).

I am very concerned about how higher inflation will impact the wine industry, especially when combined with a stagnant overall economy (GDP actually fell in the US in Q1/2022).

The Big Squeeze

Costs are increasing, some dramatically, throughout the wine and grape commodity chains and rising interest rate expenses will add to cost woes. The list of cost factors is long and includes energy, fertilizer, transportation, glass and other inputs, and especially labor, which remains in short supply.

Will growers and wineries be able to hold on to their margins by passing higher costs along to consumers in the form of higher prices? A lot of people I talk to think so. Surveys suggest that many wineries plan to raise prices in 2022 and there is an attitude that consumers might not push back too much, given that the price of everything else is rising, too.

So I am a little bit surprised that some of the data suggests that wine prices have not risen along with the prices of other goods — at least not yet.  Wine Business Monthly, for example, cites NielsenIQ data on average bottle prices. The May 2022 issue reported an average price of $8.52 for the most recent 4 week survey period, up from $8.18 reported in the May 2021 issue — an increase of 4.1  percent. Average domestic bottle price rose  from $8.12 to $8.46 and average import bottle prices rose from $8.35 to $8.69.

The Booze Bust

Prices are rising, according to these figures, but at about half the current rate of overall inflation. NielsenIQ doesn’t measure all sales channels, of course, and there is a lag in the data, so maybe prices are really rising faster than these numbers suggest and wine industry margins will hold.

But the IRI data shown above, taken from a recent Rabobank report about inflation and the beer market suggest that wine in particular and beverage alcohol in general is struggling to increase prices in line with rising costs. Take a close look at the top half of this table, which shows that some non-alcohol beverage categories have been able to boost price much faster than the roughly 8% general inflation rate for the U.S. economy — topped by sports drinks with an incredible 17%+ annual rate price increase. Wow!

Beer, wine, and spirits have all increased average prices, but much less than, say, coffee, and substantially below the overall inflation rates. In other words, the real price of wine, on average, has actually fallen in the last year and the relative price of wine with respect to some other beverage categories has fallen, too. Averages hide a lot, of course, and some strong brands have successfully pushed prices higher while others have not. But beverage alcohol generally, according to the Rabobank figures, has fallen behind in terms of price.

Why haven’t wine prices increases faster.? Here are a few of the many possible explanations.

  1. Radar’s Rule. Wine prices will increase — “wait for it,” as Radar used to say on M.A.S.H. — it just takes time for price changes to work their way through the system.  It is hard to refute this because it is impossible to know the future. Maybe there is something about wine’s annual production cycle that causes price changes to come more slowly. But then why do beer and spirits, which are in continuous production, also lag behind the inflation rankings?
  2. The Wall. Consumer pushback is too strong in the wine category for large price increases to take hold. Yes, I agree that wine buyers are very price sensitive, but prices do rise when they are driven by short supply. And of course there is the whole premiumization phenomenon, where consumers pay more for what they see as better products while resisting price rises on products they already buy.
  3. The Hidden Price Increase Trick. Candy bar makers sometimes try to disguise price increases by simply shrinking the size of the product. Wine makers can do something a bit like that by shifting grape sources from coastal to inland vineyards and in some cases by blending in wines from earlier vintages. Consumers may not notice (just as they might not immediately realize their candy snack has shrunk a little).  Wineries can also increase their average revenue by reducing production of lower-tier wines, shifting the grapes up the ladder.
  4. Three-tier Blues. It’s the three-tier system, where producers sell to distributors who sell to retailers who sell to consumers. On one hand this system means that there are three margins at stake and to each tier has an interest in raising the price at which it sells wine. But each tier also has an incentive to resist increases in its cost of goods. So distributors push back on producers who want to raise price, retailers push back on distributors, and consumers push back on retailers.  The three-tier effect may explain why the lowest average price increases in the Rabobank table above are for beer, wine, and spirits.

More Questions Than Answers

There are other theories and explanations about inflation and the wine category, but perhaps the most important thing to say is that, with the most recently experience of significant U.S. inflation so far back int he rearview mirror, we are left with more questions than answers.

All the basics — the who, what, when, where, how, and why of the wine market have changed very dramatically since the 1970s and 1980s.

Will wine prices rise in line with inflation? If so, when? And how will consumers react? Come back next week for more analysis.

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Thanks to Steve Fredricks at Turrentine Brokerage for stimulating my thinking on this topic.

Countdown to Wine Wars II

Here at Wine Economist World Headquarters we have started counting down the days until the release of Wine Wars II: The Global Battle for the Soul of Wine.  The book’s official release date is July 1, 2022, but it is not too soon to put in your pre-order at Amazon.com or Rowman & Littlefield. Wine Wars II will be available in paperback, e-book format, and (eventually) audio-book, too.

Wine Wars II is a major revision of my best-selling 2011 book Wine Wars. I’ll be honest — I wasn’t really planning to revise Wine Wars, but I couldn’t help myself. I re-read the book last year on its 10th birthday and there were some parts that really made me smile — they held up very well over the decade since release.

But there were other parts that made me shake my head. I wouldn’t write that today, I thought, either because so much has changed in the global wine industry or because I have changed — learned so much from all the people we’ve met on our global travels.

So there was nothing to do but write a revised book, which went into Rowman & Littlefield’s production pipeline last year and will come out in a few weeks.

I asked a few colleagues to read the book and write “blurbs” to help promote it. Here’s what they have to say.

Judy Chan, CEO of Grace Vineyard China:

10 years ago, when I first read Wine Wars, I was excited to see finally someone wrote about the business aspect of wine. As a wine producer in China who was new to the industry (and the industry was also very new in China), the book gave me a global perspective to look at my local market. With the updated information in this edition, it would be refreshing for someone who wants to see how the industry has and has not changed.

Elin McCoy, author of The Emperor of Wine, global wine critic for Bloomberg News and U.S. Editor of The Wine Conversation podcast

No one makes the powerful economic forces behind a bottle of wine more fascinating than Mike Veseth. Yet his easy-going, down-to-earth approach to these complex topics also brims with entertaining stories and humor – who else would analyze the appeal of wine brands named Secret Squirrel or Tussock Jumper? This new, 10-years-later, version two of his classic Wine Wars is filled with pithy insights about the world of vino today, such as ‘identity trumps authenticity.’

If you want to understand the future of wine, this book is a must read. It will convince you that climate change, economic risk, and stronger-than-ever global wine brands threaten the soul of wine itself. Are we headed for a dark age? Spoiler alert: Wine Wars II ends on a slightly optimistic note, in Portugal.

Andrea Robinson, Master Sommelier and author, Great Wine Made Simple

What a timely book for business leaders and their advisers! While the book’s context is the wine and wine grape growing industries, the challenges and opportunities pinpointed and deftly parsed easily apply to so many industries and brands. Globalization, climate change, the economic challenges of labor, supply chain, brand-building and brand equity preservation in a digital world—Mike Veseth’s synthesis of their present-day coalescence, and the ‘so what’ of that, seems almost clairvoyant. Wine Wars II is also a fun, punchy read, ripe with storytelling, along with some cool comparative wine tastings to illustrate the points. As an economics and finance-trained banker-turned-sommelier, I found this book to be invaluable for my work with clients and wine industry stakeholders of all sizes and stripes, as well as a delight to read.

Alessandro Torcoli, Director, Civiltà del bere

I’ve always been amazed by Mike’s ability to clearly describe wine dynamics in a global perspective with a deep understanding of local forces. Wine Wars II is a must-read book to anyone who want to feel like a real expert on our marvelous, but a bit tricky world of wine.

Flashback: Global Rosé Market Q&A

Spring is here and summer is just around the corner, so it is time to Think Pink. Here is a Flashback column from 2019 that is still relevant today. We tend to assume that we know how the Rosé market breaks down, but the details might still surprise you.

One thing has changed: Rosé sales are not growing at the double-digit rates of three years ago, but then overall wine sales growth has been stalled in recent months. Keep an eye on store shelves in the coming weeks — I think you’ll see pretty pink bottles everywhere.

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(Originally published March 12, 2019) Interest in Rosé wine is on the rise. The most recent Nielsen numbers (as reported in Wine Business Monthly) show that sales of Rosé wine in the U.S. market is growing by more than 40% per year — the fastest growth rate of any category.

Producers want to better understand the Rosé phenomenon, which explains why both the Unified Wine & Grape Symposium and the Washington Winegrowers convention featured specialized Rosé seminars this  year.

This column aims to add to the discussion by bringing together what Sue and I have learned at the Unified and during recent visits to France, Spain, and Italy, some insights from Elizabeth Gabay‘s recent book, Rosé: understanding the pink revolution, and a 2015 report on the global Rosé market produced by the OIV and the Provence Wine Council (CIVP). Here is a pdf of the OIV/CIVP report.

Who Makes the Most Rosé Wine?

Rosé is made pretty much wherever wine is made and sometimes accounts for a remarkable share of a region’s production (think about how important Mateus and Lancer’s Rosé were for Portugal during their peak years).

France is the largest producer by far today followed by Spain, the United States, and Italy. Production has increased dramatically in Australia, Chile, and South Africa, according to the OIV/CIVP report.

Who Buys It?

Let me answer this question three ways using three different figures from the OIV/CIVP report. The data are from 2014, so current data will differ, but the patterns are still relevant.

oiv1

Rosé wine sales are significant just about everywhere wine is consumed, but France is the market leader. Rosé accounted for 30% of all wine sold in France in 2014 according to the study, consistent with other reports that Rosé outsells white wine in French supermarkets, which feature large sections devoted solely to the pink stuff.

Although France is the largest Rosé producer in the world, it actually imports Rosé from Spain, which is the largest Rosé exporter. I think there is a pattern of inexpensive Spanish imports, which fill supermarket shelves with box wine, although that is only part of the story.oiv2

Is Rosé a wine for women? I have heard this said many times and never really believed it. The OIV/CIVP study casts doubt on this stereotype. Although women drink significantly more Rosé than men in some markets such as Germany, the Netherlands, and the UK, there doesn’t seem to be a strong gender bias in other markets. especially in France but also in the U.S., Russia,  and Canada. Men drink more Rosé than women in Brazil, according to the study.

oiv3

Finally, consider the distribution of sales by age group. Winemakers today are very interested in breaking into the millennial market. So it is significant that the OIV/CIVP study finds a strong youth bias in Rosé consumption.  Young people in every country surveyed here have a higher Rosé consumption than older people. France is noteworthy because all age groups consume Rosé in substantial quantities, even if the younger ones drink a bit more.

Bottom line: the market for Rosé seems to be both broad and deep. No wonder everyone is so interested.

How Much Does Color Matter? Is Rosé Just a Summer Wine?

Wait — that’s two questions. I wrote about color in an earlier column, so I will make that answer short. The conventional wisdom is that pale Rosé sells better than darker Rosé wines. But the fact is that Rosé from around the world comes in many different hues (as Sue’s photo above from a tasting in the Loire Valley shows).

I agree with Elizabeth Gabay that the color issue is exaggerated, but I don’t expect to convince anyone. If someone makes a darker Rosé and it doesn’t sell, I am sure that the color (not other factors) will be blamed.  They used to say that nobody ever got fired for buying IBM equipment and no one’s going to get a pink slip for making too pale a Rosé wine.

The summer wine question is quite interesting and can be answered in two ways. Yes, Rosé is a summer wine in the sense that there is a strong seasonal component in sales. Consumers drink more Rosé in warmer months. But Rosé is not just a summer wine as sales are now significant throughout the year.

Is There Easy Money in Rosé?

The answer to this question is related to the seasonality question above. It is easy to imagine that Rosé is a Chateau Cash Flow kind of wine. You pick the grapes, make the wine, ship the wine, cash the check — all in just a few months. The money pours in on a timeline only a little longer than Beaujolais Nouveau, which is the ultimate cash flow wine.

But there’s a hitch in the easy money Rosé game — you have to sell out to make it work. The residual seasonality of Rosé sales means that moving your product in February is more difficult than in July or August. And although I have had some Rosé that has benefited from a few years of bottle age, the conventional wisdom is that last year’s Rosé is over the hill — Rosé passé!

The consumer preference for fresher Rosé (which is also true for some other wines, such as Marlborough Sauvignon Blanc) creates a problem for producers. If you don’t sell out, then last year’s slow-selling wine is likely to clog up the supply chain, discouraging orders for this year’s wine.  Reliable supply is important to developing customer loyalty, so you want to have enough, but excess supply is hard to get rid of. Rosé producers must navigate complicated currents!

Here Be Dragons: Wine and the Economy Enter Uncharted Waters

The International Monetary Fund is expected to announce today revised global economic forecasts –– slower growth, higher inflation, and increased uncertainty due to war in Ukraine plus (although I don’t know if it will feature in the IMF report) massive  covid lockdowns in China. Here be Dragons, indeed!

As much as we all would like to think that economic conditions and the global wine market will soon return to what we used to call “normal,” I think it is important to realize that we have actually entered what are in some ways uncharted waters. Old maps and rules of thumb do not necessarily apply and the ability to pivot quickly as conditions change is even more important than in the past.

Flashback to the 1980s

Sometimes I get to thinking that I’ve passed this point in life one time before. (That’s actually a line from a John Hartford song.) Way back in 1981 I wrote a college economics textbook because I couldn’t find a text that could help my university students understand what was happening to the economy.

The uncharted territory back them was stagflation — high inflation and high unemployment at the same time. The standard textbook analysis used Keynesian analysis to understand unemployment and the Phillips Curve to plot the trade-off between unemployment and inflation. Higher unemployment meant lower inflation. But we had both high inflation and high unemployment — how did that happen? And what could be done about it?

The problem (in very simple terms) was that inflation was caused by cost-push not demand-pull factors and had unleashed sustained self-fulfilling inflationary expectations.  The Volker solution was highly restrictive monetary policy that pushed unemployment even higher until the expectations broke. Harsh medicine for a vicious disease.

Zoom Ahead to 2022

Zoom ahead to 2002. After years of relatively stable or even falling price levels, inflation is here again at rates that haven’t been seen in the U.S. since the 1980s. The problem this time is a combination of cost-push and demand-pull factors. Higher energy, food, and transportation costs plus persistent shortages of key commodities push prices higher while the huge fiscal and monetary stimuli of the pandemic and post-financial crisis era have pulled inflation higher, too.

This is not a repeat of the 1980s, by any means, but also not like anything we’ve seen at this level in a very long time. I can’t remember seeing such a combination of broad forces aligned to boost demand and constrain supply.

The war in Ukraine adds to the inflationary pressure, especially with respect to energy and food prices, and it is hard to see these forces disappearing any time soon. Even if a truce were declared today, the energy and food price effects would continue for some time. The Chinese covid lockdowns are squeezing production of many manufactured goods at the same time.

Disruptions in global trade and finance are another factor to take into account. For a long time the “China Price Syndrome” kept a lid on prices of manufactured goods. If a company was tempted to raise price, the ready availability of cheaper alternatives from Asia and especially China acted as a constraint. The “China Price” served as a price anchor then, but much less so now because of unraveling trade relations.

Getting from QE to QT

Taken together this is a situation we haven’t really seen before, but the thing that really makes people like me nervous is monetary policy, The Federal Reserve will be responsible for squeezing inflation out of the economic system (just as it was in the 1980s), but financial conditions are different now. We have had very low interest rates for a long time now and wave after wave of quantitative easing (QE — Fed purchases of Treasury and mortgage-backed securities that pump liquidity into the markets). The markets have kind of become addicted to the constant monetary boost.

Raising interests from this very low level can be expected to disrupt financial markets if only because of the mathematical impact on present value calculations. Exchange rates will shift, too, with disproportionate impact of development market currencies.

But the real “uncharted waters” factor is the transition from QE to QT, quantitative tightening. This will initially take place as the Fed’s bond holdings mature and are not rolled over, which takes liquidity out of the market. It will start slow (which still means billions of dollars a month) and could pick up speed if necessary.

The question is how financial markets will deal with this change after having a liquidity drip line month after month for this long? There is nervous talk of another sharp liquidity crisis, but maybe bigger than the last one, which the Fed addressed quickly and well. If key credit markets freeze up and contagion takes place, the Fed will have little choice but to reverse course, opening the door to even higher inflation.

The alternative is a very hard landing as the impact of the financial crisis spreads through the economy. How hard a hard landing? It depends on what it would take to shift inflationary expectations. So you can see the concern — we may be perched on a narrow ledge with higher inflation on one side and financial crisis on the other.

What About Wine?

The wine economy operates by its own rules, but it can’t fully escape the forces shaping the economy in general. To repurpose something that is said about the pandemic economic, we aren’t all in the same boat, but we are in the same storm.

Wine has also experienced a combination of cost-push and demand-pull factors, but not uniformly for various categories. Demand-pull, for example, seems focused on more expensive wines. Cost-push is everywhere, however, which means that the crunch is felt particularly in the middle- and lower-price tiers.

Honestly, I cannot remember a time when cost pressures have been so broad and deep. To what extent will price-sensitive consumers push back on price increases? Or will the consumer inflation expectations in general soften attitudes towards rising wine prices? Given that these are uncharted waters, the map holds more questions than answers.