Wine and the No-Recession Recession

Are we headed for a recession here in the United States? Or are we already there? What about the future — the second half of 2022 and 2023?

If you follow economic news reports you have encountered all sorts of answers to these questions. And you can be forgiven for being a little confused and maybe quite a lot frustrated that the answers to these important questions are not clearer.  Herewith a brief guide for the perplexed with implications for the wine sector.

The Recession Question

The “rule-of-thumb” definition of a recession is when there are two consecutive quarters of falling gross domestic product (GDP). The U.S. economy is in a recession now by this definition because GDP fell in both the first and second quarters of 2022 (second quarter data subject to revision). By this measure, many of the world’s most important economies are either in recession, too, or teetering on the brink.

The two-quarter rule is very useful, but it is not the final world. The National Bureau on Economic Research (NBER) more formally defines a recession in a way that stresses depth, diffusion, and duration:  a recession is a significant decline in economic activity that is spread across the economy and lasts more than a few months.

The NBER’s more nuanced definition is better than the two-quarter rule, but it has some downsides. How significant is significant, for example? And how widely spread need the decline be? There is also the problem, unavoidable with lagged economic indicators, that a recession can only be declared well after it has started and will probably be over before the conclusion is called.

So we might be in a recession now — one that started months ago in fact — or we might not. We will only know for sure later on — perhaps when the recession (if there is one) is already over. Argggh!

Up, Down, Twist

If you follow business and finance news you will find evidence to back up any hypothesis you may have about a recession. Prices in some sectors are rising quickly (have you bought a airline ticket recently?) and plunging steeply in other areas.

There are plenty of stories of firms with squeezed profits, declining sales, and employee lay-offs. But there are also stories about rising sales and profits and, of course, the labor market puzzle, where the number of unfilled positions is about twice the number of people who say they are looking for work (but apparently cannot find it).

Last week’s job report was unexpectedly strong — the unemployment rate is only 3.5% and total employment is back to the pre-pandemic level — suggesting that the U.S. is not currently in recession, despite what the GDP figures say. Ironically, some analysts speculate that this good jobs news actually increases the odds of bad news in the near future. The reasoning is that the Federal Reserve will be forced to raise interest rates even higher now in order to slow control demand-driven inflationary pressures.

What’s the story? Is the economy up or down? The correct answer (which applies to wine, too) is … yes. If you are looking for a generalized answer to the recession question you won’t find it. Maybe it is best to say that the economy is twisting. The devil is in the details here and the answer you get depends upon where you look and how.

The Price is Right?

There are several reasons for this complicated picture. One of them is that the economy — like the wine market — is never all one way or another. Like the climate, it is always running hotter in some areas and colder elsewhere.

But another, particular to this moment, is the fact of rapid inflation because an inflationary economy works by different rules. In an economic system with stable prices, consumers cut back purchases when employment falls or when there is fear of unemployment. In an inflationary economy, the pressure to cut back spending affects a much broader set of consumers who find their budget squeezed by rising prices of necessities. Higher energy and housing prices (although moderating somewhat in recent weeks) have put the squeeze on millions of households regardless of job market status.

And so that’s what we are seeing now. So maybe the recession question isn’t the right one to be asking.

The Squeeze: A Tale of Two Worlds?

The conventional wisdom is that wine is recession-proof. Maybe. But an inflationary squeeze and the twist it creates is different and I don’t see how wine sales can escape unscathed.

Under these circumstances it is more important than ever to know your customers and the product chain that connects them with your business. Based on recent quarterly reports, for example, it looks like selling wine into mass market Walmart World’s part of the retail spectrum, where both the retailer and its clients seem to be really feeling the squeeze — is much different from selling wine into high income Costco World, where the squeeze is still on but the impact seems more moderate. So far.

Wine and the Dollar: Big Mac Index Update

The Economist newspaper’s most recent analysis of global exchange rates was released a few days ago and the results are noteworthy, especially for those of us in the wine trade where exchange rates are an important factor in both import-export flows and in the cost of imported bottles, corks, equipment, etc.

No News is News?

Exchange rates are in constant motion — most currency values change at least a bit — and sometimes quite a lot more! — on a daily basis. It is a fact of life in international trade and finance. But sometimes there is a strong secular movement that shakes things in a big way and the recent sustained rise in the U.S. dollar’s value is a good case in point.

There are dozens of forces that can shift exchange rates — I used to joke that the worst job in the world was the person who had to write the “exchange rate” headline for the Wall Street Journal every day because he or she had to boil down dozens of factors into a few words. I remember one headline that read “Dollar Rises on No News.”

There is plenty of news right now to explain the dollar’s appreciation relative to most of the world’s currencies and the most important explanation are rising U.S. interest rates that the Federal Reserve has implemented and is expected to continue this year. Rising interest rates attract short term investment funds from abroad. The dollar strengthens as the investment funds pour in until the point (to simplify quite a lot — experts please forgive me!) where the dollar is so expensive that the risk that it will reverse course and fall exceeds the interest rate premium that it earns.

Econ 101 Impacts

That’s what is happening now and the Econ 101 impact is that the strong dollar makes imports relatively cheaper for buyers in the U.S. but makes U.S. exports more expensive for foreign buyers. Imported wine will be cheaper because the currencies used to buy them are cheaper in dollar terms. U.S. wine exports will face a headwind because the strong dollar raises their cost to foreign-currency buyers.

A strong dollar is not, therefore, particular good news for U.S. wine businesses that compete with imports or have export aspirations. It is, however, potentially good news for U.S. importers of foreign wine and the owners of U.S. brands that rely upon bulk wine imports to fill their bottles, boxes, and cans. This bit of good news has been tempered recently, however, by international trade logistics issues that make imports more costly and delivery less reliable. The dollar’s value is just one factor in the complex web of wine trade.

The interest rate effect diverts the dollar from what is called the purchasing power parity (PPP) level, which is the exchange rate where the currency’s buying power is the same inside the U.S. as it is on the international markets. A currency that is at or close to its PPP level does of itself distort trade. If you have travelled abroad and thought the prices there were a lot cheaper (or more expensive) than back home, you have encountered a PPP distortion.

Big Mac Index Update

The Economist calls its Big Mac Index a “lighthearted” attempt to estimate the PPP level of exchange rates in order to see which are over-valued and under-valued using the ubiquitous fast-food hamburger’s price in local currencies as the foundation of analysis. It seemed like a silly idea when first revealed back in 1986, but the Big Mac Index has proved to be fairly accurate overall in its assessments. More often than not, major currencies have tended to converge over time towards their Big Mac PPP exchange rate.

So take a close look at the table at the top of this page (click on the image to enlarge it). The U.S. dollar is so strong that there are only a small number of major currencies — Switzerland in particular — that are over-valued relative to it. Most other currencies, including the Australian dollar, Argentine peso, and Chilean peso — are undervalued, which means their wine exports have an exchange-rate based competitive advantage in the U.S. market.

The euro is undervalued as well, but by much less than I might have guessed given that its value has tumbled toward dollar-euro parity in recent weeks.

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The Economist has also released an updated Big Mac index shown here, which is adjusted for differences in per capita GDP. The idea, in simple terms, is that many prices (especially for non-traded goods and services) will be higher in countries with higher income levels, so PPP settings need to take this into account.

Argentina and Hemingway

This adjustment is significant for some countries, as the table above shows. The Argentina peso, for example, is now calculated to be very much over-valued, not under-valued, and I think this is probably accurate. A Financial Times article published last week reports that peso’s black-market rate, which had been steady recently at about 200 pesos per dollar (compared with the official rate of about 130 pesos), has suddenly plunged toward 350 pesos. Such a shift is often a sign of a developing currency crisis.  Will the peso do a “Hemingway” — first decline slowly and then suddenly collapse? Stay tuned.

The currencies of Australia and Chile along with South Africa are still under-valued after the GDP adjustment, but the euro is shown to be over-valued, suggesting that, further depreciation is possible.

The U.S. is experiencing historically high inflation just now, which by itself would argue for a PPP-driven decline in the dollar’s value. But other major currency countries are having the same problem. And, in any case, rising U.S. interest rates, for as long as they last, will likely keep the dollar strong in the medium term.

The Bottom Line?

The bottom line? These are tricky times for exchange rates, with inflation pulling one way and interest rates the other. The dollar could continue to strengthen or, as expert Barry Eichengreen argued in a recent Financial Times, column, reverse course and fall.

Wine businesses that are sensitive to exchange rate changes need to be cautious indeed. You cannot control the exchange rate, but there are ways to hedge against unfavorable shifts using either forward exchange markets (you lock an exchange rate today for a set transaction in the future) or foreign exchange options (giving you the option to make a purchase or sale at a fixed future price).

Hedging is important if a business has significant costs or revenues in a foreign currency. Recent earnings reports suggest that some large and sophisticated businesses have not fully hedged their positions, however, with the result of unexpected earnings (or costs) due solely to exchange rate adjustments on otherwise stable transaction.

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What is a “Hemingway?” I have coined this term to characterize a particular pattern of decline. One of the characters in Hemmingway’s The Sun Also Rises is asked how he lost his fortune. Slowly and then suddenly, he replies.

Villamagna DOC: Leading the Way for Montepulciano in Abruzzo

Villamagna is a tiny appellation by any measure: 85 hectares, seven producers, two wines (Villamagna DOC and Villamagna DOC Riserva). But its importance exceeds its size and points the way forward for Abruzzo and its Montepulciano wines. Sue and I only spent a few hours with the Villamagna winemakers, but we came away deeply impressed with the wines and the people who make them.

About the wines … well, I have been trying to think how to describe them to you and here is the best I can do. Do you know the wines of the Stags Leap District in the Napa Valley? Well, to me at least, the wines of Villamagna DOC are to Montepulciano d’Abruzzo wines in general what Stags Leap is to Napa. You can see the family resemblance in each case, but the wine from the smaller region is distinctive and makes a strong impression.

Distinctive by Design

It is not an accident that the Villamagna wines are distinctive. Starting in the 1990s some of the producers in this small village began to think about what they could do to increase quality and to stand out and perhaps above others in the region.  They had nature on their side, with soils and climate well-suited to quality grapes.  The vineyards are located about 10 km from the Adriatic Sea and about 10 km from the foothills of the Majella mountain range, so a combination of influences affect the grapes, including especially a large intra-day temperature variation during the growing season.

But natural advantages are not always enough, so the appellation founders began to identify specific areas with the best potential for high-quality grapes and to establish appellation protocols that would produce wines that were both individually distinctive but also clearly part of a common family tree. These efforts culminated in the creation of the Villamagna DOC appellation in 2011.

Higher and Lower

The standards for Villamagna DOC wines are higher than for Montepulciano d’Abruzzo DOC wines generally. The maximum permitted vineyard yield is lower, for example, and the minimum alcohol level higher. Americans will wonder why a higher alcohol level is desirable, since the problem here is often that alcohol levels are higher than we might like.

But the point of the regulation is to require producers to fully ripen grapes rather than pick early when the grapes are not necessarily of peak quality. Villamagna DOC requires fully ripe grapes that achieve at least 14% abv, for example, while the minimum standard for Montepulciano d’Abruzzo DOC is only 11.5% abv.

The ageing requirements are also different. Montepulciano d’Abruzzo DOC can be released in the spring after harvest. Villamagna DOC wines must wait two years (three years for Riserva) and spend time in oak.

A New Generation of Wines

Obviously, many Montepulciano d’Abruzzo DOC wines exceed the minimums in these areas, but there is considerable variation. The point is that all of the Villamagna DOC wines must meet the higher standards.

Elegant and powerful is how the producers describe their wines. I think I’d say elegant, balanced, and distinctive, with a line of bright acidity running through the wine that makes me think of Stags Leap.

The grapes and geography as very important, but Villamagna DOC is really a people story most of all because it is not very often that a small group of winemakers can achieve so much. Part of this can be explained by generational transitions within the wineries.  New faces and new thinking are useful indeed when the world of wine has changed and quality, not quantity, is the surest path to success.

But it is inevitably more complicated than this because the seven wineries are such a diverse group. Some are very old family affairs while others have been established during the period when the Villamagna DOC project was evolving. Two are cooperatives, which is noteworthy since changing directions, which is never a simple thing, is even more challenging when cooperative members must be convinced to give their votes.

The seven members of the Villamagna DOC are Agricosimo, Cantina Villamagna, Cascina del Colle, Palazzo Battaglini, Piandimare, Torre Zambra, Valle Martello. Congratulations to them all for their commitment and achievement.

The Road Ahead

But it is too soon to rest on laurels. Making excellent, distinctive wines is the beginning of the project. The next step is to get the word out so that the wines can have the market (and earn the prices) they deserve.

And then? Well, the step after that is for other Montepulciano d’Abruzzo DOC producers to follow along by making a very serious commitment to quality both in the cellar and vineyard.  The vast majority of Abruzzo wines are Montepulciano and elevating both the wines and their reputation won’t happen overnight. But it is the way forward in today’s market.

Listen Up! Wine Wars II now available in audiobook format

My new book, Wine Wars II: The Global Battle for the Soul of Wine, is now available in three formats: paperback, e-book, and (starting this week) audiobook.

You can find the audiobook version (read by Jonathan Yen) at Amazon.com, Tantor Media, or wherever you go for audio information.

It is 10 hours and 34 minutes of behind-the-scenes reports on the hyper-competitive world wine market scene.

 

Quality by Design at an Abruzzo Cooperative Winery

The first thing you notice as you approach Cantina Frentana is the tower, which rises up over the flat landscape and trellised vines like a lighthouse. And in a way it is a beacon, shining a bright light on the future of Abruzzo, Italy’s underestimated wine region.

Abruzzo Lighthouse

The tower, Torre Vinaria, was originally built in 1958-60 with the practicalities of winemaking in mind. A gravity-flow winery, as you probably know, is thought to be gentler on the wine because less pumping is involved (and economical of labor, too, I think). Such facilities are frequently built on hillsides, but there are few suitable hills so near the Adriatic coast, so the grapes were hoisted to the tower’s top floor and worked their way down until they were finished wine at the bottom.

The tower, 28 meters high and 18 meters in diameter, is thus a symbol of a thoughtful commitment to quality. It was also a statement of confidence and ambition because it was created along with company itself, which is a cooperative or cantina sociale as they say in Italy. Cooperatives are generally born in times of crisis for grape growers, who band together to make and sell wine from their grapes when other market opportunities are scarce. To have this tower rise up from tough vineyard times was indeed confidence and optimism.

Preserving Vineyards and Grape Varieties

Ninety-two growers signed a deed to organize the Cooperative Society “Cantina Sociale Frentana” on November 16, 1958. The first vintage was released (and the famous tower completed) two years later. Now, after more than 60 years, the cooperative has 500 members who collectively farm 1000 hectares (or about 2500 acres). The average vineyard size is small, only 4 hectares or about 10 acres, and so there are many members who farm very small plots indeed.

As the years have passed and the founding members grown older year by year, the cooperative has had to face the fact that interest in the hard work of grape growing is not always passed down to the next generation. To keep membership alive, therefore, it has instituted what it calls the vineyard bank.  The cooperative contracts with the elderly grape grower and family to manage the vineyard for them, thus allowing the family to maintain membership, ownership, and income.

Cantina Frentana is committed to preserving native grape varieties, especially the distinctive local white grape  Cococciola. Indeed, it is the largest producer of this wine in the region and, hence, in the world. Still, sparkling, or a bit frizzante, it is a delicious wine.

Stronger Brands, Higher Margins

A generation ago, when Burton Anderson surveyed Abruzzo for his classic Wine Atlas of Italy, the number of high-quality producers he found could be counted on your hand. The rest, including the cooperatives that dominated the landscape, bet on quantity over quality. And in a big way.

The statistics that Anderson cited in 1990, were stunning. Abruzzo’s wine production often exceeded the output of Tuscany or Piemonte, for example, with less than half their vineyard areas. This was made possible by pushing vineyard yields to the highest average in all of Italy — 133 hectoliters per hectare, according to Anderson. I calculate this to be about ten tons per acre on average, which is high given the viticultural practices then in use and the fact that red wine grapes dominate the market.

Get the Incentives Right

High yields, and the lower quality that often follows, creates a vicious cycle. High output and low quality push prices down. Swimming upstream against this current by raising quality is risky and expensive, so the incentives are to push for even higher yields to make up in volume what is lost in margins. This can be a race to the bottom.

Cooperatives are often part of this problem, which is why they have poor reputations in some regions, but it doesn’t have to be the case as Cantina Frentana shows. In my experience there are three steps that cooperatives must be willing to take to move ahead in quality. It is all about getting the incentives right.

First, grower members must commit to sell all of their grapes to the cooperative. Otherwise, they will sell the best grapes privately (or make their own wine from them) leaving the cooperative with the low-quality product. Second, the cooperative must be able to vary grape price by quality, so that growers will find the lower-yield/higher quality trade-off attractive. If all grapes are worth the same, we are back to the race to the bottom again.

Finally, the cooperative must be able to refuse to purchase sub-standard grapes. This is obviously necessary if quality is to be maintained, but difficult from a social standpoint because cooperative members are also neighbors and sometimes even family.

Necessary But Not Sufficient

Cantina Frentana satisfies my quality cooperative checklist, but it is important to remember that these are necessary but not sufficient conditions for success. Excellent wine is the beginning not the end in today’s crowded and competitive marketplace.

Cantina Frentana impressed us with their wines, commitment to quality, ability to adapt to changing natural and economic climates, and their efforts to build brands for their wines and margins for their grower members. Cooperatives like Cantina Frentana are part of the promising future of wine in Abruzzo.

Back in Burton Anderson’s day, a cooperative winery was probably the last place someone would send us to learn about the promising potential for Abruzzo’s wine industry. Flash forward to 2022 and Cantina Frentana was our first stop. There is a message there.

Is Abruzzo the Next Big Thing for Italian Wine?

Is the Abruzzo region the next big thing in Italian wine? That’s the question on our minds here at Wine Economist world headquarters after returning from a media tour of Abruzzo last month. The tentative answer is that Abruzzo has the foundation needed to move up to the next level in the Italian wine hierarchy. Abruzzo is on the rise — let’s see how far it can go!

Abruzzo By the Numbers

From the standpoint of volume, of course, Abruzzo is already a big thing. Abruzzo boasts 33,000 hectares (over 80,000 acres) of grape vines, of which more than half are planted to its signature red wine grape, Montepulciano. Total production is 3.2 million hectoliters or more than 35 million 9-liter cases of wine each year. About a quarter of the wine is designated DOC.

There are more than 250 wineries in this region. With more than 6,000 grape growers it is obvious than many of the vineyards are quite small. No wonder, then, that cooperative wineries are very important here (as they are in most of Italy and Europe generally).

The “Good Value” Curse

Montepulciano d’Abruzzo and Trebbiano d’Abruzzo wines are produced in large quantities and are available world-wide. But, as I wrote a few weeks ago as we were preparing for this visit, the wines entered the U.S. market years ago at what were then the “sweet spot” price points. As the market has moved up to higher price tiers, however, Abruzzo’s wines (like those of Chile) lagged behind s bit, recognized for their   good value rather than great quality.

Indeed, I remember stumbling onto a big 1.5 liter bottle of Montepulciano d’Abruzzo by a well-known producer at a local Grocery Outlet discount store a few weeks ago. It was priced just above the Two Buck Chuck level. Not the best advertisement for Abruzzo wines!

The Abruzzo wine producers have adopted a strategic plan to raise the profile of their wine region (the media tour, which included journalists from North America, Europe and the UK, and Asia was part of that program). One small step that I think will be important is to establish a stronger Abruzzo identity by unifying some of their classification systems and adopting the logo you see above. This sort of strategy worked very well for Sicilian wines and it holds promise for Abruzzo.

Abruzzo Has Much to Offer

Tourism (and not just wine tourism) is one way to strengthen a regional identity in today’s competitive market. How many people do you know who took a Douro River cruise in Portugal, for example, fell in love with the country, and have been buying Portuguese wines ever since?

Abruzzo has a lot to offer tourists who take the time to explore. There are golden beaches on the Adriatic coast, for example, and delicious seafood served at restaurants located in converted trabbochi (extravagant fishing shacks built at the end of long piers).

There is beautiful scenery and charming towns in the hills and mountains, too, with wonderful food including juicy porchetta and tasty grilled lamb skewers. All this with fewer crowds than in the better-known tourist spots. Honestly, Abruzzo is hard to beat once you make the modest effort to get there. Abruzzo’s visibility in the world of wine will rise as more and more people discover its many charms.

Abruzzo Pecorino Potential

But wine regions are ultimately built on the quality of the wines they produce and we come away from our brief visit very optimistic. Part of this, as I will explain over the next two Wine Economist columns, is because of specific efforts to raise quality and create distinctive wines that we discovered. But a lot of it is because of our overall impression of the region’s wines, which I think was shared by many in our group.

The clear favorite among the wines we tasted were those made from the Pecorino grape. These white wines, both still and sparkling, were bright and appealing — alive in the glass for the most part — and seemed to us to be a perfect fit as the U.S. market shifts to white wines, especially Sauvignon Blanc, with a bit more zip than Chardonnay and Pinot Grigio.  We also enjoyed fruity white wines made from the Cococciola grape, which has only relatively recently been upgraded from blending grape to a varietal wine. But Pecorino was the star.

Pretty in Pink: Cerasuolo 

The other hit with our group was Cerasuolo d’Abruzzo, a darkish rosé wine made form the Montepulciano grape. It was distinctive and delicious — perfect for the warm evenings we experienced. Some producers have been encouraged to make paler versions for the U.S. market because of the perceived prejudice against darker pink wines, but I don’t see the point. Anyone who tries this wine will want more.

So what about Abruzzo’s most important wines — Montepulciano and Trebbiano d’Abruzzo? Perhaps it was because of the heat, but the red wines didn’t impress as much as the whites, although (stay tuned for upcoming Wine Economist columns) we did find some really memorable wines. And, with a few exceptions, the overall impression of Trebbiano was overshadowed by the Pecorino wines.

The Road Ahead

One logical market strategy might be to highlight the Pecorino and Cerasuolo wines, which match so well with trends in the U.S. market, while raising quality standards for Montepulciano and Trebbiano. Indeed, it seems to me, that’s exactly what’s happening now.

But there are still many questions to be answered before Abruzzo’s wine sector can fully achieve its clear potential. Can the cooperative wineries, which are so important here (and were sometimes in the past blamed for low standards), raise their game? And can Montepulciano, the most-planted grape variety, refresh its image? I will address these questions in the next two Wine Economist columns.

The global wine market is almost insanely competitive. The standard is constantly rising. The Abruzzo producers we met have listened to what the market is saying and found a pathway ahead.

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Thanks to the Consorzio di Tutela dei Vini d’Abruzzo for inviting us to visit the region and learn more about it and its wine sector. Special thanks to our friends at I.E.E.M. for taking care of all the logistics and making the visit as smooth and enjoyable as possible.

We are especially grateful to four wineries who generously hosted us during out visit and showed us some of the very best of Abruzzo wines:

Cantina Frentana:  A cooperative winery on the move. See next week’s Wine Economist for details.

Agriverde Winery:  An award-winning winery seriously committed to environmental goals. Ambitious vision matched by achievement. Keep an eye on this one!

Bosco Winery: Historic family-owned winery that both looks back to tradition and ahead to the future. We could spend all day in the family museum, wandering with a glass of great wine in our hand.

Margiotta Winery:  A perfect example of a small family winery making excellent wines. Humble and proud in equal measure. Italian wine at its best.

 

Podcast Alert: Talking about Wine Wars II with Natalie Maclean & Kris Levy

Want to learn more about my new book, Wine Wars II? I recently recorded two interviews that are available as podcasts.

Thanks to Natalie Maclean and Kris Levy for taking the time to chat with me about the powerful forces shaping the world of wine. Click on the images below to hear our discussions.

Unreserved Wine Talk with Natalie Maclean.

You can also find Natalie Maclean’s Unreserved Wine Talk interview on

Instagram: https://www.instagram.com/p/Cfq11pHsOko/

Facebook: https://fb.watch/e6vMqVzsgg/

And LinkedIn: https://www.linkedin.com/posts/nataliemaclean_economics-activity-6950412383697723392-W-mf?utm_source=linkedin_share&utm_medium=member_desktop_web

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Everyday Wine with Kris Levy podcast available on Spotify and Apple podcasts.

A Tale of Two Glasses & Wine’s Triple Crisis

My new book Wine Wars II has just been released — you can order it in paperback or e-book format from Rowman & Littlefield, Amazon.com, and other online and bricks-and-mortar book sellers. The audio version will be released in a few days. How exciting!

Rowman & Littlefield is offering US and UK customers a 30% discount on Wine Wars II publisher-direct purchases for a limited time. See details below.

This week’s Wine Economist offers you a taste of my new book in the form of two brief excerpts from the first chapter. Cheers!

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It was the best of wines, it was the worst of wines (apologies to fans of Charles Dickens). The global wineglass, it seems, is both quite empty and full to the brim. We live today in the best of times for wine if we evaluate the situation objectively, as economists like me are trained to do. Never before has so much good wine been made and so many wine choices offered up to consumers. For someone who loves wine, the glass is very full, indeed; it is hard to imagine better days than these. The global markets deliver a world of wine to your door. Drink up!

And yet many enthusiasts are anxious about the future of wine. The good news we find in our wineglasses and on the supermarket shelves is often accompanied by disturbing rumors, feelings, and forecasts. It is the worst of times, too, you see—especially if you are a maker of cheap wine in France, Italy, or Spain, the largest wine-producing countries. Everything about wine is wrong for you. Consumption at home has been falling for decades and squeezing your market share, and import competition has increased. The rise in global wine drinking that you counted on to power your export business has unexpectedly stalled at exactly the wrong moment. You find yourself making the wrong wine in the wrong style from the wrong grapes at the wrong price and trying to sell it in the wrong places. You are betrayed at every turn by the markets that once treated you so well. You hold an empty glass, or so it must seem.

Times are troubling in Australia, too, where a wine boom was followed by a wine bust, when consumers around the world have seemingly turned away from the muscular Aussie wines they enjoyed so much just a few years ago. So the Aussies turned to China and, through lots of hard work, turned it into their number 1 export market, bigger that either the United States or the United Kingdom. Then the lucky country’s luck turned again. Driven by political disagreements that have nothing to do with wine, China imposed tariffs of more than 200 percent on Aussie wine, choking off this promising market.

Wine producers are optimists by nature, but they face serious challenges. Recession, pandemic, falling consumption, rising antidrinking lobbies, water shortages, global warming, and even raging brush fires all threaten the livelihoods of winegrowers and producers in many parts of the globe.

It is the worst of times for consumers, too, if they seek that special taste of a place that wine geeks like me call terroir. The wine in your half-empty glass is free of any technical flaw, but so what? Does it have a soul? Does it express any particular place or any producer’s distinct vision of what wine should be? This is the age of McWine, I have heard people say: wine that is all the same. When everything is the same, then it is all nothing! And what’s worse than that?

These are good times and bad ones, too, for the world of wine—what a contradiction! What about the future? Will wine’s tale of two glasses have a happy ending? Or will our (excuse the Dickensian pun) “grape expectations” be crushed? I’m an optimist about the future of wine, but as an economist, I am trained to pay close attention to the dismal side of any situation. I wrote this book to try to find out just how empty or full the global glass really is and how the world of wine is likely to change.

The first thing to understand about wine is that it is many things, not just one, in terms of both wine itself and the economic forces that drive the wine industry, so the story of the future of wine will necessarily be a complicated one. Although hundreds of factors will come into play as the wine world evolves, three big forces will almost certainly shape the overall pattern: globalization; brand-driven commodification; and resistance to these powerful winds, which I call the revenge of the terroirists. Globalization and commodification are economic push forces that are transforming the world of wine. The revenge of the terroirists is all about pushing back.

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WINE’S TRIPLE CRISIS
The global wine industry is in the midst of a triple crisis, and I am not really sure how it will end. The climate change crisis comes first. It affects everything if we consider both direct and indirect effects, so it may seem odd to think of it as a wine crisis. Wine grapes generally can be made to grow under quite extreme conditions; in some colder regions, they actually bury the vines in the winter to protect them and unearth them each spring so that they can come back to life (you might call this Lazarus viticulture). But specific wine grape varieties thrive in only very narrow bands of average temperature, and wine regions defined by particular grapes or wine styles are threatened by relatively small changes in environmental conditions. Wine is, therefore, the canary in the coal mine when it comes to climate change. It will feel the impacts before many other industries, and so it is not a surprise, as I explain later, that wine businesses are among the strongest advocates for progressive environmental action.

The climate change crisis dwarfs everything else in the long run, but because the long run can seem far away and we often misjudge how fast it is approaching, climate concerns do not get the attention they deserve. Indeed, as the global reaction to the coronavirus pandemic crisis has demonstrated, climate change generally isn’t treated with the “drop everything” or “operation moonshot” urgency that real crises warrant. But even if the climate change threat were to disappear tomorrow, wine would still be in trouble.

The second crisis is economic. Wine is magical beverage, but it is a crazy business. Wine’s economic environment is characterized by cyclical, structural, and “wild card” forces that make it difficult to prepare for or successfully execute a business plan.

Global wine consumption grew steadily for the twenty years that ended in about 2008, the date we associate with the global financial crisis. Rising wine sales were important because they slowly soaked up a surplus of wine. Too much wine? Well, for many years the European Union in effect subsidized wine
production to stabilize agricultural economies, especially in France, Italy, and Spain. Wine farmers were paid to grow grapes and to make wine that could not be sold, so some of it was distilled into industrial alcohol. Yuck! Those policies are history, and European winegrowers turned from government subsidy wine to wine aimed at global markets. This is a good thing, but it happened just as wine production increased in other parts of the world, too. The result: a lot of grapes, a lot of wine, and a lot of jobs and incomes at risk.

Rising global wine sales were most welcome in this context, and when sales dropped a bit in 2008, no one was very concerned. “It’s just the economy, dummy,” they said. “Wine will spring back when the economy improves.” But it didn’t, and the next ten years were what I have called “wine’s lost decade.” Why did wine lose its mojo? There are many possible reasons (I explain them later), but the sudden loss in momentum changes the nature of the game from a positive-sum fight, where a rising tide raises all ships, to a zero-sum fight for market share. And the battle isn’t just between Old World and New World or among the growers and producers in these regions; the opponents are now more diverse and unexpected than ever before.

The reason? Wine’s identity crisis. Wine has never been just one thing. It is, after all, both that fancy French Champagne at the top of the wine wall and that big box of Franzia at the bottom. Wine is healthful (think Mediterranean diet) and dangerous (read the government required warnings on wine labels in the United States). It is culture to some and just another commodity to others.

The cartoon character Pogo famously said, “We have met the enemy, and he is us,” and this is true in a way for wine. The biggest threat to wine’s identity is something inherent to wine’s existence: alcohol. You might think that wine is just grape juice with alcohol, but wine doesn’t taste much like the grapes it is made from except for in a few specific cases. Fermentation doesn’t just add an alcoholic kick; it transforms the product in complex ways. It’s the same with the way that fermenting yeast makes bread different from flour and water. So wine as we know it is impossible without alcohol, but it may also be impossible with it if antialcohol forces have their way.

Wine’s identity crisis is significant because it seems like those who see wine as a social or health problem, not an essential element in our culture, have seized the momentum. If wine doesn’t know who it is and what it is and cannot tell its story to the world, then how can it survive?

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Wine Wars II 30% discount offer. Many thanks to Rowman & Littlefield for making this discount available.

US Customers: Order Wine Wars II here and use code RLFANDF30 at checkout to receive your discount.

UK Customers. Use the code RLFANDF30 to order from Rowman & Littlefield International
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The Road to Wine Wars II (and a 30% Discount Offer)

My new book Wine Wars II will be released in just a few days on July 1, 2022, and so. in the spirit of shameless self-promotion, let me remind you that you can order Wine Wars II in paperback or e-book format from Rowman & Littlefield, Amazon.com, and other online and bricks-and-mortar book sellers.

Rowman & Littlefield is offering a 30% discount on Wine Wars II publisher-direct purchases for a limited time. Scroll down to the bottom of this page for details.

Tantor Media will release the audio-book version of Wine Wars II (read by Jonathan Yen) on July 19, 2002. It will be available everywhere audio books are sold. Ten hours of fascinating stories about where global wine is going and how it got there.

A Tale of Two Glasses

Paperback, e-book, audio. Wine Wars II is everywhere!

Wine Wars II updates and extends the most important arguments I made in the original Wine Wars and then adds a new set of chapters on Wine’s Triple Crisis. Each “flight” or set of chapters ends with suggested wine tasting so you can consider the arguments using all your senses. What fun!

Here is a brief excerpt from chapter 1 “A Tale of Two Glasses” for your reading pleasure. It talks about the origins of Wine Wars and the development of Wine Wars II. I think it is interesting that the road to Wine Wars II began with a winery visit about forty years ago, when the problems facing the wine business and the economy more generally were a lot like those we confront today.

HOW I STUMBLED INTO THE WINE WARS

People often ask me how I became a wine economist, an economist who studies the global wine markets. The answer is rooted in a particular time and place. Sue and I were still newlyweds, taking a low-budget vacation in the Napa Valley back in the day when that was still possible. We were headed north on the
Silverado Trail late on our last day, pointed toward our economy motel in Santa Rosa, when we decided to stop for one last tasting.

The winery name was very familiar, and I had high hopes for our tasting. If I had known more about wine back then, I would have recognized this as one of the wineries that kicked French butt in the 1976 Judgment of Paris wine tasting. We pulled off the road and went in to find just the winemaker and a cellar rat at work. No fancy tasting room back then, just boards and barrels to form a makeshift bar. They stopped what they were doing and brought out a couple of glasses. If I knew more about wine back then, I would have been in awe of the guy pouring the wine, but I was pretty much in the dark. So we tasted and talked.

I started asking my amateur questions about the wine, but pretty soon the conversation turned around. The winemaker found out that I was an economics professor. Suddenly he was very interested in talking with me. What’s going to happen to interest rates? Inflation? Tax reform? He had a lot of concerns about the economy because his prestigious winery was also a business and what was happening out there in the financial markets (especially interest rates and bank credit, as I remember) had a big impact on what he could or would do in the cellar. Wineries, especially those that specialize in fine red wines, have a lot of
financial issues.

In addition to the initial investment in vineyards, winery facilities, equipment, and so forth, each year’s production ages for two or three years, quietly soaking up implicit or explicit interest cost as it waits to be released from barrel to bottle to marketplace. The wine changes as it ages, but the economy changes, too. It’s impossible to know at crush what market conditions will be like when the first bottle is sold. Wine economics is a serious concern. Few winemakers are completely insulated from the business side, and sometimes the economy can have a huge effect on what winemakers get to make (if they have the resources to stick with their vision) or have to make (if they don’t).

And so a famous winemaker taught me to think about wine in economic terms and to consider that supply and demand sometimes matter as much as climate and soil when it comes to what’s in my wineglass. I should have known.

Although my interest in wine and economics merged on that Napa day, it sat on its lees for a long time, as I waited for an opportunity to link my personal passion with my professional research agenda. The two naturally converged a few years ago when I began writing what turned out to be a four-volume series
on the global economy. My 2005 book Globaloney: Unraveling the Myths of Globalization includes a chapter called “Globalization versus Terroir,” my first attempt to write about wine economics for a general audience. Globaloney argues that complex global processes shouldn’t be reduced to a few simple
images. Globalization and food are more than just McDonald’s, for example, and globalization of wine isn’t just McWine.

The wine chapter in Globaloney gave me confidence that I had more to say about money, wine, and globalization, so I launched a website called The Wine Economist (WineEconomist.com), where I could work out my ideas in public, make connections, and develop a wine voice. After several years and nearly
200,000 words of blog posts, The Wine Economist evolved into the first edition of this book.

THE ROAD TO WINE WARS II

I wasn’t sure if anyone would want to read about the business of wine, but I was wrong. Wine Wars was warmly received by both critics and readers. It turns out that while wine is good, wine and a story is even better, and stories about the business side of wine can be very interesting. A number of wine industry readers have said that Wine Wars helped them connect the dots and see things more clearly. Consumers, who have no particular business connection, say they just like knowing the backstory of their favorite drink.

I’ve spent the last decade on the wine road speaking at wine industry conferences around the world and learning more about wine and the people who make it. It is a tough job, but someone has to do it, and apparently I am that lucky someone! I have recorded my impressions and experiences in hundreds of columns on The Wine Economist.

Wine Wars has been joined by three other books that continue my analysis of global wine: Extreme Wine (2013); Money, Taste, and Wine (2015); and Around the World in Eighty Wines (2017). Wine Wars celebrated its tenth birthday in 2021, and that occasion made me stop and think (as round-number birthdays sometimes do).

The powerful forces that I identify in Wine Wars are still important, but they’ve changed in ways both big and small. Environmental and demographic shifts, for example, re now much more clearly understood as wine industry challenges. There is a lot to think about and to write about. And so I have written this new book, Wine Wars II, which updates the first edition and extends its argument to address wine’s global crisis.

In a way, this journey has brought me back to that dark cellar on the Silverado Trail in Napa Valley, the great wines we sampled that day, and my “aha!” moment when I realized that wine and economics are a perfect pairing. I’ve learned much more about wine and wine economics, and I appreciate now more than ever the many challenges that the world of wine faces. But I remain an optimist, as I show in this book. I still have grape expectations.

 

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.