Monthly Archives: September 2008

The Bottle Shock Effect

September 30, 2008 By in critics, Economic impact, Sideways, Wine Competitions, wine critics 1 Comment

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

The Sideways Effect

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

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

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

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

Bottle Schlock

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

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

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

1976 Paris Tasting Scores

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

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

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

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

The Bottle Shock Effect?

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

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

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

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

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

Indian Tariffs and Vino Exceptionalism

September 23, 2008 By in India, trade policy Leave a comment

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

Bad Samaratans

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

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

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

Indian Wine Tariffs

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

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

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

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

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

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

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

Vino Exceptionalism

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

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

Wine Critics and their Discontents

September 7, 2008 By in decanter, robert parker, wine critics, wine spectator 1 Comment

The Principal-Agent Problem

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

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

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

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

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

Parker and Vaynerchuck

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

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

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


Worth a Thousand Words

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

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

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

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

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

Mixed Messages

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

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

The Wine Spectator Award Hoax

September 4, 2008 By in wine awards, Wine Competitions, wine critics, wine magazines, wine spectator 3 Comments

It has been a couple of weeks now since the Wine Spectator hoax hit the news. Robin Goldstein (a.k.a. fearlesscritic.com) “blew the whistle” on Wine Spectator in a session that I happened to chair at the American Association of Wine Economists meetings in Portland. (Robin actually revealed his hoax as an unscheduled prelude to a completely different presentation at the meetings.)

The wine media quickly picked up the story and now it is everywhere. The story has generated a certain amount of embarrassment for Wine Spectator and given Robin and his new book a lot of  publicity.

What Robin did was to create a fake Italian restaurant (Osteria L’Intrepido di Milano) along with a made-up menu and wine list. Then, following directions on the Wine Spectator website, he applied for an Award of Excellence, which is the way that Wine Spectator recognizes and encourages restaurants with strong wine programs. Wine Spectator tried but was not able independently to confirm the facts about the fake restaurant; they took the application on trust as an honest entry and presented it with the appropriate award in the August 31, 2008 special restaurant issue (see page 181). You can read all about it on Robin’s website for the fake restaurant, http://osterialintrepido.wordpress.com/

Where is the Outrage?

How upset should we be to discover that Wine Spectator can be tricked into giving its wine award to a fake restaurant?  Michael Morrell, my chief cheap wine research assistant, was outraged.  Although price is the most important factor for him in choosing wine, he admits that he is also influenced by wine ratings. The award hoax undermines his trust in wine critics in general and the ratings and advice they produce.

I can understand Michael’s concern, so I consider this a very serious matter, but I don’t think the fact that Wine Spectator fell for a hoax is reason for us to doubt its integrity.  Here is my report.

The Wine Spectator Award of Excellence is given to restaurants to recognize their wine programs.  Although the actual criteria for receiving an award seem very modest to me (you can read them on page 97 of the special restaurant wine issue), it is a fact that about 30% of the new entries each year fail to meet them (the success rate is obviously higher for establishments who enter and receive an award year after year).

There are three levels of award.  3254 restaurants received the base level recommendation.  802 second tier “Best of Award” ratings were given to restaurants with more comprehensive wine lists. 73 top of the line “Grand Awards” were bestowed.  The people at Wine Spectator are proud of their award program and believe that it has encouraged restaurants to upgrade their wine programs.

Caution: Economics Content

I’m sure this is true, but I tend to view the matter in economic theory terms.  Consumers have lots of restaurant options and are uncertain which ones might have good wine choices. The restaurants know how good their wine selections are but have trouble effectively communicating this to potential customers. This is the classic economic problem of “asymmetric information” and the classic economic solution is “signaling” – where one side of a potential transaction finds a way to reveal key information to the other side to help seal the deal.

Restaurants that want to attract wine enthusiast customers need a way to “signal” them about their wine programs and the Award of Excellence is one way to do this.  Restaurants that think sending this signal is worth meeting the criteria and paying the entry fee do it and get on the list.  Others, even some that have strong  wine programs, don’t bother. They have other ways to send the message, I guess.

Wine Spectator fell for the Osteria L’Intrepido hoax because it relied upon the honesty of applicants, assuming, I suppose, that no one would go to the trouble and expense of applying without a conventional commercial purpose. This is another side of asymmetric information — Robin presumably knew his motives in setting the fake restaurant “sting” and Wine Spectator could only guess or assume.

In Vino Veritas

Truth is especially important in the wine world and, because of the problem of asymmetric information, it is particular difficult to know with confidence.  We depend upon the honesty of self-interested actors and the truthfulness of their signals. When we read wine ratings or see wine competition awards, for example, we assume that the judges and critics are tasting the same wines that we buy in the market. But it would be easy for a dishonest producer or distributor to put special wines in the bottles sent to the critics or wine award competitions. The easiest switch would be to put some of last year’s highly ranked wine in place of this year’s weak effort. Most wine critics rate products that are sent to them by makers and distributors and rely upon the honesty of the sender.  Only a few – Gaiter and Brecher at the Wall Street Journal come to mind – seek out and purchase their wines through normal retail channels.

Doctored “critic cuvee” wines are a potential hoax problem.  I am not aware of any wine publications that have been hoaxed in this manner, but I have read and heard speculation about special “award cuvee” wines being entered in competitions.  The nature of the situation makes us all vulnerable to hoaxes.

Wine Spectator fell for this hoax but it wasn’t because its editors are dishonest in giving their awards.  I think most of the criticism of Wine Spectator in this situation is a bum rap, especially since the magazine’s editors seem to be unusually careful in avoiding advertising conflicts of interest.  That’s the subject of my next post.