Book Review: The Business of Wine

June 27, 2009 By Mike Veseth in book reviews, Jancis Robinson, wine research 1 Comment

The Business of Wine (edited by Geralyn G. Brostrom and John C. Brostrom) is organized as an encyclopedia with entries from A (Airlines comes first) to Z (for Zinfandel, of course). I opened the book with two questions on my mind: Why an encyclopedia? And why another encyclopedia?

Why an encyclopedia?

This question comes up because there are a lot of different ways to tell the story of the business of wine and to organize that story. An encyclopedia, with alphabetically arranged entries of various lengths, is a peculiar choice when you think about it.

On one hand, it gives a lot of freedom to the reader to cut and paste her own story by darting back and forth among items, possibly but not necessarily hitting all the key points along the way. On the other hand it also gives the editors quite a bit of control, since they get to choose what gets in (and in which author’s account) and what and who are left out.

Does the encyclopedia format work, or would a series of essays by various experts (the format chosen for another recent book also titled The Business of Wine) have been more useful?

Why another encyclopedia?

This question arises because we already have a really excellent encyclopedia of the business of wine — it is embedded in The Oxford Companion to Wine 3/e edited by Jancis Robinson. Although the Oxford Companion is an encyclopedia of wine in general, there is a lot of great wine economics to be found here.

This is understandable. It is difficult to think about wine without straying, intentionally or not, into wine economics. Winemaking is an art, a science and a business and you really can’t leave the business part out if you want to understand the whole process. That’s why about a third of the Masters of Wine exam deals with questions about the business of wine.

The Oxford Companion does a good job dealing with many wine economics topics. Does the new encyclopedia add something to a bookshelf that already contains the Oxford Companion?

Managing the Trade-Offs

How does the encyclopedia format work? Well, having spent some time with this book I have to say that it is an OK compromise. It is a lot more hit-and-miss than the ideal book of essays that I imagine, but apparently that book is very difficult to write because no one seems to have written it. The business of wine is very complicated and the parts of the business and the factors that affect it are both numerous and highly interconnected.

The encyclopedia format is problematic, but all the other wine business books I have read have had their problems, too. (One in particular — I won’t name it, but you probably know the one I’m talking about — promised a first-person account of the wine trade but descended into something closer to a personal vendetta against professional colleagues.)

Do we need another encyclopedia – this specialized one – when the Oxford Companion already does a pretty good job covering wine economic topics? Yes, I think so, but as a supplement to the Oxford Companion not a replacement for it. I find it useful to have a book that drills down into the wine business in many cases, rather than treating it as part of a more general survey.

And some of the choices the editors have made are interesting. The Argentina entry, for example, is written by Laura Catena, VP of Bodega Catena Zappa and owner of Luca winery. And Joel Butler MW, the head of wine education at Ste. Michelle Wine Estates, wrote the Washington State essay. Interesting to get these industry insider views.

Possible Improvements

My initial doubts about this new book have been overcome to a considerable extent. There are a number of ways the book could be improved, however. It seems to me that the editors might want to tinker with ratio and proportion a bit. Most encyclopedias like this divide entries into short, longer and longest (the longest being a couple of thousand works at most) and it is probably difficult to match topics and lengths. Maybe the entry on Airline wine sales could have been shorter and the discussion of Biodynamic wine a bit longer – you know what I mean. It’s a tricky business.

Most of the entries include suggestions for further reading and these are often inadequate (as is the brief attempt at a bibliography). An encyclopedia like this is usually the introduction to a topic for readers, not the last word, so readers need to know where to go next. A little more guidance would be useful, especially for students.

And although this is an encyclopedia, I would have appreciated a longer introductory essay that tried to say something interesting about the state of the wine industry today and its challenges for the future.

Got data?

Finally, I am an economist, so I’d naturally like to see more data. Many of the entries include a good deal of data, as you would expect, and there is an appendix on “international wine data,” providing basic consumption and production information on many but not all the countries discussed in the main text. I think this could be usefully expanded to include more country-level data as well as data about international flows and time series data on prices and quantities.

Let me end on a positive note. This book exceeded my expectations and I think it is a useful reference, especially good for anyone just getting started in the study of the business of wine. And especially useful when read alongside other standard references like the Oxford Companion and Tom Stevenson’s excellent Wine Report annual series.

Supply and Demand in New Zealand

June 19, 2009 By Mike Veseth in book reviews, globalization, Marlborough Sauvignon Blanc, New Zealand, Rabobank, Supply and Demand, wine brands, wine markets 1 Comment

My copy of the second edition of Michael Cooper’s Wine Atlas of New Zealand arrived this week and I am having trouble putting it down. Cooper’s coverage of the wines, the wineries, the people, the industry and the market is exceptional. And it is stunningly beautiful, too, with excellent maps and spectacular photos. A coffee table book in terms of size and weight, but with real substance. One of the two best regional wine atlases I own (the other is Burton Anderson’s Wine Atlas of Italy, which is still a valuable reference 20 years after its publication).

(Note: Cooper’s NZ Wine Atlas hasn’t been released yet in the US, but it is easy buy from UK online sellers like Amazon.co.uk.)

The Amazing NZ Wine Story

I’ve always been fascinated by the New Zealand wine story — how a tiny (0.5 percent of global output) wine producer at the far corner of the earth could become a leading global brand (a NZ wine is the #1 Sauvignon Blanc in the US) and earn the highest average export price of any country in the world.

I couldn’t wait to get Cooper’s second edition because a lot has changed for New Zealand wine since the first edition was published in 2002 and my last research trip there in 2004. A lot has changed, but a lot has stayed the same, too.

The biggest threat to New Zealand’s success has stayed the same: the problem of balancing supply and demand. New Zealand was plagued by boom and bust cycles for many years. Overproduction of low quality wines created a crisis in the 1980s. Many winemaking businesses collapsed and were snapped up by NZ or foreign buyers, leading to the internationalization and consolidation of the industry. The NZ government initiated a grubbing up scheme in 1986 to reduce vineyard plantings, especially of low quality wines, setting the stage for the current boom.

New Zealand has been extremely successful in this era of global wine, which has been characterized by high quality, a strong global brand (Marlborough Sauvignon Blanc and now Pinot Noir as well), and a liberal trade regime that accepts high import levels of inexpensive wine as the price to be paid for high levels of higher-priced exports.

The Spectre of Surplus

Despite this success — or more precisely because of it, fear of wine and grape surpluses, price wars and market collapse continue to haunt New Zealand producers — at least those who are old enough to remember the crisis of the 1980s. In agriculture we know that nothing generates a surplus tomorrow faster than high prices today.

Cooper’s data make this boom-bust concern easy to understand. New Zealand’s industry has grown rapidly — can it be sustained? Producing vineyard area in New Zealand tripled from 10,000 hectares in 2000 to more than 31,000 hecrates (projected) in 2010. Wine production rose from 60 million liters in 2000 to 200 million in 2008. The number of wineries risen, too, if not quite so quickly: about 600 today, up from 334 ten years ago.

NZ domestic wine sales and wine imports have been relatively flat over the last ten years, so essentially all of the increased production has been targeted for export: 87.8 million liters in 2008 compared with just 15.2 million liters in 1998.

So far the world market has been wiling to absorb this rising production (and without diluting the NZ brand and the price premium it commands). Can this continue into the future or does Stein’s Law (see note below) apply?

A recent Rabobank report on “New Zealand Wine Supply — Testing Limits” provides mixed indicators. Rabobank acknowledges the importance of balancing supply and demand, especially given the world economic crisis, and notes that nature may limit runaway growth. Marlborough is running out of land suitable for vineyards, according to the report.

The day will come when the quantities of Marlborough Sauvignon Blanc available … will reach its physical limit and the long term supply and demand outlook looks very favorable for growers and producers in the region. It is vital that in the next 10 years the reputation and bargaining power of producers in this region be maintained in order for the region to enjoy higher returns in the future.

In other words, things look good in the long run, it’s the short run that NZ needs to worry about. Persistent short term surpluses could devalue NZ wines from premium products to commodities. That would be enormously damaging to the industry.

There are some indicators that the damage is happening now. I have heard of deep discounts on some New Zealand wines in Britain, for example, and I even saw iconic Cloudy Bay on sale at Costco this week for just $20, about $10 less than its price last year. More to the point, however, today’s Gisborne Herald reports that Pernod Ricard, which owns a number of important NZ brands, is terminating many or most grower contracts in the Gisborne region (North of Hawkes Bay on the North Island). The president of the Gisborne Winegrowers group is quoted

I have fielded a lot of calls from very concerned and distressed growers — my advice to them is to certainly not spend any more money on any of those blocks … Meantime, they should talk to their accountants and bankers.

Gisborne is a major producing area, but it doesn’t have the name recognition abroad of Marlborough, Martinborough, Hawkes Bay and Central Otago. It is Chardonnay country with 52.8% of producing vineyard area in that varietal compared to 8.2% planted to Pinot Gris and less than 4% each to Sauvignon Blanc and Pinot Noir. Chardonnay has become unfashionable — it is not where the market growth is these days. It makes sense therefore that Gisborne might be the first area to feel the combined effects of an overall surplus and shifting demand.

The Next Big Thing?

What is to be done? The Rabobank study looks to Pinot Gris, arguing that it could join Sauvignon Blanc and Pinot Noir as a leading NZ export wine thereby expanding and diversifying the NZ export market. The expected growth of wine consumption in Asia is one factor in this optimistic scenario, since Pinot Gris is said to pair well with Asian foods. Food friendly and premium price — these are attractive qualities it is said in the growing Chinese wine market, according to Rabobank.

Pinot Gris is also thought to be a style that younger wine drinkers will find fun, friendly and easy to like (but also flavorful, unlike certain Pinot Grigio you may have been served …). Michael Cooper is optimistic, too, in his Wine Atlas discussion of the varietal., citing “high potential” and “impressive weights and flavour richness” on both North Island and South wines.

Pinot Gris is profitable, too. Made in stainless steel tanks with no oak aging, Pinot Gris is a good cash flow wine. I can’t remember seeing NZ PG on store shelves here in the U.S., however. Perhaps I’ve just missed them or maybe NZ producers are focusing on different markets — Britain, Australia or Asia? — to avoid undercutting Sauvignon Blanc sales here.

“Demand for Pinot Gris,” the Rabobank report asserts, “should underpin even greater returns for growers in the medium to long-term.” A good thing, I think, if things hold together until the medium- and long-term arrive (there’s a famous Keynes quote about this, although I don’t think he was talking about wine). There is still the old problem of the short-term supply-demand balance to be worked out.

Note: Stein’s Law (named for Presidential economic advisor Herbert Stein, is that if something cannot go on forever it will stop. Stein’s point was not that all bubbles burst but rather that market forces tend eventually to rein in unsustainable trends (although not always in a gentle way) and you don’t necessarily need government to do the job for you.

Wines of Spain: Not Lost in Translation

June 13, 2009 By Mike Veseth in emerging wine regions, EU wine market reforms, EU wine reforms, globalization, Spain, wine markets, wine price Leave a comment

Spain has the largest area devoted to vineyards of any country in the world and has achieved considerable international success, both critical and commercial. But it also confronts the many challenges typical of Old World producers. As I write The Wine Economist blog and work on my new book^*I am increasingly convinced that much rides on the ability of Old World wine producing countries like France, Italy and Spain to adjust to and succeed in changing market conditions.

Spain is an especially interesting case study in this regard. On one hand Spain faces many of the problems we associate with Old World wine. Although overall production has fallen in recent years it is still well above consumption (which has fallen, too). The surplus — poor quality wines with no market — have been sent to the distillery in recent years, but this is about to end as the new EU reforms kick in. These reforms will benefit wine regions and producers that increase quality and are able to adapt to the new more competitive global market environment.

Map of Spain’s Wine Regions

The Spanish wine industry is well positioned in some ways to take advantage of this situation. Consumers are looking for good value in wines today and I have found a number of interesting and distinctive wines from Spain in the competitive sub-$14 price range, where demand is still relatively strong as buyers trade down from more expensive products. White wines from Spain are attractive options for the growing number of consumers who have lost interest in Chardonnay and the reds would be a good choice for those who’ve grown tied of Australian Shiraz. Jaded ABC (Anything But Chardonnay) and ABS (Anything But Shiraz) buyers are up for grabs and Spanish producers are making their case.

Today’s market, for all its economic discontents, is a good opportunity for Spanish wines to move deeper into the American market, but there are problems that must be addressed. American wine buyers have learned to speak Italian, French and, well, Californian when it comes to wine in terms of varietals and appellations. They have trouble, both literally and figuratively, translating Spanish wine.

Spain has an unusually rich heritage of native grape varieties, which is both an advantage and an obstacle to be overcome. Unfamiliar varietal names are not an insurmountable barrier, although you won’t know if you like Tempranillo, Albariño and Garnacha and other native grape wines until you try them, so getting consumers to take that first taste or make the first purchase is very important. Appelations are a bigger hurdle. Spain has more than 50 regional appellations – Denominaciones de Origen or DOs – and mastering this system and understanding the differences is a challenge – an educational challenge.

The Spanish wine industry has wisely decided to confront this problem directly this summer by organizing a series of 3-day educational seminars around the country organized by The Wine Academy of Spain in association with Catavino. Wine professionals and enthusiasts will meet in Denver, Houston, Chicago, Boston, New Haven, Atlanta, Seattle, Portland, San Francisco, San Diego, Cleveland, Washington and New York (click here to see dates and registration information) and learn about the wines of Spain. Three days? Well, yes. Looking at the schedule it seems to me that it will take at least three days to learn the basic of Spain’s regions and their wines, appellations, terroirs, varietals, history and production and market structures.

Mario Battali once said that there is no such thing as Italian food, there are only the regional cuisines of Italy, which is why Italian food is endlessly interesting. I suspect that the same can be said about Spain and its wine. There is no Spanish wine, only the wines of Spain – and American wine enthusiasts have a lot to learn about them.

Mastering the Spanish wine vocabulary will take work, but it should be pleasant work. I am hoping to be invited to participate in the Seattle workshop (Chateau Ste Michelle and Dr. Loosen invited me to the Riesling Rendezvous last year and I found that experience very valuable) so that I can report on it here and write about the Spanish industry with more authority in my book. I hope to gain a better understanding of the wines of Spain and where they fit into the future of wine.

^* The working title of my new book is The Future of Wine: Globalization, Two Buck Chuck and the Revenge of the Terroiristes.

Special thanks to Steve De Long of delongwine.com for alerting me to this interesting and ambitious program.

The #1 Sauvignon Blanc

June 9, 2009 By Mike Veseth in brands, Constellation Brands, globalization, Marlborough Sauvignon Blanc, New Zealand, Supply and Demand, wine brands, wine markets 1 Comment

Decanter.com reports that Nobilo Marlborough Sauvignon Blanc has overtaken Kendall Jackson as the best selling Sauvignon Blanc in the United States. The ranking is based upon sales volume, but the wines retail for about the same $10 to $12 price, so Nobilo probably ranks first by value as well. An amazing achievement, given the many obvious challenges the New Zealand wine industry faces in terms of size, production cost, shipping distances, access to US distribution and so on.

A Matter of Style

It is interesting to consider how Nobilo and the New Zealand industry have managed to achieve this success. The first reason is the distinctive quality of Marlborough Sauvignon Blanc itself. Even wine critics who don’t think very highly of Sauvignon Blanc in general (I’m talking about you, Jancis Robinson) acknowledge that the Marlborough wines are distinctive and that the best of them are truly exceptional. In my house they set the standard for Sauvignon Blanc.

Why are these wines so good (and so popular)? Winemakers always start with the vineyard and it is certainly true that Marlborough seems ideally suited to produce Sauvignon Blanc grapes. (Ironically, no grapes at all were grown there before the mid-1970s). The skills of the winemakers are also important. The distinctive style of the wines is another factor. The June 2009 Wine Business Monthly includes a fine article by Curtis Phillips on Sauvignon Blanc yeasts that nicely explains the NZ style. NZ SB, he writes, emphasizes a varietal style, letting the fruit speak forcefully. The French SB style is “anti-varietal,” he says, emphasizing texture and minerality over fruit aromas and flavors.

Finally there is the oak-influenced style, which originated in France but was made famous by Mondavi as Fumé Blanc. This barrel-fermented SB style remains very popular in the U.S., but has obviously been eclipsed in the marketplace by the fruit-forward Marlborough product.

The New Zealand varietal style is a hot commodity. New Zealand producers should hope that it stays hot and doesn’t fade as some popular regional styles have done (I’m thinking about how quickly Australian Shiraz has fallen from favor).

The International Influence

Nobilo’s rise to #1 in the US market is not an accident, according to the Decanter.com article. Nobilo is a Constellation Brands product — one of five New Zealand export brands of ConstellationNZ (see logos above). Joe Stanton, the ConstellationNZ CEO, explains that his company’s strategy was to make Nobilo the top US SB by focusing on “traditional” wine buyers and giving them what they expect in the way of packaging for premium wine: cork instead of screw-cap, for example, and flint-colored glass bottles instead of traditional French green. Plus, of course, the intense Marlborough aromas and flavors. New wine in old bottles (and closures), I guess, and it worked.

ConstellationNZ accounts for 40% of all NZ wine sold in the US — an astonishing figure, but understandable given the strong brands that it has acquired (Nobilo, Kim Crawford, Drylands, Selaks) or built (Monkey Bay)and the efficient distribution system that has evolved to get these wines and all the other Constellation products on store shelves and restaurant wine lists.

In fact, the New Zealand industry is dominated by foreign-owned wineries, as wine writer Michael Cooper points out in the new edition of his fine Wine Atlas of New Zealand. Of the top wine producers only two (Delegat’s and Villa Maria) are Kiwi-owned. The largest producer is Pernod Ricard NZ (formerly Montana wines), part of the big French drinks group. Pernod manages 25 NZ brands according to their website, including of course Montana (sold as Brancott Estate in the US), Corbans, Church Road and others.

The most famous NZ wine — Cloudy Bay — is owned by LVMH Möet Hennesy-Louis Vuitton, the French luxury goods conglomerate. Matua Valley, another leading NZ producer, is part of the Australian Foster’s Group. The list goes on.

It is tempting to consider the pluses and minuses of international ownership as Michael Cooper does briefly in the article linked above. This is a topic that I plan to analyze in more detail my next book. In the meantime, however, it is perhaps best to consider how the combination of the local (New Zealand’s wonderful terroir) and the global (big multinationals like Constellation and Pernod Ricard) have combined to both produce New Zealand’s tasty wines and to deliver them to our doorsteps.

New Zealand has done specutacularly well in the global wine market so far. What lies ahead? Watch this space!