Yearly Archives: 2010

The Paradox of [Wine] Choice

December 27, 2010 By in Argentina, Gallo, Marlborough Sauvignon Blanc, New Zealand, popular culture, wine markets, wine ratings 8 Comments

I always look forward to the week between the Christmas and New Year holidays because that’s when the pace seems to slow down a bit and I can settle in to read The Economist‘s special double issue.

Of particular interest this year is the essay on page 123 called “Tyranny of Choice: You Choose.” The main point is simple, but the implications are quite broad, with particular relevance for today’s wine markets.

Good — Up to a Point

The simple point? Choice is good, but only to a certain degree. Too much choice is, well, too much and can sometimes stop decision-making dead in its tracks. I say that this is a simple point because we have all suffered from the problem of too many options overloading our preference systems. Or am I the only one who sometimes has trouble ordering coffee at Starbucks or a sandwich at Subway?

Government is a good example of this Paradox of Choice. One party rule is notoriously problematic.  Multiple parties provide useful competition. But at some point more political choice is really less –particularly less in terms of stability.  Fragile, shifting multi-party coalitions mean short governmental half-lives with no one looking after the whole since everyone’s focused on their own tiny slice of the electoral pie.

What makes The Economist article interesting is that it ties together so many elements of this dilemma, from literature to academic research and from potato chips to human reproduction.

Rollerblading Monstromart

Super-abundant choice is a fact of modern life. The Economist suggests that you …

Wheel a trolley down the aisle of any modern Western hypermarket, and the choice of all sorts is dazzling. The average American supermarket now carries 48,750 items, according to the Food Marketing Institute, more than five times the number in 1975. Britain’s Tesco stocks 91 different shampoos, 93 varieties of toothpaste and 115 of household cleaner. Carrefour’s hypermarket in the Paris suburb of Montesson, a hangar-like place filled with everything from mountain bikes to foie gras, is so vast that staff circulate on rollerblades.

One cost of this embarrassment of riches is confusion or, put another way, higher transactions costs. Making a choice means comparing the qualities and value of different options, which is difficult enough when there are only two brands of breakfast cereal, but mighty time-consuming and complicated when there are 200.

The Economist explores several dimensions of this problem, citing a Nobel Prize winning economist (Daniel McFadden), an Italian novelist (Italo Calvino) and cartoon character Marge Simpson!

Expectations have been inflated to such an extent that people think the perfect choice exists, argues Renata Salecl in her book “Choice”. … In one episode of “The Simpsons”, Marge takes Apu shopping in a new supermarket, Monstromart, whose cheery advertising slogan is “where shopping is a baffling ordeal”. “How is it”, muses Ms Salecl, “that in the developed world this increase in choice, through which we can supposedly customise our lives and make them perfect leads not to more satisfaction but rather to greater anxiety, and greater feelings of inadequacy and guilt?” A 2010 study by researchers at the University of Bristol found that 47% of respondents thought life was more confusing than it was ten years ago, and 42% reported lying awake at night trying to resolve problems.

Greater choice first delights us, then overwhelms us, then it can sometimes drive us crazy. There must be a “best” among all the rest. Which is it? And how will I know? The quest for the best can sometimes destroy the pleasure of the very good by introducing an unwanted but unshakable sense of doubt.

The Age of Anxiety

Which brings us to wine. It does seem like the problems of exaggerated choice apply especially to wine. Of those 48,000 items on the upscale supermarket shelves, chances are that 1500 or more are bottles of wine. Wine is the largest choice space in the modern grocery store, ten times richer in terms of the number of options than the #2 area (breakfast cereals) and much more complex.

Wine buyers have never had it better in terms of the number of choices available from around the world. And we’ve never had it worse regarding the possibility of confusion and the pressure to find our perfect wine. It’s the Age of Anxiety for wine.

I find it interesting that some of  the hottest products in the wine market seem to simplify wine just a bit and perhaps unintentionally  address this anxiety. Gallo’s inexpensive Barefoot brand wines have very done well in the last few years; most people view this as a price thing — the result of trading down. But Barefoot also offers consumers a more casual idea of wine that would appeal to anyone who wants to get out of “perfection” rat race and just enjoy wine without over-thinking it. (And every Barefoot bottle features a “Gold Medal” from a wine competition, giving buyers the security of a sense of quality.)

The hottest wine sectors today are Marlborough Sauvignon Blanc and Argentinean Malbec; is it a coincidence that these wines are easy to understand, with many good producers at various price points? The problem of choice still exists for buyers of these wines, of course, but perhaps more of the pleasure of choosing survives.

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Several people have asked about the series on BRIC wines.  Fear not — it will resume in a few days with a report on Russia,

More Bad News for Australia: Parallel Imports

December 22, 2010 By in Australian wine, economic crisis, Economic impact 2 Comments

Sometimes I feel like a broken record when I write about the Australian wine industry: bad news, bad news, bad news.

Most recently the bad news was the Dutch Disease. Australia’s mineral export success has driven up the foreign exchange value of the Australian dollar, making imports cheaper and exports (including wine exports) more expensive abroad.

That’s just what the shell-shocked Australian wine industry needs — higher prices or slimmer margins in key export markets!  But now the bad news is even worse — the strong Aussie dollar is driving down wine prices in Australia’s domestic market and slashing producer margins there, too.  How? Through “parallel import” programs that crafty retailers have put into effect. An article from the Sydney Morning Herald explains the situation.

Caution: Economics Content

Parallel imports are a consequence of a very common practice called international price discrimination. Price discrimination is the business strategy of charging different prices to different customers for similar or even identical products. Different buyers have different ability to pay and price sensitivity and it is sometimes possible to charge some customers a high price and others a low price in an attempt to extract all possible revenue from the market demand curve.

Classic examples of price discrimination include the highly complex pricing system that airlines typically employ with some seats being sold for four or five times the cheapest fare depending on when and how the ticket is purchased. Student and senior citizen discounts are relatively benign and generally accepted price discrimination examples.

International price discrimination is the practice of selling similar goods at different prices in different countries based on local demand conditions. In the case of Australian wine, for example, it appears that local wine market conditions in Brazil or Malaysia might cause winemakers to want to sell products there at lower prices than in the more mature domestic market. If the prices are set correctly, the combination of lower prices in some markets and higher prices in others can maximize the winemaker’s profit.

The Key to Price Discrimination

The key to price discrimination, according to your Econ 101 professor, is to prevent resale. The whole strategy backfires if someone finds a way to buy your products in the low price market and resell them (undercutting your sales) in the high price market. This fact limits price discrimination to situations where resale is costly, difficult or just plain impossible.

If someone finds a way to sell your discounted product back to the home market, the logic of price discrimination explodes.

Now the “parallel import” problem in Australia is that some large retailers there have discovered stocks of lower-priced Australian wines in other countries and are importing them back into Australia to sell for less. The strength of the Australian dollar (Dutch Disease again) makes this even more profitable. The Herald reports that

Parallel importing is … hurting business as supermarket chains and some of the bigger independent bottleshop chains bypass Australian brand licensees and import from third parties in countries including Brazil, Malaysia and the US.

Parallel importing hit record levels in the past year as the dollar continued to strengthen and retailers, looking for ways to drive prices down and exert control over their suppliers, became more aggressive in importing.

Some Australian producers are thus getting a double squeeze in their home market. They are exporting wine at the slimmest of margins (because of lower foreign market prices and the strong Australian dollar’s impact) only to see the wine shipped right back and sold by local retailers, undercutting their plans for higher margin home market sales.

Why do they call these “parallel imports?” I imagine it is because the imports and exports form two parallel lines, with cargo ships full of outbound and inbound wine containers crossing mid-ocean. Australian wine producers need to cross their fingers that even more bad news is not in the cards.

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Special thanks to my Australian informant “Crocodile Chuck” for tipping me off to this situation.

The BRICs: Misunderstanding Brazilian Wine

December 17, 2010 By in Brazil wine market, BRICs, wine history, wine markets 6 Comments

This is the second in a series of articles on wine in the BRICs – Brazil, Russia, India and China.

Intuition isn’t a very good guide to understanding the wine market in Brazil, so it is easy to misunderstand what’s going on there. Nearly everything you think you know about wine in Brazil is probably wrong. For example, a lot of people probably imagine that

  • Brazil doesn’t produce wine, or not much of it anyway. How could they? The country is covered with Amazonian rain forests (except for the beaches in Rio, of course).
  • Brazil probably doesn’t consume much wine, either. Everyone drinks those caipirinha things, don’t they?
  • If they do make wine, it is probably very bad. But I wouldn’t know – I’ve never had any.

Time to Think Again

What’s wrong with these statements? Where should I begin? Brazil produces a lot of wine – it is the fifth largest Southern Hemisphere producer (after Argentina, Australia, Chile and South Africa). Brazil’s 3.5 million hl production (2007 data from OIV) is more than twice the corresponding figure for new world wine power New Zealand (1.5 million hl).

While you might think of Brazil as a land of beaches and jungles, it is a very geographically diverse country with several major vineyard areas. The principal winegrowing region is the state of Rio Grande do Sul on the warm edge of the world wine-growing zone (roughly 30 – 50 degrees of latitude north and south). Serra Gaucha has more than 90,000 acres planted to vine.

Wine is grown in several parts of Brazil, as the map indicates,  including the São Francisco Valley, a hot desert area in the northeast just nine degrees south of the equator. Winegrowers there use plentiful irrigation and specialized viticultural techniques to more or less program grapevines to produce crops twice a year on a rolling schedule that keeps winery equipment in nearly constant use.

The Roots of Brazilian Wine

Wine in Brazil goes way back. The Portuguese planted grapes around São Paulo in 1532 and Jesuit priests established vineyards in Rio Grande do Sul in 1626. But it took a wave of immigrants from Italy in the late 19th century to firmly plant the vine in Brazil.  The migrants came from Italy’s northeast – Trentino and the Veneto – and were drawn to the climate and hilly terrain of the Rio Grande do Sul. They brought winegrowing knowledge and a taste for the wines of their homeland, especially sparkling wines (think Spumante and Prosecco). Their influence persists today.

Although average wine consumption for Brazil is low — less than 2 liters per capita — Brazil’s middle class is on the rise and the wine market is growing beyond its traditional immigrant base. Many people are betting on Brazil and hoping that it will become a more prominent player in the world of wine.

Grape Expectations

It is an old joke that “Brazil is the country of the future … and always will be.” Champagne-maker Möet & Chandon saw Brazil’s potential, especially for sparklers,  as far back as 1973, when it was making its big globalization push into the U.S., Australia and Argentina. They invested in sparkling wine production in Brazil figuring that if anyone was going to sell domestic “Champagne” to fizz happy Brazilians it should be the Champenoise themselves. Möet & Chandon were soon joined by other wine/drinks multinationals including Seagrams, Bacardi, Heublein, Domecq and Martini & Rossi, so the international presence in Brazil is quite strong.

Wine production 100 years ago was focused on quantity instead of quality, as it was in most of the world, and that meant American hybrid grapes rather than European-style vitis vinifera varietals because of climate concerns. Market problems led to the establishment of large cooperatives in the 1920s and 1930s, as growers, many with tiny vineyards, struggled for market power. As in Northern Italy, these cooperatives are still important today as the wine industry moves up the quality ladder.

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Unlikely Name for a Brazilian Wine

One of these cooperatives grew so large that it became more or less the Riunite of Brazil. Cooperative Vitinicola Aurora was receiving grapes from more than 1500 family growers at its peak in the mid-1990s and producing (and exporting) very large quantities of wine.

Even though you think you have never tasted a Brazilian wine, you may well have sampled the Aurora coop’s products.  The name on the label wasn’t Aurora – it was Marcus James!

Here in the U.S. Marcus James is now a Constellation wine brand imported from Argentina, but it began life in the 1980s as the Aurora coop’s brand. The very un-Brazilian name was derived from the first names of an Aurora executive and the son of his  American business partner.  The wines were simple and affordable (the Yellow Tail of their day?) and captured a substantial market. You probably tasted Marcus James if you were drinking wine in the 1990s, perhaps at a party or reception even if you didn’t actually buy any of it yourself.

By 1996 Marcus James was selling more than half a million cases in the United States – more than the entire Argentinean wine sector at the time – and exporting to 30 other countries as well. The Aurora production facility was the largest winery in the Southern Hemisphere and one of the largest in the world.

The brand was so successful that Constellation Brands apparently had concerns about the ability to meet growing demand and when the contract came up in 1998 they switched wine sources to Argentina. Marcus James continues to be a successful brand here in the U.S. (it is the #3 Argentinean brand), selling Argentinean Chardonnay, Merlot, Cabernet, Riesling and Malbec (plus some California White Zin). Aurora still sells Brazilian-made Marcus James wine at home.

Brazil in Motion

The Brazilian market is in transition today. Vitis Vinifera grape varietals have replaced the hybrids in most places. As Brazil’s wine market has opened up to imports, quality standards have  risen and although the basic wine market is still large, the quality sector is expanding. Wines are being produced that can compete on international markets.

Richard Hemming published reviews of Brazilian wines on the subscriber-only part of the Jancis Robinson website in 2009. He rated four Brazilian wines in the four star 17+/20 category, with a 1998 Cave Geisse Brut 1998 sparkler topping the list. The tasting note for a Lidio Carraro Nebbiolo 2006 describes it as “Very pale and brick-hued. Cherry, tobacco, floral, violets. The tannin is high and proud, the fruit sophisticated and there is a perfume that persists across the whole palate.” Sounds good enough to drink, doesn’t it?

The Miolo Group of wineries is often mentioned as one of Brazil’s quality producers and two of their wines received strong reviews in Hemming’s article. It is worth exploring their website if you are interested in where Brazilian wine is going.  They are clearly ambitious, producing wines in many quality ranges, including a reportedly Parkeresque icon-level wine (unsurprising since Miolo is one of Michel Rolland’s clients). World export markets are clearly in their plans.

This is the new new world of Brazilian wine, but the old world still lingers. I think this is a common characteristic of the BRICs today – one foot in the present, the other in the past, moving quickly toward the future.

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Brazil’s past is surprising, its present is promising and its future … well, I am optimistic that the promise will be fulfilled. Now on to Russia to see what we can learn there.

The BRICs: The New New World of Wine?

December 13, 2010 By in Brazil wine market, BRICs, China wine, Economic impact, emerging wine regions, India, Russia wine market, wine research 7 Comments

This is the first of a series of articles on wine markets in the BRICs. BRICs? Is that a wine term? No, although it sounds just like brix, a measure of a grape’s sugar level. Jim O’Neil of Goldman Sachs coined the term BRIC in 2001 to refer to  Brazil, Russia, India and China.

Initially many people suspected that BRIC was just a gimmick — a way to package four very dissimilar countries into an appealing acronym that would draw investor interest. If it was a strategic maneuver it was a brilliant one because of the way it captured the world’s imagination.

More than a Gimmick

“BRICs” is an attractive name for many reasons, perhaps especially because it looks and sounds like NICs — the Newly Industrialized Countries of Hong Kong, Singapore,  Taiwan and South Korea that have been so successful in the global economy.  There was some question initially about why these four particular countries were chosen (why Brazil and not Mexico, for example, and what about Turkey?) and what if anything they had in common, but the idea quickly caught on.

Today the BRICs are firmly established, as the Economist noted earlier this year in an article titled, “The BRICs: The trillion dollar club.”  The BRICs have turned into something real.  Why? According to the Economist …

The BRICs matter because of their economic weight. They are the four largest economies outside the OECD (Organisation for Economic Co-operation and Development, the rich man’s club). They are the only developing economies with annual GDPs of over $1 trillion (Indonesia’s is only half that). With the exception of Russia, they sustained better growth than most during the great recession and, but for them, world output would have fallen by even more than it did. China also became, by a fraction, the world’s largest exporter.

In a recent Economist article (that included this provocative graph), Goldman’s O’Neil was asked to look ahead 25 years, from 2011 to 2036, and to speculate about the future.

One of the questions he raised was whether the BRICs would have greater total (but obviously not per capita)  income than the G-7 countries and what that might mean if they did. A good question to discuss … over a glass of BRIC wine.

The Future of BRIC Wine?

BRIC wine? Well, yes. All the BRIC countries produce wine and all are important wine markets for the future. As these economies grow, their expanding middle classes will be increasingly attractive target markets for the world’s wine makers and their wines will begin to appear on you local shop’s shelf.

China was the 6th largest wine producer in the world in 2007 according to International Organization of Vine and Wine (OIV) statistics, with an estimated 12 million hectoliters of wine produced (for readers who still think in “English” units, a hectoliter equals 100 liters or a little more than 11 standard nine-liter cases of wine).

By comparison, #1 Italy and #2 France produced nearly 46 million hl each in 2007 followed by Spain (34 million hl), the U.S. (20 million hl) and Argentina (15 million hl). BRIC Russia was 11th in the global wine league table, with 7.3 million hl of output followed by Brazil in 15th place with 3.5 million hl.

India does not appear in the OIV wine statistics, indicating that its wine industry is quite small at present. But India definitely is on the wine map — the omnipresent Michel Rolland even has a client there (Grover Vineyards). India is already a major producer of table grapes, with 2007 production only a little less than Chile and the U.S. combined (that’s a lot of grapes), so it is not unreasonable to suppose that higher levels of wine grape production may follow. India would be on the wine BRIC list for its potential as wine import market, of course, even if it didn’t make any wine at all.

Solving the BRIC Puzzle

Some people in the wine industry dream that the BRICs will be the solution to the problem of global over-supply. OIV estimates that 266 million hl of wine was produced in 2007 but only 249 million hl consumed,  a gap of 17 million hl or about 200 million cases. Yikes! Do the BRICs have the potential to soak up all that extra wine and bail out the global industry?

Dream on, say the experts consulted for a 2009 article in Meininger’s Wine Business International. “Are the BRIC countries going to solve the problems of oversupply in the world today? I don’t think so,” said Arend Heikbroek, associate director for beverages at Rabobank (and one of the sharpest wine analysts I know). “It’s a long-term shot,” he continued, ” it’s complicated, each market is completely different. You need to understand the risk, the dynamics, the traders, the distribution system and the legal system in each of these markets.”

Fair enough. Each BRIC is its own particular puzzle, I guess, and it is too soon to know how they will fit into the bigger puzzle of global wine.

The BRICs will be important to the future of global wine even if they aren’t a silver bullet solution to current problems. They are the new new world of wine and we need to figure out what we know about them– and we don’t know.

In this series I’ll examine each BRIC wine market in turn starting with Brazil by bringing  together and synthesizing various published reports and then try to pull things together into a summary. I hope readers with particular expertise will leave comments to help broaden and deepen the analysis. So away we go!

Bottled Poetry: Historical Perspective on Napa Wine

December 7, 2010 By in book reviews, wine science Leave a comment

James T. Lapsley, Bottled Poetry: Napa Winemaking from Prohibition to the Modern Era. University of California Press, 1996.

I had the pleasure of speaking on a panel with James Lapsley at a conference at UC Davis over the summer and his wity and insightful remarks made me realize that I needed to re-read his 1996 history of wine in the Napa Valley.

Lapsley is as close to a renaissance man as you are likely to meet.  He’s a winemaker, historian, and wine economist who teaches in the Davis Viticulture & Enology program and runs the extension service that benefits thousands of California winegrowers by providing technical support.

Bottled Poetry follows the development of the Napa Valley wine industry from the end of Prohibition to the mid-1990s, when the foundation of Napa wine today was being built. It is the sort of book that only a winemaker/historican/economist could write and so it makes fascinating reading.

Lapsley weaves several themes into this history.  The most interesting to me, as someone who drinks wine and studies wine markets but has never made wine, is the story of the low quality of most California wine was in the early post-Prohibition years and what a struggle is has been to reach the high quality standards that we take for granted today.

I am especially impressed with the role of science and technology has played in rise of wine quality. It is easy to think of technology as the enemy of terroir and I suppose sometimes it is, but much of the improvement of wine in recent years is due to improved technology and winemaking practices.  White wines in the 1930s and 1940s, for example, we stored in huge redwood vats for several years before release.  Fermentations were naturally hot and the use of sulfites was quite haphazard. Quality suffered.

Bottled poetry? Lapsley doesn’t make it sound like  many of these wines had much poetry left in them by the time they hit the marketplace.

Many prominent Napa figures were instrumental in developing technical improvements, Andre Tchelistcheff and the Mondavi brothers among them. All the wines benefited from these innovative efforts but the improvement in white wines is especially noteworthy.

A second theme is the influence of large corporations and although Lapsley tells the story in an even-handed way,  it’s clear that big money often had a corrosive effect.  Several of Napa’s historic wineries were absorbed into corporate portfolios where their powerful brands were exploited even as the quality of the wines was debased.

Commercial winemaking is a delicate art. It devours capital like a hungry shark, as Lapsley notes, so deep pockets are useful and corporate funding tempting. But the profits comes only in the long run, which does not always suit the needs of businesses that must produce positive quarterly earnings reports.

Corporate ownership isn’t necessarily the kiss of death for fine wine, but the the history of Napa is filled with enough negative cases to make anyone a skeptic.

A final theme is the fundamental challenge of balancing supply and demand and this is a problem that continues today.  Lapsley’s book ends on an upbeat note that I think is still appropriate 14 years after its publication. Napa Valley has grown and changed, that’s for sure, and although its problems have not disappeared its promise continues to be realized.

All in all, Bottled Poetry is a great read and a terrific addition to the wine economics history bookshelf that also includes volumes like Thomas Pinney’s A History of Wine in America. I understand that Jim Lapsley is working on another history project — the 19th century roots of the California wine industry. Can’t wait to read it!

Retail Wine Sales: Big versus Hot (Hot Hot)

November 30, 2010 By in Argentina, Australian wine, Constellation Brands, Gallo, New Zealand, Supply and Demand, wine markets, wine price, Yellow Tail 18 Comments


I thought it would be interesting to take a look at what’s “big” in the wine market (where the most consumer dollars are going) versus what’s  “hot” (or “hot hot hot” as in the video above), showing the fastest growth.  I’m using U.S. off-premises wine sales data from Nielsen for the 52 weeks ending 9/18/2010 taken from the December 2010 issue of Wine Business Monthly.

Baseline information: Off-premises wine sales in the U.S. totaled $9,172 million in the period covered here according to the Nielsen report, with an overall growth rate of 3.2%.

Which product categories are the largest in absolute terms and which are growing the fastest? I’m going to break down the data by wine varietal, country of origin (for imported wines) and price category. Take a minute and write down what wines/countries/price points you think will be at the top in each category and see if you’re right. Here goes

Chardonnay Leads the Way

Forget what you thought you knew about Chardonnay being so yesterday and Pinot Noir kicking Merlot’s butt. In terms of the overall retail market sales, the giants (or are they dinosaurs?) still dominate.

BIG varietals

Varietal $ million
Chardonnay $1,996
Cabernet Sauvignon $1,347
Merlot $911
Pinot Gris/Grigio $734
Pinot Noir $526
White Zinfandel $427

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American wine drinkers are nothing if not traditional, reaching again and again for familiar varietals, so the usual suspects come top of the table. Pinot Noir has indeed surged in the post-Sideways era, but its lead over wounded White Zin is not large and it still lags far behind arch nemesis Merlot.

Obvious Chardonnay is the consumer default with a 50% lead on Cabernet and double the sales of Merlot. Pinot Grigio, the #2 white varietal, lags far behind.

I find the varietal “hot list” below quite interesting. The fastest growing wine varietals  are Riesling, Pinot Noir (of course), Sangiovese and Sauvignon Blanc. (Interestingly, varietal Sangiovese is rising while Chianti is a shrinking category in the Nielsen league table.)

HOT varietals

Varietal Increase
Riesling 9.4%
Pinot Noir 8.9%
Sangiovese 8.7%
Sauvignon Blanc 8.5%

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It seems to me that while the “big” varietals are wines that many consumers purchase to drink on their own (because of their high alcohol levels and for other reasons), the “hot varietals” are a bit more likely to be food wines. I wonder if that’s a trend?

World Wine Web

Most of the table wines that Americans drink are American — there is a very strong home country preference. Domestic wine sales totaled $6,524 million for the period covered here while imports accounted for $2,648 million. What countries supply the most imported wine as measured by total expenditures? Here’s the Big list:

BIG import countries

Country of Origin $ million
Italy $804
Australia $771
Chile $243
France $228
Argentina $187
New Zealand $125

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As the table shows, Italy and Australia are #1 and #2 respectively in off-premises sales. It is interesting that France has fallen to #4 behind Chile. Argentina and New Zealand make the cut here (Spain did not!) as you might expect, but bear in mind that Italy still sells more wine in the U.S. than Chile, France, Argentina and the Kiwis combined. The concentration ratio in this market is very high: Italy and Australia may be struggling at the moment, but they are in a league of their own.

Italy and Australia will not be over-taken soon, but the market momentum seems to have has passed. Look at the big growth numbers that Argentina and New Zealand are putting up below! Wow. Annual growth rates of more than 20%!

HOT import countries

Country of Origin Increase
Argentina 27.6%
New Zealand 21.1%
Germany 4.4%
Chile 1.7%
Spain 0.6%
Portugal 0.3%

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Now look at the gap between the really hot ones and the rest! Germany comes in at #3 on hot list, but with a low 4.4% increase for the year. Sales of most wine imports (including Italy and Australia) have actually fallen in the last year. Spain and Portugal squeeze onto the list at #5 and #6 by simply avoiding utter collapse. The import wine segment is slumping badly, with Argentina and New Zealand the only significant exceptions.

The Price is Right

Finally, let’s look at the market in terms of price points.  What are the biggest and hottest parts of the wine wall in terms of price?

BIG price points

Price Segment $ million
$3.00 – $5.99 $2,688
$6.00 – $8.99 $1,903
$9.00 – $11.99 $1,868
$12.00 – $14.99 $910
$0 – $2.99 $794
$15.00 – $19.99 $557
$20+ $446

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You can see from the data why Gallo is having a good year (or probably having a good year, since they are a private company and don’t release data so I can only guess). Their brand portfolio is aimed at the heart of the market, from $3.00 to $11.99. Lots of good targets there!

You can also see why Constellation Brands is probably finding this a challenging year. They reconfigured their brand portfolio to take advantage of what they saw as upmarket opportunities.  They moved up the wine wall a bit but the market changed directions and went downmarket, leaving them in a less competitive position.

HOT price points

Price segment Increase
$9.00 – $11.99 9.1%
$20+ 7.4%
$12.00 – $14.99 5.0%
$3.00 – $5.99 4.5%
$15.00 – $19.99 2.5%
$0 – $2.99 (0.1)%
$6.00 – $8.99 (4.0)%

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But Constellation’s upmarket bet may yet pay off. The hot price segments are all in the wine wall’s upper strata.

The Old Elasticity Trap

The rise in spending in the super-premium + categories is an encouraging sign, but I think some caution is necessary in interpreting the data. Many observers see the big increase in expenditures on $20+ wines and conclude that consumers are coming back to this segment strongly — that the demand curve has shifted. But I suspect that there is a lot of bargain hunting taking place and that margins are falling – bad news. Maybe we are just following discounted prices down the demand curve.

For many of today’s buyers a $20+ retail wine is a highly discretionary purchase and so the demand curve may be quite elastic. Econ 101 students will remember that total expenditure increases when price falls for a product with an elastic demand.

The large percentage expenditure increases we seen in the data could result from discounting — $30 wines being sold off for $25 and so on — rather than an actual increase in demand or shift in the demand curve.  The increased revenues are good and inspire optimism, but they may disguise the bad news of shrinking margins.

(As I am writing this, the neighborhood Safeway is offering an extra 20% off any wine selling for $20 or more. I suspect sales revenue will increase at the lower retail markup.)

Overall conclusions? I’d rather not, thanks. These data are interesting more for the questions they raise than the answers they provide. But the questions about how the U.S. wine market is changing are worth pondering (hopefully over a nice glass of wine). Cheers.

On the Oregon [Terroir] Trail

November 23, 2010 By in AVAs, Oregon wine, wine markets 6 Comments

Don’t know how I missed the big news. The folks in Oregon’s Yamhill-Carlton District AVA have been successful in their petition to change the appellation’s name. Henceforth they’ll be known as Yamhill-Carlton not Yamhill-Carlton District.  Wow, I’m glad they finally got that fixed! “District” was redundant, according to one report, and the name was said to be too long to fit on a wine label.

Oregon winemakers are a bit intoxicated with appellations, so I suppose they can be forgiven for being so particular about them.  Oregon imagines that it is Burgundy West (not without some justification) and longs for the fine grid of appellation and vineyard designations that Burgundy is famous for.

Never Satisfied

Not satisfied with the Willamette Valley AVA and six sub-AVAs, many Oregon winemakers have taken the Burgundy-inspired next step, releasing portfolios of vineyard designated wines.  While I admire their efforts to deeply mine their terroir, I am a bit concerned that they might also be undermining the regional brand.

The idea of Oregon wine is not necessarily an easy one for many consumers outside the region to get their heads around. Adding a couple of layers of complexity seems like it could make the big sell even harder. Fortunately, as Paul Gregutt noted in a Decanter article a couple of years ago, particular AVA names are essentially meaningless to many buyers, invisible to all but the most ardent enthusiast, so perhaps I am misoverestimating the confusion factor.

Even so, there are two concerns. First, if everyone is looking after their own little patch of dirt, who’s paying attention to the bigger “Willamette Valley” regional brand? I do think this is a serious issue because regional reputation is hard to earn and easy to lose.

I was shocked a year ago when I saw my first sub-$10 Oregon Pinot Noir, but that sticker shock has passed.  Willamette Valley Pinots in that $10 range are a common sight now and I have seen prices as low as $5.99. Yikes!

The Oregon industry with its low yields and high costs can’t afford to be defined as a “value” region and the marketplace seems to be going in that direction. Maybe, as some have suggested, it’s time to look up and consider the big picture in Oregon.

So is the focus on micro-terroir misguided when these bigger problems loom? Well, not necessarily if there’s really a there there. (Did that make any sense? Let me try again.) Not if the fine geographical divisions are valid and the wines made therein are truly distinctive. But are they?

Target: Archery Summit

With this question in mind we went in search of clear evidence of Oregon terroir. Our target: Archery Summit, chosen because they are owned by the same corporate parents as Napa’s Pine Ridge, which I examined in my Stags Leap District project, and because of their terroir-driven focus on single-vineyard bottlings from distinctly different parts of the valley.

Was there a there there? Well, yes, even I could taste it (and I don’t claim to have a particularly  educated palate), especially the Looney Vineyard wine. Of course Archery Summit has resources unavailable to many others to vigorously pursue terroir. It may therefore be a mistake to generalize from this one winery or others with the same intense focus (Ken Wright Cellars, for example), but it is clear to me that those Bugundian dreams are not wholly unfounded.

One wine that we tasted, made when Archery Summit (and Pine Ridge) founder Gary Andrus was still in charge, was sort of an über-terroirist experience. The 1996 Chêne d’Oregon Pinot Noir was actually aged in barrels made from an oak tree that grew on the vineyard site. As the Archery Summit website explains …

Creating a distinctively ‘Oregon’ Cuvée originated with a desire to marry the taste of Oregonian Pinot Noir and native Oregon oak. Our French cooper François Frères crafted six barrels of Quercus garryana Oregon white oak for the inauguration of Chêne D’Oregon. This Pinot Noir blend aged in 100% new Oregon oak barrels displays the true embodiment of Oregon’s forests, vineyards and soils.

Terroir squared. Very intense. Not to everyone’s taste (maybe this much terroir is too much?) but very interesting nonetheless. Quite an experience!

Rational Exuberance

Oregon winemakers can be forgiven for not caring one iota about my concerns about their AVA structures (or why Stags Leap District fits on a wine label while Yamhill-Carlton District apparently does not). The reviews are just in for their 2008 wines and the scores and comments are fantastic.

One wine broke through Wine Advocate‘s long impenetrable (by Oregon) 95 point ceiling. The Shea Wine Cellars 2008 “Homer” received a 96-point rating (the highest I have seen in WA for an Oregon Pinot) and the Antica Terra “Bontanica” was rated 95.  These great wines and their rave reviews (not just the big numbers)  give the whole Oregon industry the recognition it has long sought.

2008 may be the best vintage in Oregon’s relatively brief  history, according to Wine Advocate critic Dr. Jay Miller. A good thing, too, since it comes after the problematic 2007 wines, many of which are still awaiting buyers. Vintage matters in Oregon, just as it does in Burgundy where the weather is famously variable from year to year.

I’m still concerned about the future of the region if supply and demand cannot be brought into better balance so that economically sustainable prices reappear. (Even Pine Ridge, Archery Summit’s parent, has responded to the soft market by releasing a $20 value brand called Forefront. No idea where the grapes might have come from …).

In the meantime, however, maybe it is best to simply appreciate what Nature has provided. Open up a bottle of ’08 Oregon Pinot and enjoy. Happy Thanksgiving!

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Thanks to Chris Hayes for showing us around Archery Summit and helping us dig into its terroir.

A Wine Economist First?

November 18, 2010 By in Shameless Self-Promotion 17 Comments

I guess I should file this post under “shameless self promotion.”

Just wanted to share the good news. Many of you know about my “day job” as a professor at the University of Puget Sound in Tacoma, Washington. This week I was named “Professor of the Year” for Washington by the Council for the Advancement and Support of Education and the Carnegie Foundation for the Advancement of Teaching.

I think I may be the first wine economist to receive this award!

I’d like to share this honor with my current and former students, my colleagues at the University of Puget Sound and most of all my teachers and professors who were such wonderful role models for me. I feel like I’m getting credit for the work all these folks have done over the years, so I’d like to turn the spotlight back on them!

Teaching is a lot like wine-making. Education and wine are relationship businesses. Both require big investments that take years to bear fruit.  And each vintage is different, so the challenge never disappears.  When all the pieces come together, the result is, well,  magical.

Here’s the official press release:

Mike Veseth Named Professor of the Year for Washington State

University of Puget Sound is Top in the State for Receiving the Award

TACOMA, Wash. – In his office Mike Veseth keeps a large bucket of vividly-colored juggling balls.  “I started juggling, because I didn’t want to forget what it is like to do something for the first time and to have to struggle to get it right,” the University of Puget Sound professor says.

After 35 years of teaching and developing what a colleague describes as “an unbelievable mastery” of his academic field, Veseth did not want to lose touch with the inevitable frustrations of being a student. And so he juggles—badly by his own account—and learns how to learn, so he can pass along a passion for learning to his students.

This is how Mike Veseth, the Robert G. Albertson Professor of International Political Economy, came to be honored with the prestigious 2010 Washington State Professor of the Year award, sponsored by the Council for the Advancement and Support of Education and the Carnegie Foundation for the Advancement of Teaching. Veseth will attend a Washington, D.C., award ceremony on Thursday, Nov. 18. He is the sixth Puget Sound professor to secure the title, making the college the foremost recipient of the award in Washington state.

“Mike changed my life,” wrote more than one former student in testimonies. “I was a prickly, argumentative, and contrary student,” wrote Kirsten Benites ’03, from London. “Regardless of whether he personally believed my arguments, he taught me how to defend my position in a logical way.”  Theater artist Seema Sueko ’94 said that, at first, the professor’s notoriety “intimidated me.” But once Veseth offered the shy student guidance and opportunities, he “transformed me, gave me a voice … and laid the foundation for me to excel.”

Veseth became an excellent teacher by remaining forever a student. He learned what methods of teaching resonated with his students and adopted them. When a changing world demanded a new class, he created it; when the class required interdisciplinary knowledge, he recruited the faculty for it; when a textbook did not exist, he co-wrote it; when the text was adopted by 100 other colleges, he and his colleagues used the funds to support student research.

Urban legends trail Veseth. In earlier days he put elements of the economy’s national income accounts to verse, provided keyboard music, and encouraged students to dance the “gross domestic  polka,” while the class sang along. He currently teaches a class called The Beautiful Game where students study racism, sexism, class conflict, nationalism, commercialization, and globalization through soccer. There is always a long waiting list for his course on The Idea of Wine, which examines the cultural contradictions of post-industrial society using a wine glass as its lens. For seniors preparing to tackle their first thesis, Veseth prescribes a session of juggling the infamous colored balls, so that the students are armed with the humility and determination needed for the uphill climb.

A colleague has remarked on the number of students who pass in and out of Veseth’s office. “I try to get to know the students’ personal interests,” Veseth explains. “So even if it’s an abstract subject, I can find a link that relates to something they care about.”

Veseth demands the best, and his students respond. Aaron Ausland ’96 writes about “miserably throwing away” a graduate school application essay after being told by Veseth it was “not his best work.” The revised essay gained Ausland admission to Harvard Kennedy School, where he wrote an award-winning master’s thesis that propelled him to his current position at the global anti-poverty agency, World Vision.

“I sit here with a pile of letters received from Kathmandu to London, from members of Classes of 1993 through 2011,” wrote Kristine Bartanen, Puget Sound academic vice president and dean, in her letter of nomination. “All of them found the inspiration for actualizing their lives of service to the global community as a student in Mike’s classroom. You can see that being an outstanding teacher is not just what Mike does, it’s who he is.”

Michael Veseth, co-founder of the first undergraduate program in international political economy, has written, edited, and co-authored more than a dozen books including Mountains of Debt; Globaloney (named a Library Journal best business book of 2005); Globaloney 2.0: The Crash of 2008, and the Future of Globalization; and Wine Wars (forthcoming 2011). A Puget Sound professor since 1975, Veseth has held visiting posts with the American Institute on Political and Economic Systems in Prague and Johns Hopkins University’s The Paul H. Nitze School of Advanced International Studies in Bologna, Italy. He is a graduate of Lincoln High School in Tacoma, Wash., and earned undergraduate and graduate degrees from University of Puget Sound and Purdue University.

CASE and the Carnegie Foundation have been partners in offering the U.S. Professors of the Year awards program since 1981. TIAA-CREF, a leading financial services organization, is the principal sponsor for the awards luncheon. Additional support is received from a number of higher education associations, including Phi Beta Kappa, which sponsors an evening congressional reception.

The U.S. Professors of the Year program salutes the most outstanding undergraduate instructors in the country—those who excel as teachers and influence the lives and careers of their students. Nominees for the award are selected by their own institution and are judged by two separate panels of education experts and professionals on the basis of criteria including their impact on students, scholarly approach to teaching, and contribution to education in the institution, community, and profession.

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The photo is by Drew Perine, taken from The News Tribune story by Rob Carson.

Past is Prologue at Tantalus Vineyards

November 14, 2010 By in Canada, history, wine markets Leave a comment

Past is prologue, Shakespeare wrote in The Tempest, and I’ve learned that if I want to figure out  the future I first need to understand the past. That’s why we decided to visit Tantalus Vineyards on Dehart Road southeast of Kelowna, British Columbia. My investigation of the future of Canadian wine had to start at its roots.

Jane Hatch (that’s her in the video) and David Patterson showed us around the contemporary winery and hospitality facility that  opened just a few months ago (the video was made while it was still under construction).  Jane is the winery’s general manager and David its production winemaker.

Past, Present and Future

Looking down over the vineyards to the lake from the new LEED certified building with its First Nations mask decorations, it would have been easy to forget the past and just enjoy the present. But Tantalus is a place where past, present and future come together.

J.W. Hughes bought land here in 1927 and planted his Pioneer Vineyard to vitis lambrusca varietals (think Concord grapes and the like), to be sold on the table grape market. In 1930 he agreed to sell grapes to Victoria Wineries Ltd. (for $100 a ton) in what may be the first wine grape contract in Canadian history.  Commercial B.C. wine production up to that point was focused on fruit wines – loganberry wines at Victoria and apple wines at nearby Calona Wines Ltd, for example. It was a good way to use up surplus fruit.  There is no indication that the wines were of particularly high quality. Consumer expectations for wine were low and these products found buyers.

Hughes expanded his vineyard holdings and then, starting in the mid-1940s, began to sell them off to his farm managers. That’s how Martin Dulik came to own Pioneer Vineyards, which he paid for over seven years beginning in 1944 by giving Hughes half of the revenues from each harvest.

Dulik, a Czech immigrant, managed the vineyard well and the grapes that he and his son Den produced were sold on both the wine and table grape markets. As wine production in the region expanded in the 1960s, many growers replanted to French hybrid varietals like Seyval Blanc, but Den Dulik resisted the trend, reasoning that his vitis labrusca grapes made better wine than the hybrids. He was probably right, although the wines they were went into were often the unsophisticated “pop” products that were popular at the time.

Taking the Next Step

In 1978 Dulik was persuaded to plant White Riesling and these vines are the foundation of Tantalus Old Vines Riesling that I tasted on my visit. Soon Pinot Noir, Chardonnay and other vitis vinifera vines joined Riesling in Pioneer Vineyards.

Everything was in place, therefore, when Den’s daughter Susan developed a passion for wine and started making wine with the family fruit. Her project soon developed into a farmgate winery called Pinot Reach conceived with the intention of making exceptional Pinot Noir. Pinot Reach opened in 1997. Its wines, especially the  Old Vines Riesling, were soon being praised by no less than Jancis Robinson, the celebrated British wine critic.

Investor-enthusiasts Eric Savics and Eira Thomas bought the winery and vineyards from the Duliks in 2004, renaming the operation Tantalus,  and began the transformation that includes the new winery facility you’ll find there today. Tantalus’s recent development reflects two trends that I saw everywhere on our Okanagan wine tour.

Global Meets Local

The first is a growing international influence. Although the market for these wines is mainly local, the winemaking influences are decidedly global. Tantalus’s senior winemaking consultant, Jacqueline Kemp, is a New Zealand “flying winemaker,” who brings international experience to her work here. Production winemaker David Patterson is Canada-born, but he learned winemaking  in New Zealand and earned his winemaking spurs there and in Oregon and Australia.

All across the region I met winemakers and “flying interns” from around the world. In a way this continues an existing pattern, since many of the early winemakers here were immigrants who brought winemaking knowledge with them, but it is more than that. The Okanagan is now clearly part of a very intense global exchange of technical winemaking knowledge.

Talking with David about the great strides that the region’s wines have made, I brought up climate change. Surely the changing natural environment accounts for the improvement, I suggested. David disagreed. It was better winemaking, not warmer weather, that made the difference he said, and surely the international influences are part of that.

The second trend, which is seen so clearly at Tantalus, is that this global energy is clearly focused on identifying distinct local terroirs. The Tantalus team realize that theirs is an exceptional location for Riesling and Pinot Noir and they are drilling down into those vineyards and particular varietals to see what they will reveal.

The region is extremely varied in its micro-terroirs – almost anything is possible here from ice wine to Syrah and Zinfandel. But just because something can be done doesn’t mean you should do it and the race is on to find out what works best for each vineyard block.  Focus and increasing specialization are the wave of the future here.

Yes and No

So is past prologue?  Yes and no. Yes in the sense that the Okanagan wine industry wouldn’t be what it is today without the evolutionary process it’s experienced. The industry is stronger for the work of its pioneers and the legacy they created.

But no, the world has changed, is changing. With better winemaking and increased investment the true potential of  this region’s wine industry is being unlocked. The challenge now is to get the word out and then to get the wine out. I’m trying to do my part on the former, but the latter is the bigger challenge in the long run because of regulatory structures that make marketing and distribution costly and inefficient even within Canada to say nothing of international trade.

O Canada, my how you’ve changed. I’m looking forward to visiting again in a few years to see how present trends develop.

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This post owes a debt to John Scheiner’s writings, especially The Wines of Canada (Mitchell Beazley, 2005), John Scheiner’s Okanagan Wine Tour Guide (Whitecap Books, 2006) and his British Columbia Wine Companion (Orca Books, 1997).  Scheiner’s blog and books are great resources for anyone who wants to know more about B.C. wines.

Grandi Vini (or Joe Bastianich is Nuts)

November 8, 2010 By in book reviews, Italian wine 1 Comment

Joe Bastianich must be nuts.

The food business is crazy; you have to be nuts to own even a single restaurant in today’s market much less the twenty that Joe owns in partnership with the equally insane Mario Batali.  The wine business is maybe even crazier; Joe owns three wineries in Italy and several food and wine shops, too,  just in case he ever has a moment of free time with nothing else to do!

And now there’s this book, Grandi Vini.  You don’t have to be nuts to write a book (although I think it probably helps), but I’m not sure a really sane person would write this book, which aims to identify the 89 best wines in all of Italy and tell their individual stories.

Nuts? Oh, Yes.

Why is this nuts? Well, Italy is maybe the the most complex and varied vino terrain in the world. Here in the U.S. we often talk about “Italian wine,”  but really there is no such thing. Mario Batali once said that Italian food doesn’t exist, there are only the regional cuisines of Italy. It’s the same with Italian wine.

Just take a look at De Long’s nifty wine map of Italy shown below — what a crazy quilt! Local wines in Italy evolved from (largely) indigenous grape varieties and co-evolved with the local cuisines.  Common threads, to the extent there are some, are few and far between. 

Some of this complexity is hidden, submerged by regional wine appellations. Soave, for example, is a very familiar name — so familiar that we don’t always recognize it as a wine that comes from a particular place (the Soave zone outside of Verona), is a blend of grape varietals with the very unfamiliar indigenous Garganega playing the leading role and is made in a number of distinct styles (including Soave Classico and the exquisite Recioto di Soave).

The more you drill down into Italian wine, the more complicated (and interesting) it becomes and the more you start to understand how crazy Joe Bastianich must be to attempt to identify the very best wines.

Yes, yes, I know that Gambero Rosso’s famous annual guide Vini d’Italia has done this for many years now, bestowing their “three glasses” tre bicchieri designation on the year’s very best. (Receiving three glasses is like getting three Michelin stars.)

But their team tastes and rates thousands of wine (16,000+ in my dog-eared copy of the 2007 edition) from hundreds of producers (2,206  in 2007) and in the end bestows scores (262) of top prizes.

For Joe to try to do this all himself, despite his intense relationship with Italian food and wine (which now includes Eataly in New York — another Joe and Mario production)  and to narrow down the list even further than Gambero Rosso is … well, audacious at least if it isn’t actually insane.

What Joe Says … and Doesn’t Say

So what about the book? Well, it’s a great read (just because Joe is crazy doesn’t mean he can’t write). Wine is good, I tell my audiences, but wine and a story is much better and the 89 stories that Joe tells here make great reading, both individually and taken as a whole. I am fascinated by what he says … and what he leaves unsaid.

The unsaid is quite striking. Joe’s family is from Istria and he calls Friuli in Italy’s northeast corner his Italian home. That’s where you’ll find his wineries including the eponymous Bastianich. (The Bastianich Vespa Bianco is Wine Economist household favorite.) I consider Friuli one of Italy’s great wine regions, so I was surprised to see just three wines listed here (versus five for nearby Alto Adige and six for the Veneto).

Mind you the three are stunning wines (from Josko Gravner, Edi Keber and Silvio Jermann), but I think there are more Friulian wines that deserve to be raised to the vino Italiano pantheon.  Just sayin’ that Joe shouldn’t short change the home team in his attempt to be objective.

What Bastianich says is significant, too. As I have read through the various entries I find one strong theme: change. Joe is constantly recognizing winemakers who bring new ideas to Italian wine, especially “modernist” ideas. He wants his readers to understand that Italian wine today is not your grandfather’s rather flat raffia-clad Chianti. By implication, I think, he is saying that many “traditional” producers became lazy and let quality slip.

The best producers today are bringing new ideas and technologies to the vineyard and cellar and are making really distinctive wines of quality that honor tradition but are not slaves to it. These are the wines that are showcased in Grandi Vini.

It’s All in the Timing

The best Italian wines find a way to express their unique terroirs while also meeting international standards for quality. The worst Italian wines — and there are many of them — fail utterly and are part of Italy’s enormous overhang of unsold wine.

Italian wine is in a slump right now. U.S. off-premises sales of Italian wines have actually declined in the last year, although they have picked up a bit in the last few months. This is a good time to seek out the better wines. Hopefully Joe’s book will inspire many wine enthusiasts to take the plunge.

I still think Joe Bastianich is nuts for writing a book like this, but I hope he stays nuts for while.  I’d like to see his crazy vision of Italian wine develop and its consumer market grow.

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Grandi Vini: an opinionated tour of Italy’s 89 finest wines by Joseph Bastianich. New York: Clarkson Potter Publishers, 2010.