Monthly Archives: December 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!