The world is becoming Hot, Flat, and Crowded according to New York Times columnist Thomas Friedman’s bestselling 2008 book. Hot and crowded are easy to understand, but flat?
Yes, Friedman, said, flat as “a metaphor for the rise of middle-class citizens, from China to India to Brazil to Russia to Eastern Europe, who are beginning to consume like Americans. That’s a blessing in so many ways–it’s a blessing for global stability and for global growth. But it has enormous resource complications ….”
Fat Not Flat
Friedman is counting on the world’s growing middle class to shake things up and he is probably right. Here in Wine World, however, I think the trend is fat more than flat, although it might amount to the same thing in the end.
“Flat” suggests to me that the gap between the top and bottom — 1% elites and 99% masses — is closing. Wine certainly isn’t getting flat in this sense, although the recent softness of Bordeaux en primeur prices argues against this a bit.
No, the floor and the ceiling aren’t getting any closer when it comes to wine — so I think the best way to describe this trend is Fat — fat in the sense of “thick in the middle:” middle class, middle market, middlebrow.
Thick in the Middle
Wine’s recently-concluded long slack cycle (see previous post) flooded many markets with good, reasonably priced wine. The impact of the economic crisis encouraged consumers to trade down (to cheaper wines), to trade over (to different types of wines), and trained wine drinkers to look for bargains. Many new consumers entered the wine market at the same time, bringing with them new tastes, new attitudes, and a refreshing willingness to experiment.
There are several key indicators of the degree to which wine markets have been open to new ideas. The great success of New Zealand and Argentina as wine exporters reflects both the quality and value of the products from these countries but also, I believe, their good fortune in entering the global market at this time.
Marlborough Sauvignon Blanc and Argentinean Malbec are easy to understand, easy to drink and even easy to pronounce. They are the hottest import categories in the U.S. market. Significantly, neither of these wines is especially cheap. They are generally priced in the middle market, well above Two Buck Chuck and even higher than popular brands like Barefoot. They fit my “thick in the middle” model to a “T.”
The Moscato boom is another indicator, although I won’t press this too far since there is not yet a consensus about where it came from, what it means or how long it will last (readers should feel free to correct me about this in the comments section — I’d really like to know the answers). Moscato/Muscat sales have surged in the U.S. — up by 65% in the last year alone according to Nielsen data published in this month’s Wine Business Monthly. Moscato wines had higher dollar sales than Riesling, Syrah/Shiraz, Zinfandel or Malbec in the last year in the retail vectors that Nielsen monitors . Wow!
Now For Something Completely Different
The one thing I am sure about is that Moscato’s unexpected popularity indicates that consumers are willing to try something new. And while they look for bargains and value, they don’t seem to be focusing on the bottom shelf. Nielsen reports that sales of wines below $6 have been essentially flat in the past year in revenue terms and spending on wines in the $6 to $8.99 range declined. Spending on wines in the $9.00 to $11.99 range, however, has actually increased by about 10%.
We’ve also seen the emergence of hot new brands in this middle market middlebrow segment. The rapid rise of brands like Gallo’s Apothic Red Blend and Ste Michelle Wine Estate’s 14 Hands suggests that consumers are focusing on this market category.
It’s not quite true that these particular wines came out of nowhere to achieve great success in the off-premises trade, but it’s not entirely wrong either. They are another sign of the thickening of the middle segment of the wine market of consumers ready and willing to try new things and not entirely constrained by old attitudes and allegiances.
The Supply Side of the Story
So far I’ve focused on the demand side of the story but supply plays an important role, too. As grape and bulk wine markets tighten up (see previous post) it is only natural that scarce wine resources will go where the margins are and where substitution is easiest. The “middle” wines I’ve just discussed are often priced at the “fat” part of the market where better margins may be found. (I say “may” because this market segment is quite competitive and competition has a way of squeezing margins.)
Some of these “middle” wines are blends, not single varietal wines, and come from broad appellations (Washington State, California). A few are non-vintage. These properties allow winemakers to more easily substitute among supplies of grapes and bulk wines to make or complete their products — the ability to substitute is important when supplies are tight and costs are rising.
Middle market wine for middle class, middlebrow consumers — is this a good thing? I guess it depends upon whether you are a Martian or a Wagnerian. I’m a Wagnerian myself, so I see this as a healthy development, even if wine loses a little of its mystery and becomes just a bit more like other everyday products. Making wine a part of everyday life is a worthy goal here in the U.S. and I don’t think the 1% wines (or even the 25% wines) have much to fear.
There’s one more trend on the horizon that completes this theme. Come back next week to learn about how wine has become even more “uncorked.” And I’m not just talking about screw caps!
[This is the third in a series of articles on Tight, Fat and Uncorked, the three trends I see shaping the wine industry in the near future.]
Thanks for the article. I agree that amongst the two options, fat vs. flat, “fat” in the middle is more directionally correct. And yes, they might amount to the same thing. But the reasons for that are fascinating because they reflect how dynamic, responsive, and fragile the wine industry can be on both the demand and supply sides. Muscato is a great example to demonstrate some of these characteristics.
The “moscato boom” demonstrates that the world of wine is flattening, though I don’t know the common consensus on the root causes for the boom. But, I believe the “boom” is driven, in part, by popular culture, and wine consumption growth amongst emerging niche market wine consumers. Muscato in recent years has been the beverage of choice for many high profile figures, ranging from hip-hop artists to reality show personalities. These figures can wield huge influence potential. Take for example Cristal having to publicly distance themselves from hip-hop mogul Jay-Z for fear that consumers were to closely aligning the Cristal brand with his life-style attributes. Popular culture (music in particular) can transcend broadly across many wine market segments, and have impacts in new key market niches.
Things like celebrity influence may resonate highly with emerging large niche consumer segments like “Millennials.” This consumer segment demonstrates a high receptivity to wine consumption and has a market population potential of 70 million (according to estimates). Based on number alone this segment may prove to be a powerful “flattening agent.” Studies suggest that individuals in this segment tend to appreciate new products so long as they are genuine, sincere, and reflect similar value propositions. Another way of stating this is that “Millennials” want to feel special.
So on the supply side, industry giants like Gallo have the market strength to successfully manage profit and lost margins across brands (perhaps even as grape crop prices rise) and capitalize on the buying power of this niche segment. Well, that is so long as individuals in the “Millennial” category can afford to buy wine, and so long as Gallo can continually create and market new brands like Apothic Red which appeal to “Millennials” without making them feel targeted (because then it wouldn’t be sincere).
Great conversation Professor, thanks for letting me contribute.
Millennials are, by description, in the 16-34 year old profile. Quite a significant portion (28%) of these are unable to buy alcohol of any type – over 19 million of the 70 million. Some are still 5 years away from being of age.
Gallo has long controlled the spot market pricing of grapes throughout northern California with their long-term grower contracts.
As for the M-Boom: “[Hip-hop rapper] plugs have accelerated a full-blown Moscato boom: According to Nielsen, sales grew about 73 percent in 2011 after doubling the previous year. It is the fastest-growing varietal in California—E.&J. Gallo, California’s top bulk winery, has introduced five new Moscato products over the last two years. Growers in California have been frantically planting Muscat grapes (the kind used in Moscato) to keep up with demand, marking the first known occasion in which rap [music] has directly affected the biosphere.”
Sorry, posted before tagging:
Vines by the Rhyme
Rappers boost a varietal.
By Willy Staley in New York Magazine.
Good points. So while Gallo can hedge against longer term rising grape prices through extended grape contracts they may not be as agile to offer popular varietal wines to the 70% of millennials that are of age to buy wine. I guess that puts more emphasis on them to focus on up-front marketing, branding, and packaging.
Very interesting series of posts.
In the long run, I think that the availability of more “middle” wines is great for consumers and by extension, for the industry as a whole. Personally, I only began to understood the incredible diversity of wine once I started drinking reasonably-priced wines on a regular basis. That exposure led me to understand higher-priced wines as well, although they still aren’t everyday wines for me (and probably most consumers). Using your lingo, I would guess that many wine aficionados only become a Martian after a period as a Wagnerian.