I think I’ve seen the future of American wine — or at least one aspect of the future, since nothing in wine is simple — and I didn’t need a Time Machine, Crystal Ball or souped-up DeLorean to do it. All I had to do was walk into my neighborhood Safeway store and take a look around.
[This is the final post in a series about what I think I learned at this year’s Unified Symposium regarding the future of the American wine market. Scroll down to the earlier posts if you haven’t already read them.]
The buzz at the Unified Symposium this year was about America’s growing wine market and the bodacious 2012 U.S. grape harvest. Higher demand, abundant supply — happy news. But, as I have argued over the past few weeks, the future is more complicated, full of both opportunities and challenges.
The U.S. is unlikely to be able to meet all of the rising demand profitably in the long run if current trends continue, so imports will likely fill the gap. U.S. producers should adopt a “Machiavellian” strategy to seize control of import flows, especially important at the low-price end of the spectrum, and systematically shift U.S. products into up-market categories. The changes are coming, I’ve written, so the best bet is to think ahead and be well-positioned when the future finally comes around.
Bota Box Globalization
Not everyone agrees with this vision of the future and I’ll talk about alternative views in a moment. But first I want to show you where things seem to be headed. Here for your consideration is a version of globalization that I think points the way. I call it Bota Box Globalization.
Bota Box is a line of 3-liter bag-in-box and 500 ml tetrapak wines from DFV. Jon Fredrikson named DFV winery of the year for 2011 at last year’s Unified and the company has been growing by leaps and bounds — it’s easy to see why.
When I’ve thought about Bota Box in the past, I’ve associated it with good value, alternative packaging and put it squarely in the “California wine” category. Why California wine? Well, because that’s the appellation I remember seeing on the boxes and also because DFV is a major California producer, making about 6 million cases of their own wine brands last year and about another 6 million cases for other firms.
(Data from the 2013 Wine Business Monthly top 30 U.S. producer report — DFV is #8 out of 30 if we take only their own brands into account, wedged between #7 Ste Michelle Wine Estates and #9 Jackson Family Wines.)
Sell Local, Source Global
I guess Bota Box is still a “California brand” and of course an American brand, but DFV is already doing with it what I think many large volume (and some smaller ) producers will do — sell the brand locally but source the wines globally.
The wines were attractively displayed at the Safeway on Proctor Street when I visited on Saturday — appealing enough that the 3-liter Cab boxes were sold out. The wines were priced at $24.99 for the box, which is equivalent to $6.25 per 750 ml bottle, but you could bring the cost down to $19.99 by flashing your Safeway Club Card and cut another $2 off if you purchase in quantity, as you might for a party.
This is good value, but not bottom-shelf cheap. Bota Box is a leader in the “premium box wine” category that represents a big step up from brands like Franzia.
The packaging, the brand and the grape variety are the main things you notice when you survey the color-coded Bota Box shelf, but a little investigation brings the global factor into focus. The Merlot, Riesling, Shiraz were all California wines at my store, but the rest were imports from Chile (Cabernet Sauvignon), France (the RedVolution red blend), Italy (Zinfandel!), Argentina (both Malbec and Moscato) and South Africa (Chardonnay).
South African Chardonnay in a Bota Box? Wow! I didn’t see that coming.
Poking around the web, looking at Bota Box images, it is pretty clear that the sourcing is both flexible and global. Looks like the Malbec has come from exotic Lodi, for example, and that the Shiraz, Cab and Chard were once sourced from Australia, probably back before the Aussie dollar became so ridiculously over-valued.
And the Zinfandel once came from California instead of Puglia and probably still does in some of the containers — you sometimes find the same varieties from different countries on adjacent Bota Box shelves. The 3-liter RedVolution was from France and the big box Cab from Chile at my neighborhood Safeway, for example, but the 500 ml tetrapaks of the same wines wore a California designation.
Bota Bottom Line?
Brand, package and variety are the key factors in this business model — the particular source of the wine is a secondary characteristic for Bota Box, so long the as quality is consistent, as I assume it is.
The bottom line of my series of posts is that I see the U.S. wine market continuing to grow and imports making up a larger and larger part of it as domestic supply constraints kick in, competition increases at the lower price levels and wine export momentum is sustained. Bota Box globalization illustrates one way that smart producers will position themselves to compete in this evolving market while controlling their own destiny.
Going back to an earlier post in this series where I compared the wine market to the apple market, I think we’ll see Juice Box Globalization at the bottom shelf of the wine wall, where pressure for global integration will be very strong indeed, Granny Smith (and Bota Box) Globalization in the middle and the highly differentiated products that represent Honey Crisp Globalization at the top. It’s already happening. Are you ready? It looks like DFV is!
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What’s wrong with my analysis? Well, prediction is difficult — especially about the future — and so there is a lot of room for error. One criticism is that my analysis is fairly simplified and a much more nuanced approach is needed. Fair enough. Fortunately Jim Lapsley has already provided that in an enlightening analysis he prepared in 2010. Click here to download the pdf — it is well worth reading if you are interested in this issue. Jim concludes that
The U.S. wine market will look different in 2030. On the demand side, per capita consumption will increase as acculturated Hispanics adopt wine and as wine becomes a more integral part of the American culture. Increased per capita consumption combined with population growth could quite possibly increase total table wine sales to 3.60 billion liters.
California will remain the dominant producer within the United States, but it is likely to lose market to inexpensive bulk-wine imports. These wines are likely to be marketed as global brands, with the location of grape supply of little importance to consumers. This article has also discussed the supply and demand picture for higher priced wine for which location of production is a dominant marketing attribute. These wines, which are largely produced from coastal grapes, face quite different economic drivers on both the supply and demand sides of the market
Jim’s analysis is more sophisticated than what I have posted on The Wine Economist, but we see many of the same factors at work. I see the global integration as being a more powerful factor, but maybe that’s because I’m a globalization expert and pre-disposed to see globalization wherever I look.
Another set of reader comments essentially argues that I am too influenced by recent events and conditions — the relatively weak dollar, for example, the recent surge in bulk wine trade and current supply-demand balance trends and conditions. All these factors could and probably will change. Will they change enough to alter my conclusions?
Good point. They might! But I’m not convinced they will. I guess we will have to wait and see, but in the meantime I don’t think if would be a mistake to get ready for the increasingly global future of U.S. wine if and when it comes around.
As long as the country of origin is up front on the product all is fine and the market will grow, bury the country of origin in the small print and there may be a consumer backlash.
Once upon a time a medium sized Canadian wine company imported SA, Chilean and Australian wines in bulk bottled them and built a profitable program for them in several of the large provincial markets, this was before the critter wines but they used critters on the labels. Canada had a law that allowed imported wine to be branded (without origin) and bottled under the “Cellared in Canada” designation, well the large wine companies (those international guys) started doing this with bulk imported wine from wherever it was cheaper then created a series of brands, which appeared to be Canadian, unless you read the tiny fine print and knew what “Cellared in Canada” meant. After many years of this the media heard about the travesty being pushed on the unsuspecting public, well it ended in a consumer backlash and the requirement for the wines to be segregated to a Cellared in Canada section of the monopoly wine venders in the various provinces, sales dropped across the board, new brands have now been developed under the Cellared in Canada heading.
Moral to the story, inform the consumer and you won’t disappear as did the medium sized company that started the bulk imports into Canada, it was actually bought by one of those big guys.
Thank you for your article, Professor. Is there a case to be made for wine being one of the earlier global commodities? Nothing like the Silk Route or the spice trade, but the Phoenicians recognized wine as a tradable commodity, and wine amphorae have been found on ancient ship wrecks. Please see 1957 article below discussing shipment of wine in oceangoing tankers:
http://news.google.com/newspapers?nid=2245&dat=19571010&id=o9o_AAAAIBAJ&sjid=3aMMAAAAIBAJ&pg=2683,5209403
The stated use of the tankers in the article was to transport California wine through the Panama Canal to the East Coast for bottling but similar vessels were used to transport wine around the world, most notably from North Africa to France.
Packaging of imported wine into domestically branded products was very prevalent in California in the mid to late 1990s due to domestic supply constraint at that time. Most of that volume went to larger format BiB, and often included indication of variety, but significant volumes went into 1.5 L and 750 ml format domestic brands. A more recent example was the Pinot Noir squeeze created by the “Sideways” phenomenon, which saw $10 750 mL domestic brands being filled with “Pinot Noir” from Italy and France (which was a consumer scam because these wines’ pedigree wouldn’t conform to TTB domestic labeling regs , or were grossly misrepresented as in the case of Gallo with SDA).
There is a reason that Ciatti & Co. has had offices In all the major wine producing regions on the planet for many years. If you have a chance, attend the London Wine and Trade Fair, Prowein or Vinexpo for a never ending education. Do you consider your blog to be oriented towards wine industry professionals, or to consumers, or economists? With all deference and respect, Professor, do wine ndustry professionals need to be taught that wine has been a global business during their lifetimes and long before? You have “seen the future of American wine”– made me think of Rob McMillan’s (SVB) blog that is often based on a “back to the future” premise, and he IS driving a “souped-up” DeLorean.. I’m sure you did not mean to imply that your vision was prophetic, but Joseph Smith did come to mind upon reading you’re opening. And none of the above reply needed to have been written to an accomplished academic – only an idiot breathes pedantic to a professor 8=)
And a follow-up comment:
In one of your previous postings, I commented on the challenge that California might face in being economically competitive for commodity wine. You replied that you had talked to an industry expert who
was concerned about an impending shortage of crush capacity in the South Central Valley, wrt impact of regulatory requirements, which would concern air quality and water usage/waste water disposal.
It doesn’t seem that a shortage of commodity crush capacity will be a constraining factor. Note the massive expansions happening at DFV, Trinchero and many other huge valley processing facilities. If the San Joaquin Valley APCD Regulates carbon dioxide emissions, that could be a game killer but there are powerful forces that probably will prevent that. Some SJV mega-wineries have plans in place to shift the location of the plant slightly northward to Sacramento County if necessary, which does not have the onerous regulatory statutes of the San Joaquin Valley. Sorry for the long blab….HB
Mike,
Thanks for the mention of the article. You may remember that at the 2010 Wine Economist meeting at Davis, we served Franzia box wine at lunch. As part of the organizing committee, I had insisted that the participants taste the largest selling brand (at least at the time) in the U.S. We had 3 wines: A Chardonnay, a Cabernet and a White Zinfandel. The Chardonnay was from South Africa, the Cabernet was from Chile, and the White Zinfandel was labeled “American”–which only requires 75% of the content be from the U.S.