The Surprising Rebound & Unexpected Bifurcation of the U.S. Wine Market

March 31, 2015 By Mike Veseth in economic crisis, new normal, wine markets, wine price 5 Comments

Let’s climb in my time machine and go back a few years to 2008-2009, when the impact of the global financial crisis was beginning to be felt in the wine markets. It was a pretty gloomy time and there was a lot of talk about the need to reset our expectations to the “new normal.”

Gone were the days of great expectations as everyone scrambled to cope with the changing economic and consumer environment. What did we imagine the future would hold? Well, opinions varied, of course, but the “conventional wisdom” generally revolved around a few dire trends.

Trading Down and Trading Over

One of the most-cited trends was trading down. It sure looked like wine consumers were pulling away from wines at higher price points and shifting to less expensive products — or even moving away from wine altogether. Here’s a video that captures the moment fairly well (it was the first time I was ever interviewed by an animated character)

Trading down seemed like an unstoppable force at the time, although I suggested that it was more complicated. I noticed the strength of the Barefoot wine brand and proposed that it wasn’t just the price of the wine that made it so appealing to recession-battered wine drinkers, it was also the casual image that it offered with its surfer dude footprint in the sand style.

No one wants to admit to themselves that they are trading down, I wrote. Not good for self-esteem. But we can all embrace the idea of trading over — over to a more relaxed, less serious (and incidentally also maybe less expensive) idea of wine. Relax (there is even a brand of Riesling called “Relax”) and just enjoy wine. That’s what I thought I saw in the marketplace.

The $20+ Dead Zone

Whether it was trading down or trading over, the result was the same: the $20 and up segment of the wine market was declared a “dead zone” where nothing moved. People still drank more expensive wines, then just didn’t buy them. They “drank up” from their cellars rather than “trading down” at the wine shop.

Wineries found that many wine club members were pulling back from scheduled shipments. Restaurant wine sales took a very big hit, too, as consumers dined out less frequently and economized on wine purchases when they did. Restaurants coped by trading down themselves, putting more pressure on wineries.

Dumping, Discounting and Flash Sales

Some wineries held their prices and absorbed inventory accumulations rather than discount or dumped excess wine on the bulk market (where Cameron Hughes and others found some outstanding bargains for their customers). They saw price cuts as a one-way street. You can lower prices, but can you raise them back up again when good times return? Some wineries split the difference by bringing out second labels to sell for less — chateau cash flow wines — while holding the price line on prestige brands. Lots of mistakes were made along the way and some wineries fell out of the market.

Many discounting strategies were rolled out. Safeway stores began running promotions where $20+ wines could be purchased for 30% off the regular price (or 40% off with a 6-bottle purchase) — a clear attempt to reduce inventories in the “dead zone” category. A number of “flash sale” wine websites appeared that allowed wineries to sell off surplus stock quickly and outside of the usual sales vectors.

Sometimes wineries found themselves caught in competition with their own wines as buyers (wine club members, restaurants, a few distributors) dumped their stock back on the market, under-cutting carefully calculated producer pricing strategies.

There were some great bargains for buyers who recognized them (and had the credit card headroom to take advantage), but there were not very many true winners among wine producers, especially those in the higher price ranges. The frankly defensive strategy of generating cash flow while protecting key price points was the best that many wineries could hope for. divide

Up the Down Staircase

Would consumers shift back when the recession was over? Not many people held out hope for a reset of the reset. So the current state of the U.S. wine market, which Jon Fredrikson has called “A Tale of Two Markets” comes as something of a surprise.

The U.S. wine market has split in two as the table above shows. (The table shows recent data for off-premises wine sales as measured through the particular retail channels monitored by the Nielsen Company. These data are indicative of what’s going on in the broad market.)

While the market is expanding at a moderate +3.4% pace (at least it is growing, unlike wine markets in some Old World regions), there is a clear division between wines selling at prices below $9 and those that sell for more. Although the cheaper wines make up the majority of the market by volume, they are shrinking in dollar sales value, especially the $6.00 to $8.99 segment.

The New Conventional Wisdom?

More expensive wines, on the other hand, represent a rising market segment. All price segments over $9 are growing as per these data, with the fastest growth at the highest price point — $20 and above!

This is truly a dramatic turnaround for U.S. wine. What is behind this unexpected change? I’ll survey the new conventional wisdom in my next column.

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BTW that’s a really old picture of me in the video — I hope that I’ve improved with age since 2008. The Costco reference is a bit off in that interview, too. Costco sells wine at a low mark-up, but they don’t try to compete at the very bottom of the market as the video images suggest. I don’t think I’ve ever seen boxes of Franzia at a Costco, for example.

Exchange Rate Lessons from Australia’s Wine Boom and Bust

March 24, 2015 By Mike Veseth in Australian wine, book reviews, economic crisis, exchange rates Leave a comment

Kym Anderson (with the assistance of Nanda Aryal), Growth and Cycles in Australia’s Wine Industry: A Statistical Compendium 1843-2013). University of Adelaide Press, 2015. (Available as a free pdf download — follow the link above.)

Kym Anderson’s new book on the five major boom-bust cycles of the Australian wine industry is a landmark wine economics study. Like all of Anderson’s work, it is data-driven and provides both the casual reader and focused student with a wealth of information. A detailed Executive Summary is followed by 73 pages of analysis (and ten more of references), 86 revealing charts and more than 450 pages of tables.

Answers and Questions

I’m not sure I have ever seen such a detailed account of what happened to a wine industry, when, where and how. The data span the decades, regions, grape varieties, international regimes and economic cycles. Such a wealth of information is valuable both for its ability to answer questions and for the way that it provokes them.

I won’t attempt to summarize Anderson’s big volume here (Andrew Jefford did a great job of this in his Decanter column) but I thought I might illustrate the sort of focused analysis that the book makes not just possible but convenient. We are always looking for lessons from history and I think Australia’s wine business cycles are useful in this regard, especially the fifth cycle, which began in 1986 and continues today.

Exchange Rate Effects?

Anderson describes the recent collapse of the Australian wine industry as the result of a “perfect storm of shocks” including drought and rising irrigation water prices, the global financial crisis, the rise of the Australian dollar (driven by mineral exports to China), increased competition from other wine-exporting countries, and China’s austerity policies (which have reduced demand for luxury wine products). He could have added vineyard heat spikes, wildfires and the gradual but significant effects of global climate change to the list of challenges. Perfect storm, indeed!

Since we are currently experiencing a period of major exchange rate realignment, with the U.S. dollar on the rise and the Euro seemingly in free fall, I thought it would be useful to tease out the many ways that the Aussie dollar impacted its wine industry in recent years. According to news reports currency instability was the hot topic at the ProWein wine fair this year, so analysis of the possible effects is timely. Here are some brief points taken from the Executive Summary.

The 1986 boom began, Anderson tells us, as a response to the historically low value of the Australian dollar (hereafter abbreviated AUD), which encouraged exports by reducing their price to foreign buyers. The AUD’s low value was due to falling prices for mineral exports.
Wine exports boomed, rising to 2.3% of all Australian exports by 2004.
Wine prices increased, stimulating vine plantings, higher production and more exports but higher prices also limited domestic wine market growth making Australian producers more dependent on export markets.
Rising exports increased the incentive for investment in developing overseas markets for Australian wine, both through generic marketing and private brand promotion. Meanwhile, other countries also began to expand wine exports, too, contesting key market spaces.
The AUD began to rise in 2001 (driven by Chinese mineral demand). Competition in export markets made it difficult to pass through rising foreign exchange costs to export customers, so much of the burden was passed back in the form of lower AUD export receipts and, in due course, lower wine grape prices.
Meanwhile, the strength of the AUD made imports cheaper, including wine imports, which increased dramatically. Especially affected were Sauvignon Blanc imports from New Zealand and Champagne imports from France.
New Zealand Sauvignon Blanc became the best-selling white wine in Australia. Not the best-selling imported white wine. The best selling-white wine, period!
Wine grape prices collapsed and the value of vineyard land fell, in some cases to the same low value as unimproved farm land. This is the bust that the Australian industry is still recovering from.

Lessons for the U.S. Today?

The exchange rate isn’t the whole story of Australia’s fifth wine cycle by any means, but you can see that it had important effects. The long term instability in the exchange rate translated into booms and busts in wine exports, imports, wine prices, grape prices, land prices and so on.

Anyone who thinks the current rise of the U.S. dollar won’t impact the U.S. wine industry or have global repercussions should take a look at Anderson’s study of Australia. The U.S.story will be different, and the impacts less just because our domestic market is so much larger, but there will be significant impacts.

This is just one of the analytical threads in Kym Anderson’s important new book. I invite you to dig and see what questions his work raises and what lessons you can learn.

Unintended Consequences: How the U.S. & Canada Accidentally Destroyed Wine

March 17, 2015 By Mike Veseth in wine history, wine law, wine markets 4 Comments

At one point in Kym Anderson’s new book about the Australian wine industry he reflects on what can be done to shorten that country’s current wine slump and to get things sailing again on an even keel. One of his suggestions caught my eye:

“Governments need to keep out of grape and wine markets and confine their activities to generating public goods and overcoming market failures such as the free rider problem of collecting levies for generic promotion and R&D.”

This is more than the simple Adam Smith “laissez-faire” idea. Anderson’s book clearly demonstrates the law of unintended consequences — how well-meaning government policies sometimes have had unexpectedly negative side-effects. No wonder he recommends a cautious approach to wine and grape policy.

I was reminded of this when I was researching the history of the Canadian wine industry for a recent speaking engagement in Ontario. I was struck by Canada’s experience with Prohibition in the 20th century, how it differed from the U.S. experiment, and how both ended up crippling their wine industries but in very different ways. Here’s what I learned.

How U.S. Prohibition Crippled the Wine Industry

The great experiment in Prohibition in the United States started in 1920 and lasted until 1933. The 18th Amendment outlawed the manufacture, sale or transport of intoxicating beverages, including wine. Most people assume that the wine industry collapsed as legal wine sales and consumption fell and this is partly true but not the complete story. Commercial wine production almost disappeared, but wine consumption actually boomed.

How is this possible? There were three loopholes in the wine regulations outlined in the Volstead Act. Wine could still be produced and sold for medical purposes (prescription wine?) and also for use in religious services (sacramental wine). This kept a few wineries in business but does not account for the consumption boom, which is due to the third loophole: households were allowed to make up to 200 gallons of wine per year for “non-intoxicating” family consumption.

Demand for wine grapes exploded as home winemaking increased (but not always for strictly non-intoxicating purposes). Total U.S. vineyard area just about doubled between 1919 and 1926! But the new plantings were not delicate varieties that commercial producers might have chosen but rather grapes chosen for their high yields, strong alcohol potential and ability to survive shipping to eastern markets.

Thus did Prohibition increase wine consumption in the U.S. but it also corrupted the product by turning over wine-making from trained professionals to enthusiastic amateurs working in often unsanitary conditions. The home-produced wine sometimes had little in common with pre-Prohibition commercial products except its alcoholic content.

Americans drank more wine during Prohibition, but it was an inferior product. No wonder they dropped wine like a hot stone when Prohibition ended. That’s when the real wine bust occurred and it took decades to fully recover. Do you see the unintended consequence in this story? But wait, there’s more …

How Canadian Prohibition Crippled Its Wine Industry

Prohibition started earlier (1916) and ended earlier (1927) in Canada and took a different fundamental form. With support from temperance groups, consumption of beer and spirits (Canada’s first choice alcoholic drinks) was banned as part of war policy with the stated intent of preserving grain supplies for vital military uses. Consumption was forbidden, but production of beer and spirits was still allowed for export, which accounts for the boom in bootleg Canadian whiskey in the U.S. in the 1920s.

Neither production nor consumption of wine was included in Canada’s ban on alcohol, although wine sales were limited to the cellar door. What made wine different? Maybe grapes were not as vital to the war effort as grains, although John Schreiner cites the political influence of the United Farmer’s Party in his account of this period in The Wines of Canada. Wine became the legal alcoholic beverage of choice for Canadian consumers and production boomed. By the end of Canadian Prohibition there were 57 licensed wineries in Ontario (up from just 12) to serve the big Toronto market.

Wine sales increased 100-fold, according to Schreiner, but “It would be charitable to describe the quality of the wines being made in Ontario during this period as variable,” he writes. The market wanted alcohol and set a low standard of quality, which many producers pragmatically stooped to satisfy. No wonder wine production collapsed at the end of Prohibition as consumers went back to spirits and beer.

Unintended Consequences

Thus did government policy in both Canada and the United States create wine booms during their respective Prohibition eras, but the worst kind of booms: bad wine booms. Quality suffered as quantity surged. It is no surprise that consumers turned away from wine once other beverages were available. It took decades for these industries to recover.

Both the Canadian and U.S. wine industries are vibrant and growing today, having recovered from the crippling effects of poor quality wine. But they both are still hampered by other policies — especially regarding distribution and sales — that date back to the end of Prohibition. Economic policies can obviously have unintended effects and the shadows they cast can be long indeed.

No wonder Kym Anderson is skeptical about government interference in the Australian industry. Prohibition is an extreme case, to be sure, but such cases clearly show the unintended consequence potential that exists even with other seemingly harmless proposals. A cautious approach makes sense.

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You can read more about both the Australian booms and busts and also Prohibition in the United States in chapter 6 of my 2013 book Extreme Wine. Look for a review of Kym Anderson’s book in an upcoming Wine Economist column.

Murmurings: What Can Wine Tourism Learn from Food?

March 10, 2015 By Mike Veseth in Shameless Self-Promotion, wine tourism 13 Comments

Research tells us that affluent travelers (and many of modest means, too) increasingly choose their destinations with food and wine in mind. I have several friends who are addicted to the Food Network and the Travel Channel, for example, and seek out the places they have seen on Diners, Drive-Ins and Dives, Bizarre Foods and other shows when they are on the road.

Wine and Food Tourism

Wine tourism and food tourism are increasingly intertwined and, although I didn’t see it coming, I recently found myself caught up in that mix. It started with an email from the editors at Murmur, which is a new website and app that aims to help guide foodies and winos to interesting spots in different cities in the U.S. and around the world. I was asked to write up a profile of my town and it seemed like an interesting challenge, so I jumped in.

Murmur’s focus is really on food and nightlife and most of the city guides available so far are written by food writers, bloggers and experts. But wine is not ignored, with Alder Yarrow’s guide to San Francisco, for example, and Alice Feiring’s take on New York City. Steve Heimoff wrote about Oakland and “terroirist” David White about Washington DC. I thought briefly about writing about the culinary scene in Seattle, since it is such a great food town, but my friend Jameson Fink had already done a great job there, so I decided to stay true to my roots and profile Tacoma,”The City of Destiny,” a classic “second city” just thirty miles south of the Emerald City (as Seattle is known is known hereabouts).

You can follow this link to my quirky guide to Tacoma. The format called for a brief introduction and then a guide to a “perfect day” in Tacoma followed by specific recommendations in various categories that the Murmur editors provided. I invite you to check out my recommendation and those of the other authors.

Looking for Lessons

Murmur is an interesting concept — very personal and quite different from Yelp, TriipAdvisor and other websites that sort of crowd-source recommendations. I wonder — are there any websites or apps that do for wine tourism what Murmur hopes to do for food?

I know there are plenty of apps and sites out there and lots of information, too. I’m just curious if we are playing in the same league as food tourism of if maybe there’s room to grow? I’d encourage readers to use the Comments section to share particularly effective wine tourism apps and sites and perhaps also to identify spaces that need filling in this regard.

This raises a more general question about what wine can learn from food. I have written before that food is way ahead of wine in terms of media and popular culture profile and there are good reasons for this. We live in the age of celebrity, for example, and while there are many celebrity chefs that are known outside the food industry, I wonder how many winemakers are well known outside the narrow world of wine?

Maybe we need to try to learn from the success of the food scene since consumer attitudes and expectations about wine are not shaped by wine alone but also by their experiences with other products. Celebrity is one side of this, but certainly not the whole story.

What can wine learn from food? A lot, I think, and we need to get with it especially since food has already appropriated some of wine’s mystique by embracing terroir through farm-to-fork, single origin and other characteristics that we once thought of as our own but that are now common culinary currency. The environment is very competitive and, as some of us have said recently, wine is in danger of losing ground if we don’t up our game. Learning from the success of others is a good way to begin.

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Thanks to the folks at Murmur for giving me this opportunity. It was a lot of fun to write about food and tourism. But I suspect that this is not my comparative advantage, so I’ll probably stick to wine economics in the future!

Important New Book: Growth & Cycles in Australia’s Wine Industry

March 5, 2015 By Mike Veseth in Australian wine, book reviews 1 Comment

The University of Adelaide Press has just released an important new book, Growth and Cycles in Australia’s Wine Industry: A Statistical Compendium 1843-2013 by Kym Anderson (with the assistance of Nanda Aryal). The pdf version of the 610 page book is available as a free download.

I’ll post a full review of this book on The Wine Economist in the near future, but the subject is so important and the analysis so timely that I wanted to get the word out as soon as possible. Hence this brief announcement.

Sustainable growth is the goal for most wine regions, but boom-bust cycles seem inevitable. Anderson analyzes Australia’s attempt to chart a course around the five major cycles of its wine economics history, ending of course with the current cycle that started in 1986 and is still unfolding.

The goal here is, first, to better understand the Australian experience through a clear and detailed examination of the evidence. Then it is possible to ask what lessons history offers for Australian wine and for the global wine industry more generally? The text, charts and tables provide much food for thought. Click on that link and get to work!

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Kangaroos in the vineyard? I don’t know if they are a common sight but we saw a pair much like these when we visited Hahndorf Hill Winery in the Adelaide Hills in 2013.

Eyrie Vineyards’ 50th Anniversary: Credit Where Credit is Due

March 3, 2015 By Mike Veseth in Oregon wine, wine history 2 Comments

Is 50 years a long time in the wine business? Not by some standards. The Antinori family dates its wine production back to 1385, which is Old World old. Klein Constantia in “New World” South Africa can trace it origins to 1651. Bodega Colomé in Argentina was founded in 1831. By these standards, 50 years is the blink of an eye.

Wine goes back many years here in the United States, too, but 50 years is a significant span of time. Fifty years is more of less the complete history of wine in Oregon, for example, and a round number anniversary like this is worth recognizing.

And so it was that Sue and I motored to Portland on February 22 to honor the 50th anniversary to the day of the first Pinot Noir and Chardonnay vines to be planted in the Willamette Valley (at a temporary nursery that David Lett established near Corvallis). The Letts found their ideal vineyard site in the Dundee HIlls in 1966 and the first Eyrie Vineyards vintage was produced in 1970.

Taking Credit

The Oregon wine industry has blossomed extravagantly since those first vines were planted and there is much credit to be taken and given, too. The video I have embedded below gives a sense of how much the early Oregon wine pioneers struggled and how they supported each other. They weren’t struggling to divide the pie among themselves back then because there wasn’t any pie to fight over. It was Oregon versus nature and against the world.

The achievements of David Lett and his pioneer colleagues (many of whom were in the room with us on February 22) received early international recognition at the Wine Olympics of 1979. This was a competition, sponsored by the French food and wine magazine Gault Millau, that featured 330 wines from 33 countries tasted blind by 62 judges. The 1975 Eyrie Pinot Noir Reserve attracted attention by placing 10th among Pinots. A stunning achievement for a wine from a previously unknown wine region.

Robert Drouhin of Maison Joseph Drouhin, a Burgundy negociant and producer, was fascinated and sponsored a further competition where the Eyrie wine came close second behind Drouhin’s own 1959 Chambolle-Musigny. Thus was Eyrie’s reputation set (and Oregon’s, too). It wasn’t long before Domaine Drouhin Oregon (DDO) was built in the same Dundee Hills as Eyrie’s vineyards — a strong endorsement of the terroir and international recognition of the achievement.

Tasting through wines from five decades (see my list of the wines below) it was easy to understand what all the fuss was about. Even the oldest Pinot Noir (1972) was still bright and full of evolved character. The wines were noteworthy for their strong sense of identity and that some of the wines from more difficult (more Burgundian?) vintages seemed to especially shine over the years.

It’s also worth noting that the older Chardonnay and Pinot Gris wines were stunners, too, so that Pinot Noir was not the whole show at all. David Lett was building them to last back then. It was especially interesting to taste the clear connection between the 1977 Estate Pinot Gris and the 2004 wine made from the same grape vines 27 years later. Eyrie was the pioneer Pinot Gris producer not just in Oregon but in the United States. Bravo Eyrie!

Giving Credit

The wine boom in the Willamette Valley in particular and Oregon in general didn’t happen all at once and wasn’t any single person’s creation. One of the things that I most appreciated about Jason Lett’s remarks as we tasted through wines from five decades was how he was careful to share credit starting with his mother Diana and father David, then to his vineyard and winery crew and on, as we moved from wine to wine, to all those who played a part in the story (or at least as many as possible). February 22 was Eyrie’s day, but not Eyrie’s alone.

Oregon today is so much different form where it was 50 years ago. It was a rare treat to be able to talk with some of the people who have guided the transformation and to taste and share something of the past, present and future of this vibrant industry.

The collective achievement must be beyond the imagination of all but the most optimistic of the pioneers. They and those who stood on their shoulders have created a relatively small wine region with a global reputation that continues to attract both the attention of and investment from around the world. The recent Oregon vineyard boom suggests that the story if far from over.

Looking Ahead

What does the future hold for Eyrie Vineyards? An interesting balance of continuity and change. There are plans for a new winery up in the vineyards where it perhaps should have been all the time. But the building plans are designed to retain many of the peculiar characteristics of the original building, which was a turkey processing plant before it became a famous winery.

The vineyards will change but stay the same, too. Phylloxera has finally found its way to the original vines, which are losing vigor but still making great wines. The Letts will delay replanting the original vineyards with grafted vines as long as possible, using fruit from previously unplanted sites to supplement existing sources. Expect the classic grape varieties plus Trousseau Noir and more Melon de Bourgogne and Pinot Meunier.

Congratulations to Eyrie Vineyards and to everyone who is part of their continuing story! Scroll down to see the wines we sampled on February 22, 2015. Here’s a video about the Oregon Pioneers and their sons and daughters, too. Enjoy.

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The Wines

The wines were presented in several flights organized by decade, starting with the oldest (the 1970s) and moving forward. I have rearranged the list of wines below according to wine grape variety for easy reference. Each flight included a Pinot Gris, a Chardonnay and two Pinot Noirs. The 2000s flight was followed by the 2012 single vineyard Pinot Noirs and finally we toasted the 50th anniversary with a sparkling wine that Jason Lett made especially for this event. Ever forward looking, Lett began this anniversary project (and this wine) in 2009.

Eyrie Pinot Gris

1977 Estate

1983 Willamette Valley

1991 Willamette Valley

2004 Original Vines

Eyrie Chardonnay

1973 Estate

1984 Estate

1995 Estate

2002 Estate

Eyrie Pinot Noir

1972 Estate

1976 Barrel Reserve

1980 South Block Reserve

1986 Barrel Reserve

1992 South Block Reserve

1998 Estate

2005 Estate (Jason Lett’s first Eyrie wine)

2007 South Block Reserve (David Lett’s final Eyrie wine)

Eyrie Single Vineyard Pinot Noir

2012 Sisters Vineyard

2012 Outcrop Vineyard

2012 Rolling Green Vineyard

2012 Daphne Vineyard

2012 Original Vines

Eyrie Pinot Meunier Rosé Brut Nature Sparkling Wine

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Thanks to Eyrie Vineyards and the Lett family for inviting us to this celebration. Good luck and best wishes for another 50+ years!