Monthly Archives: February 2018

Beyond Wine Boom & Bust: Taking a Closer Look at the SVB Report

February 27, 2018 By in Economic impact, wine, wine markets 4 Comments

svb-2018wine-thumbSilicon Valley Bank recently released their 2018 State of the Industry report on the U.S. wine market and if you haven’t read it you should. It is well researched, written, and argued. Most important, it will challenge your ideas about the U.S. wine industry and make you think.

Most of the media reaction to the report has focused on two “boom and bust” elements: the predictions that (1) the 20-year wine market expansion is coming to an end and (2) that the relentless rise in grape prices and vineyard valuations in Napa Valley will pause or plateau.

Both of these predictions are significant although, as the report notes, calling a “turn” in the market is inherently problematic and will be difficult to assess until a few years down the road. In the short term, for example, the report notes that the U.S. wine market should continue to grow in 2018, although at a slower pace. Value will grow faster than volume due to the “two track” U.S. market with growth in premium wine sales offsetting declining lower-shelf demand.

This Changes Everything?

Boom and bust make headlines, but there are two important points that the SVB report makes that I think should get more attention. The first is the fact that we are witnessing fundamental changes in the retail market environment. Not just retail wine market, retail everything (or just about). Who buys, when, where, and how, who consumes, when, where, why, and how. Even the way people pay is changing.  Amazon is one driving force in this environmental transformation, but only part of it.

This fact was driven home to me a few weeks ago when I read that the Swiss luxury group Richemont (controlled by South Africa’s Rupert family), announced plans to buy out Yoox Net-a-Porter,  an Italy-based  luxury “etailer.” Richemont’s brands include Cartier, Van Cleef & Arpels, Piaget, Vacheron Constantin, Jaeger-LeCoultre, IWC Schaffhausen, Panerai and Montblanc. High end stuff.

You might think that consumers would be willing to buy books and t-shirts online but that they would hesitate to throw down $5000 or more for jewelry or a watch without holding it in their hands. But you would be wrong, or so the Richemont folks believe. The idea kind of takes my breath away.

It’s a new world for wine as for other things, the SVB report suggests. And the patterns and practices that were successful in years gone by, including but not limited to bricks-and-mortar versus online sales, are not guaranteed to work in the future. Time to question and rethink.

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Talking ‘Bout the Generations

A second interesting but possibly under-appreciated point that the SVB report raises concerns generational analysis of the wine market. Most of what you read about wine today frames the changing market demographics in terms of baby boomers versus millennials. But, as this figure from Statista.com suggests, there is a “missing middle” to this analysis. The figure shows 2016 median household income by age of householder.

Lost in the focus on rising younger, poorer millennials versus declining older, richer boomers is the Gen-X generation who are in their 40s now (more or less) and reaching their peak earning (and consuming) years. They are, SVB argues, an important but sometimes underappreciated market for wine. And, as a recent Wine Access study reveals, although Gen-X is a smaller cohort than boomers or millennials, they are willing and able to spend proportionately more on wine.

I think these are very useful insights, although I’m always a bit cautious regarding generational analysis. My years as a university professor taught me that the differences between generations are sometimes less important than diversity within them. Sometimes it is appropriate to generalize about a generation, but not always.

Take boomers, for example. The conventional wisdom is that baby boomers have driven the wine market growth — and this is true — but remember that most boomers don’t drink wine regularly and many don’t drink it (or any alcohol) at all.

The boomer wine boom is driven by a relatively small segment of this generational group. In a way, the boomer wine phenomenon is about a subgroup that is at least somewhat atypical of its cohort — and that difference is key.

The SVB report goes well beyond boom and bust to include these significant insights and many others, too. Highly recommended for anyone who wants to understand the American wine industry today and where it is headed.

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Congratulations to Rob McMillan and his team for a thought-provoking report.

David Ricardo to Donald Trump: Global Wine Trade and Its Discontents

February 20, 2018 By in Economic impact, trade policy, wine, wine markets 5 Comments

5788597-mWhen David Ricardo wanted to make the logic of his famous Theory of Comparative Advantage crystal clear he knew what example to choose: wine. It was obvious that Britain should import wine from Portugal in exchange for cloth rather than trying for vinous self-sufficiency. Any fool could see that!

Make Great Britain Great?

But wine wasn’t really the point of his example. He was more concerned about the Corn Laws, a set of trade barriers designed to choke off agricultural imports and promote higher prices for domestic grain (lining the pockets of rural landowners in the process). If Britain should trade cloth for wine, then why not trade cloth for wheat and other grains as well?

The wine story was good enough to convince Ricardo’s economist colleagues, but not so much those in parliament. The Corn Laws lasted from 1815 until 1846. Economic logic triumphed over vested interests in the long run, but the human cost of the trade barriers to urban workers and their families in terms of higher food costs and lower living standards was very high.

Britain really didn’t fulfill the promise of its Industrial Revolution until the Corn Laws were repealed. It is fair to speculate that Parliament could have acted to Make Great Britain Great much sooner if they had been guided by the economic logic of wine trade.

Wine is perhaps a good guide to British political economy today, too. Brexit, which was promoted as a way to Make Great Britain Great Again, seems to have instead made British families poorer even though the change in trade policies has not yet been enacted or even agreed.  Rising import prices and stagnant wages have squeezed consumer budgets for wine as for many other items (sound familiar?). Tesco, the upscale supermarket giant, is reportedly planning a discount chain of its own to compete with increasingly popular “hard discount” Aldi and Lidl stores.

Make American Wine Even Greater?

The wine trade has lessons for the United States, too. Or at least that was my takeaway from two speakers at the “State of the Industry” session at the recent Washington Winegrowers Convention and Trade Show. 

Glenn Proctor of The Ciatti Company presented a very interesting survey of global wine market conditions. There are only two big wine markets that are growing in terms of total consumption, Proctor said: China and the United States. The Chinese market is particularly attractive because of the large rising middle class and potential for further growth.  French wines are top of the import table in China, followed by Australia and Chile — two countries that have benefited from free trade agreements with China.

Indeed, China is now the #1 export market for Australian wine, accounting for 33 per cent of exports, ahead of the US (18%), UK (14%), Canada (7%), and Hong Kong (5%). The Chinese market has powered Australia’s resurgence as a global wine power and the free trade agreement is an important part of the story.

The United States? Well, the U.S. has no free trade agreement with China and President Trump pulled the U.S. out of the Trans-Pacific Partnership negotiations — which could have opened up Asian markets — on his first day in office. Partly as a result, I suppose, the U.S. ranks #6 on the China import list. Australia wine sales volumes are more than ten times the U.S. amount.

If recent import trends continue for a couple of years, U.S. sales to China may be surpassed by relatively tiny Georgia. Georgian wine sales to China have surged (up 45%) in part because of the Georgia-China free trade structure that went into effect at the beginning of the year. The U.S. wine industry is clearly handicapped in foreign markets where other producers have preferential access.

John Aguirre, President of the California Association of Winegrape Growers, also highlighted  the importance of trade agreements for the wine industry. President Trump has raised doubts about  U.S. – Korea free trade (the Korean market has lots of potential for U.S. wine) and launched negotiations to revise NAFTA. Since Canada is the largest export market for U.S. wines, it is essential that NAFTA maintain open cross-border access.

The wine industry would suffer if the NAFTA negotiation somehow collapse, although the negative impacts would obviously be less than agriculture generally and the automotive industry, both of which have become dependent on efficient trans-border industrial integration in order to compete with efficient producers in other parts of the world.

I am hopeful that the NAFTA negotiations will be successful at updating the treaty since there is so much at stake. But my confidence is shaken somewhat by President Trump’s actions to block new appointments to the World Trade Organization’s appeals body — the entity charged with enforcing the rules of the trade game.  This will make it more difficult for the U.S. wine industry to pursue its complaint against the British Columbia wine regulators concerning their discriminatory supermarket wine sales policy, which favors B.C. wines relative to imports in clear violation, in my view, of the WTO’s non-discrimination principle.

What’s the bottom line? If President Trump: wants to Make American Wine Even Greater, he might take a lesson from David Ricardo and re-think administration actions and policies regarding global trade agreements.

Wine Business 101: Exploring America’s Largest Wine Industry Trade Show

February 13, 2018 By in wine, wine markets, wine research 1 Comment

unifiedContributing editor Sue Veseth is fascinated by wine industry trade shows. She recently attended the Unified Wine & Grape Symposium trade show in Sacramento, California. Here is her report.

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Making wine is not very stuff-intensive, right? Some grapes, a vessel for fermentation, maybe a couple of barrels, some bottles or jugs, closures — voilà!

But modern winemaking, even for small wineries and those making natural wines, can be very stuff-intensive. A good place to start looking at or shopping for all of the stuff for winemaking is the trade show at the Unified Wine & Grape Symposium in Sacramento, California. This is the largest trade show in North America for the wine and grape industry, attracting more than 600 vendors from around the world and more than 14,000 visitors. A lot of people in the industry use the trade show to connect with friends, colleagues, suppliers, and peers in the industry, in addition to shopping.

Some trade shows are focused on particular aspects of the industry. The SIMEI show we attended in Milan, Italy, in 2015, was all about machinery and technology. Smaller regional trade shows may combine winemaking and other agriculture industries. The January 2018 VinCO trade show in Grand Junction, Colorado, was about winemaking and fruit-based agriculture.

Soup-to-Nuts

In contrast, the Unified is a soup-to-nuts trade show: tractors, plants, fertilizers, trellises, bottling lines, hoses and fittings, flooring, waste and wastewater management, vessels and containers of all types and sizes, construction services, irrigation systems, cleaning equipment, chemicals, testing services, software to manage just about everything, bottles, closures, labels, packaging, marketing materials, financial services, transportation, industry publications — and the list goes on. Some vendors have been in the show for years; a few new vendors show up every year. Some vendors may wait several years before scoring a spot.

It seemed to me that the people staffing the booths this year were spending more time talking to customers and passers-by than staring at their cell phones — hooray! Conversely, fewer exhibitors this year insisted on scanning my visitor badge, probably easily realizing that I was looking not buying.

One vendor in particular especially impressed me. This vendor had a dozen staff members, including high-level executives, in a standard-sized, attractive-but-not-flashy booth. But few were actually in the booth. They were always working the floor, with both intense and casual conversations with customers and potential customers. You could tell that this vendor was focused on business.

The raptors are always one of the most popular exhibits. The falcons are used for pest control. It is easy to anthropomorphize and conclude that the birds’ beady stares may be sizing us up — perhaps as lunch?

I also enjoyed looking at the pruning equipment and vineyard supplies that could be useful to the home gardener.

Vegan Fertilizer?

So, is there anything new? Yes, to me anyway. Especially intriguing were two French vendors with vegan products and processes for winemaking. One was showing vegan fertilizer. I had hoped to bring home a sample to try, but the smell was very strong, very fertilizer-y, even packed in multiple layers of plastic zip bags. Alas, it did not make it into the suitcase. Another company offers a range of products for vegan winemaking.

I was not aware of vegan winemaking, but it turns out that many wines I know and enjoy are vegan, at least based on the Barnivore list (http://www.barnivore.com/), although they are not necessarily promoted as vegan. Another “who knew?” moment.

Costs and Benefits

The question always arises: Is it worth it? There were moments when the trade show was jammed (after the State of the Industry presentations, during lunch, and during the regional wine tasting, for example) and other times when the aisles were open and easy to navigate (such as the afternoon of the second and final day of the show). The busy times seemed as busy as in past years but the slow times seemed slower to me this year.

Participating in the show is not inexpensive, for both the vendors and those attending. A lot of people were looking, but how many were buying? Does the activity level reflect expectations about expansions, contractions, or no change at individual wineries and the industry in general? Is it an opportunity to see and be seen?

The answers probably depend on who you are, what you are selling, and what you are buying. But if you want to understand the scope of the wine industry, the Unified Wine & Grape Symposium trade show is a good place to start.

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New York Times wine critic Eric Asimov attend the Unified trade show for the first time in 2017. You might be interested in his reflections on the experience. Spoiler alert — he was also fascinated by falcon pest control.

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Many thanks to everyone who works to make the Unified Symposium and its trade show a success. Special thanks to John Aguirre and Jenny Devine and to photographer Ken Freeze for providing the image above.

 

Wine Tourism Grows Up: A Visit to Washington’s Chateau Ste Michelle

February 6, 2018 By in Uncategorized 2 Comments

chateau-ste-michelleI am in Kennewick, Washington today and tomorrow to speak at the Washington Winegrowers Association 2018 Convention & Trade Show.  Tomorrow I’ll share some thoughts about wine premiumization in the “State of the Industry” session, but today’s focus is wine tourism. I’ll give a global perspective on wine tourism as part of a program on  “The Business Side of Your Tasting Room.”

Grape Expectations?

Increasingly the tasting room’s business is not just pouring samples, selling wine, and promoting wine club memberships. Although winery visitors clearly expect to taste wines and perhaps tour the winery or walk vineyard paths, they often come expecting (or hoping for) something more.  That’s because sophisticated winery visitors don’t only visit wineries. They have many interests and develop expectations based upon their broader experiences. Wineries that want to attract these visitors need to step up to meet rising expectations.

Wine tourists and their rising standards have always been a priority at Chateau Ste Michelle, Washington state’s largest wine producer. When the current Woodinville production facility was constructed in 1976 the choice was made to locate it close to the Seattle population center, a few hours’ drive from the vineyards on the other side of the Cascade Mountains. The winery was built on the grounds of Hollywood Farm, the old Stimson Estate, and the main building was designed to closely resemble an iconic French chateau.

“The Chateau,” as we call it hereabouts, celebrated its 50th anniversary in 2017 and used that opportunity to give its visitor center a major renovation. Sue and I first visited this facility shortly after it opened in the late 1970s, when it was one of the most welcoming wine tourism destinations we found. But as the years have flown by a lot has changed. The number of visitors has increased and they have become more numerous, more diverse in terms of their wine knowledge  and also more sophisticated in terms of their expectations for a tourism experience. Inevitably, the tasting room itself had to change, too. And it has.

When I say that the wine tourism experience here has “grown up” I mean more than that it has matured and is now able to accommodate more visitors. One element of the growing up is to accommodate more diversity of tourist expectations and experiences.  The result is a textured program with many layers of opportunities.

For first time visitors, for example, the free (free!) tour and tasting is available as it has been here for as long as I can remember.  Visitors can upgrade their experience at the tasting room bar, where a variety of elevated tasting options are available for $10 to $15 per person — a bargain by Napa Valley standards.r-919411-1320418583-jpeg

Are You Experienced?

Winery visits in the old days were focused on tasting (and hopefully buying the wines) — a transactions approach. Now the state of the art is about relationships and creating opportunities to draw visitors more closely into the winery and its story so that they become both long term patrons and active brand ambassadors. I wrote in Around the World in Eighty Wines about the huge variety of experiences on offer at the Napa’s Robert Mondavi Winery and Chateau Ste Michelle has programs to match.

The Chateau Ste Michelle wine experience menu includes the above mentioned tours and tastings and moves on to a special small group single-vineyard and limited release tasting ($30 per person or $25 for winery club members), Cabernet-themed food and wine pairing experience ($100/$85), a”Sensory Sojourn” workshop ($65/$55), and a wine blending experience ($125/$95).

Small groups can also arrange to attend a sparkling wine seminar and tasting with food pairings ($55/$45), an opportunity to taste older vintage of Washington Bordeaux blends and Riesling wines ($55/$45), or grab a chance to learn how to blind taste like a Master Sommelier ($125/$95).

It is also possible to schedule visits to the Col Solare Bottega, where Red Mountain wines  produced in partnership with Tuscany’s Antinori family can be sampled, or a visit to the Enoteca, which highlights wines from Ste Michelle Wine Estate’s wineries and partners in Washington, Oregon, California, and around the world. I was pleased to see some famous Torres wines from Spain on the shelves when we visited. SMWE imports and distributes Torres wines in the U.S. as it does for Antinori, New Zealand’s Villa Maria, and French Champagne house Nicholas Feuillatte among others.

Bottom line: visitors cannot help but be impressed by the beautiful, welcoming grounds and imposing chateau facility and the delightful array of programs on offer. No wonder about 300,000 of them come each year both to visit the winery and to attend outdoor concerts on the big lawn behind the visitor center. Chateau Ste Michelle was conceived as a destination winery that’s what it is today.

The recent remodel has made it possible to expand the offerings to wine tourists so that they can custom-tailor a visit to get the experience that they seek.  Is this a model for the wine industry generally? No … and yes.

The No is easy. Most wineries don’t have the scale of production, volume of visitors, and the financial resources to make the sort of investment we see at Chateau Se Michelle possible. Only a few wineries around the globe can provide this level of service. In the last year of our travels, for example, I think only four wineries in Spain were at the same level: Freixenet, Codorníu, Torres, and Marqués Riscal.

But, Yes, this model is important for the industry to consider. Smaller wineries can offer a smaller range of experiences that are closely linked with locale, their history, and identity. Many visitors will appreciate the taste of authentic engagement as much as they do the wine itself.

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Congratulations to Chateau Ste Michelle on their 50th anniversary and wonderful new visitor center. Special thanks to Lynda Eller and Linda Chauncey for their hospitality during or visit and to Hermes Navarro del Valle for his insights.