The world is awash with wine, or so it seems from reading the news. Down in Australia, they are counting up the gallons of unsold wine in a new (to me) measure: number of Olympic-size swimming pools full. Rabobank estimates that the surplus would fill 859 big pools or, if you want a more conventional measure, about 2.8 billion bottles. That’s a lot of surplus wine.
In France, the government has allocated two hundred million euro for crisis distillation. Surplus wine will be bought up to support local prices, and then distilled into industrial alcohol. The next time you use alcohol-based hand sanitizer at your favorite Paris restaurant it might be based on wines from Bordeaux or the Rhone.
Rioja is swimming in wine, too, and here in the United States, there are big stocks of bulk wine for sale in California and thousands of acres of surplus vineyards in Washington state.
This Time is Different
Surplus wine is not a new thing. Wine is an agricultural product and so it is prone to the famous “cobweb” market theory that predicts periodic booms and busts. Turrentine, the California wine and grape brokerage, has cleverly adapted this idea to the wine sector with their “Wine Business Wheel of Fortune.” But this kind of surplus is relatively short term and what we see in the market today looks more permanent.
Sometimes government policies create wine gluts. This is a big part of Australia’s problem today, of course, as Chinese foreign policy has essentially cut off Australian wine from its biggest export market for several years. And the European Union’s famous “Wine Lake” was filled up by price support policies that encouraged over-production to stabilize producer incomes.
If wine surplus is not unusual, what is different about this time? Surpluses today are global not just national. And the driving force is primarily insufficient demand, not excess supply. Something’s changed to create a new global wine environment. What happened? It is a complicated situation, but I’ll try to scratch the surface in a helpful way today and in next week’s Wine Economist.
The Global Wine Glut in Perspective
The graph above (taken from the most recent OIV global wine market report) shows the volume of global wine consumption since 2000. Wine consumption rose steadily for the 20 years that ended with the global financial crisis in about 2007. This was the golden age of wine with many producers (think Argentina and New Zealand) entering global markets with great success and worldwide wine consumption on the rise.
The pause during the financial crisis was thought at the time to be a temporary phenomenon, but in retrospect, we can see that it was the start of what I have called “wine’s lost decade” with stagnant wine sales. The years of steady growth were no more.
Wine consumption fell during the COVID-19 pandemic period, but we expected it to bounce back when the health crisis passed. It hasn’t and in fact, global consumption has fallen back recently to levels not seen since the early 2000s. The picture looks different if we measure the value of sales not the volume of purchases because of the premiumization trend. But people are drinking less wine and less wine than we are growing.
Is there a general theory to explain what happened to global wine? There are lots of special theories that, in an ad hoc sort of way, try to explain individual circumstances. I’ve identified three general theories that help me think about this situation. I’ll analyze two of them briefly below, saving the third for next week’s Wine Economist.
Theory 1: The Generation Gap Hypothesis
The Generation Gap Hypothesis is much discussed here in the United States. The Baby Boom generation powered that long rise in wine consumption, the theory holds, but the following generations failed, for one reason or another, to engage with wine with the same ardor as their parents and grandparents. Total demand cannot be sustained because younger drinkers have not increased consumption to replace the falling demand by boomers as they age.
The younger audience is just different, in this telling, and the task ahead is to introduce them to wine’s appeal through marketing or perhaps cultural education programs. In many wine countries, affiliates of an organization called Wine in Moderation are active to present the positive case for wine in opposition to prohibitionist forces.
It is difficult to organize a response to the Generation Gap problem because generic marketing programs are costly and not always effective (and wine producers and regions have strong incentives to invest in private promotion as opposed to generic programs).
The assumption that generations are fundamentally different leads to the uncomfortable question: Which generation is the anomaly? Are Boomers the norm and the problem is to get Millennials and others to get in line with them? Or, in fact, are Boomers a special case? Was that long wine boom the result of special circumstances? If so, how likely are those circumstances to reappear? Tough questions.
I think generational analysis is very useful in understanding the global wine glut, but it is important to be careful in drawing conclusions. I remember a university colleague of mine who cautioned his Asian Studies student to avoid popular “Asian Values” explanations of political and economic conditions in Japan, Korea, Singapore, etc. “Asian Values” can be twisted to explain anything that might happen, he told his students, so it isn’t valid on its own. Economic events ought to have economic explanations, too, and ditto political events. That’s how I see the Generation Gap hypothesis.
Theory 2: The Life Cycle Hypothesis
The Life Cycle Hypothesis presents a very different theory of the global wine glut. The hypothesis holds that generations are more alike than different in many ways. In particular, the demand for wine remains latent until consumers reach a certain stage in their lives. Millennials are just now approaching this stage and later generations are still in the queue. Wait for it, as Radar used to say on M*A*S*H, and they will discover wine.
This sounds like good news, but it really isn’t because post-Boomer generations are smaller and so, even if and when they find wine, there won’t be enough of them to replace Baby Boomer consumption levels. No use waiting for wine consumption to surge (and not much use in generic promotion, etc.). Supply adjustments are necessary and the sooner the better.
One question that the Life Cycle Hypothesis raises is why the big boom in wine sales only happened when the Baby Boomers came of age. Why didn’t previous generations get the wine bug before them? An answer is, of course, that Boomers represent a surge in the population curve, so anything they do has had a bigger effect, and the generations that immediately preceded them might have understandably had their normal cycle patterns interrupted by the Great Depression and World War II. So maybe the cycles will repeat as this hypothesis suggests, smaller than the Boomers but otherwise much the same.
An Economic Theory?
I find both hypotheses useful in understanding the global wine glut, but my Asian Studies colleague’s voice haunts me. I would be more satisfied if there were an economic theory to explain the economic fact of wine’s over-supply.
Come back next week for my attempt to provide an economic theory of the global wine glut.
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A book that I have found useful in thinking about generational analysis is The Generation Myth: Why when you’re born matters less than you think by King’s College London professor Bobby Duffy. Generations matter in Duffy’s analysis, but only when taken in context. Food for thought.
Basic groceries are costing so much more. That cuts alcohol purchases for many. The high income still buy, looking at high dollar bottle sales. Going in the grocery store and having the expected $200 trip become closer to $300, and wine gets passed over.
There is also a plethora of government and pseudo government bodies telling us all alcohol is bad, lowering BAC limits for DWI enforcement.
I do agree on the generational thing, the big brands do a much better job at marketing things like “Hard Seltzer”, “Twisted Tea” to the younger generation.
May I suggest that boomers are not the largest cohort, in some ways, of these arbitrary generations.
Boomers are included in the largest segment of time, 18 years by most reckoning. 71.6 million, 4 million per year. One is me.
Gen x is a 15 year period, 65.2 millions. 4.3 millions per year.
Gen Y also about 15 and 72.1 millions.4.8 million per year. My son.
Gen Z 15 and 68 millions. 4.5 million per year.
For at least 2,000 years people have been saying the “younger generation “ blah, blah, blah.
When I was in my early 20’s my cohort drank very little wine. If they did it was sweet and cheap. I’ve seen little change.
Paul Vandenberg
Paradisos del Sol
Good article. Look forward to more.
The baby boomers not only bought far more wine than ever before they also started more wineries than ever before (hi Paul 😉 In the USA, look at winery ownership. It’s largely baby boomers, possibly 50%. Since wine is a referral sales business, their friends and cohorts were their best customers.
Then again, I wonder…the graph of evolution of world wine consumption, how would it correlate to US GDP annually or US GDP annually adjusted to inflation or US T-bill interest rate inverted or even the DEX inverted or perhaps simply the West Coast US population growth over the same period? All these could be the more important background driving global wine sales. I know listing all these US indices is parochial, that’s a global sales chart, but we have been the biggest new global wine buyer these last ten years, at least. The demographics issue is central and not easy to dismiss really in all economic issues since world war two. Since you want an economic reason for the economic events.
It’s comforting as a producer on the west coast to believe we did all the work rewarding ourselves with sales because we marketed to the right generations and planted the right vines and produced at the right price. But was it perhaps just population doing its buying anyway? And if so, is wine the canary in the coal mine? Is its sales a leading indicator of or US GDP perhaps…?
Could I suggest that we are constantly seeing such relatively rapid velocity of information flows via internet/social media that we are seeing more informed younger generations resulting in them having greater choice awareness and options. Throw in greater health awareness/wellness fixation, not wanting to drink “what my parents/grandparents did/do”, greater sustainability conscious and focus on quality over quantity then it makes sense that global wine consumption is declining. Plus the wine industry is so fragmented (globally, nationally, local) that wine competes against itself (ie “Natural” wine movement claims about “Traditional/Conventional” wine making) rather than competing against other beverages. It’s a very dynamic market situation to say the least. Look forward to your 3rd Theory! Cheers.
Mike, interesting column. One thing I wonder, but have no data about, is to what extent the decline in wine is due to increases in beer and spirits consumption. In other words, are younger generations drinking the same amount of alcohol but wine just has a smaller piece of the pie? I was in the wine business from about 2000-2015 and while beer was gaining toward the end, it was nothing like the force that it is now. And spirits consumption and competition from spirits of all sorts was nothing like now. Is there data on this?
According to my econometric study there is a proven substitute effect between wine and beer. The estimated coefficient is statistically significant.
Hi Mike
As I suggested in my comment to your previous note on the accumulation of surpluses of Cabernet Sauvignon in the USA, you can find in my Ph D thesis at the UMN (50 years ago) a rigorous theoretical analysis of the management of said surpluses as a policy instrument for stabilizing the price of grapes and bulk wine in the domestic market.
To your two theories described in this note, as an explanation of the reason for the accumulated surpluses, you could also consider that the relative size of domestic consumption in relation to total demand (75% in Argentina) has a lot to do with it.
In case you didn’t get my comment, the title of the thesis is “The Social Cost of Production Instability in the Grape-Wine Industry: Argentina.1972” A micro film copy of this work can be found in the library of the UMN Minneapolis/St. Paul Campus.
F/N: The idea behind the European Union famous “Wine Lake is in line with my analysis”,
Thank you for exploring this topic in detail. It’s a curious phenomenon. I wonder if lifestyle is a contributor. Are people gathering for family meals at which wine is served as something for enjoyment? Could this be a global trend? I’ve heard that in Napa visiting wineries is starting to lag behind visiting for the food and luxury lifestyle options. Regarding the choices of beer and spirits as alternatives to wine, hard cider should be considered, as well. There are more and more flavors in this category. I look forward to the next installment of this important investigation. Cheers!
I tend to agree with Paul Vandenberg, drinking patterns tend to be cyclical. I’m in the industry now but didn’t start out there. I got into the industry when I was 37, which coincided with when I started to gain interest in wine. Up until then, and especially in my 20’s, I only really drank cheap, sweet wines or wine spritzers. My drink of choice was Vodka and RTD’s (Mike’s etc.). As the younger generations age, their palates will change just as ours did.
I also agree that the current economic climate as well as this new focus on alcohol tolerance (Prohibition, anyone? Because that was SUCH a successful road trip, LOL) is dampening my generation’s (Gen X here) enthusiasm for alcoholic beverages. As my generation especially comes into middle age, we are starting to become more concerned with aging and health, so maybe cutting back is not such a bad idea? And when people are in a position of being forced to choose to either buy groceries and pay rent/mortgage or buy alcohol, as a 100% luxury commodity for most people, it is a no-brainer!
Finally, I think we are ignoring the role the pandemic played in all of this, from economics on down. For many who were stuck at home and those of us working insane hours to keep our shops and businesses open for customers, drinking became a normalized coping mechanism. I know I for one came out of the Pandemic with a liver that hated me, LOL! so now the focus is on reclaiming our health – ALL of our health. And for many, the pandemic really sparked a lifestyle change, from taking up crafts, sports and healthy activities, to starting businesses and returning to school.
So, it is no wonder that the alcoholic beverage industry has been turned on its head, and the wine cart especially upset! No other sector of the industry (outside of Scotch Whisky) has seen such volatile price fluctuations, and while yes, beer and spirits are also affected by climate change and weather (aka, grain), grapes tend to be more susceptible to climate volatility and therefore price volatility.