Monthly Archives: August 2024

Wine Economics 101: the Three Vs of Wine

August 27, 2024 By in cooperatives, economic crisis, wine, wine markets 3 Comments

We often talk about trends and problems in the wine industry, but I think we all know that wine isn’t a single business about which it is easy to generalize. Different countries or regions have different business characteristics, for example, and making and selling multi-million case brands like Gallo’s Barefoot differs greatly from much smaller and more local operations.

The wine industry doesn’t come in one size or shape that fits all and doesn’t run at a single speed. Significantly, while all or most parts of the “wine patch” face challenges from climate change and declining consumption of beverage alcohol, the specific conditions vary and can change quickly.

So when a journalist asks me about what’s happening in the wine industry, as happens frequently, I have to stop, pause, and think. Which wine industry are we talking about?

Wine and the Three Vs

The Financial Times recently published an interview with Stephen Cronk, co-founder of the Provençal Rosé producer Maison Mirabeau, about the perils and rewards of starting a wine business more or less from scratch.  Mirabeau has achieved great success in just a few years. How did it happen? Here’s an excerpt of the Q&A.

Was there a seminal moment in your business? Probably when I met a British Master of Wine in the Languedoc in 2008. He told me about the three Vs: viticulture, vinification and vendre, farming vines, winemaking and selling. Up until then I thought I would focus on buying a vineyard. He said don’t buy a vineyard yet: build a brand. Looking back, it was absolutely the right advice.

The idea of the Three Vs is important. There is a romantic image of winemaking that looks like this. Lovingly hand-tended grapevines surrounding a modest winery, with a cozy tasting room next door where most of the wine is sold (often by the winemaker herself) to loyal customers.  This is the idea of wine that defines the industry for many people. But, from an economic standpoint, it is a bit misleading because it suggests that wine is a single business when it is really, as the Financial Times story points out, it is really more like three.

Growing grapes is agriculture. It is a risky capital-intensive business that requires specialized equipment and knowledge. Growing wine grapes successfully and profitably is a considerable achievement. Making wine is also a risky capital-intensive business. It requires specialized equipment, some of which is only used once a year.

Finally selling wine is a risky capital-intensive business, too. It is risky because selling wine like selling anything else is affected by market forces beyond individual control. It is capital intensive because building a brand or establishing networks of personal or professional relationships to facilitate sales can consume a good deal of time and money. Many winery owners have told me that, going into the business, they thought that growing grapes or making wine would be their biggest challenge, but selling wine and tending to customers sometimes is the hardest part.

Specialization and Exchange

Because all three businesses are capital heavy and all three are risky, there is a strong incentive for specialization at the firm level and for the industry to take advantage of Adam Smith’s principle of the division of labor. Smith said that the division of labor was determined by the extent of the market and so it is not surprising that it is most fully realized in the wine business by very large wine companies that specialize in one or two but seldom all three wine industry segments.

Some of the largest winemaking facilities here in Washington, for example, are mainly engaged in contract wine production for other firms, which market the wines under their own brand names. And some large wine firms sell big volumes of wine with few direct employees, relying upon purchased grapes, contract production, and bulk wine purchases to feed their efficient marketing and distribution pipelines.

Specialization and exchange is Adam Smith’s recipe for efficient production, but the situation is never as simple as that (and nothing is ever very simple in the wine industry). Remember that each of the V-factors is risky and the risks are very different. Engaging in just one V-function means you only have to account for one set of risks, not all three, but from an industry viewpoint the risks are always there. And in some cases division of labor can magnify them.

Risky Business

All three wine industry functions are risky in part because they involve lags. The final market for wine is constantly evolving, for example, but firms that specialize in marketing have to make plans many months or even years in advance, so there is always the risk that the last quarter’s market plan is no longer relevant. That’s a problem.

Wine production involves lags, too, and they can be much longer. The wine that a producer can sell today is based on decisions made one, two, three, or more years in the past. Time lags mean that costly shortages and surpluses are more likely, creating instability. The viticulture V is also subject to lags and they are much longer than the previous ones just because of the time it takes to bring grape vines into production or to alter the product mix on existing vines.

One implication of this situation is that, while sometimes the Three Vs are in synch and tell the same story, sometimes they are not and you get a different reading on the health of the industry depending upon which V you consult. Arguably this is the case today, when the disruptions of the pandemic era and rapid inflation are working their way through the system at different speeds.

Market Dynamics

There is a certain degree of instability baked into each wine industry segment’s cake. What happens when we fit them all together? Under some circumstances, the result can be benign or even beneficial as cycles offset one another the way that the sound waves your noise-canceling headphones emit silence the racket around you. But it is also possible for cyclical factors to compound, making the overall wine industry riskier than its individual segments.

Is this one of those times when risks are compounded because instability in each segment feeds the others? Risky business(es).

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I recently discussed some of these wine economics themes and more with “Wine Behind the Scenes” podcast host Laurel Simmons. Click on this link to listen to our 30-minute conversation.

What’s New? Portuguese Translation of “Around the World in 80 Wines”

August 20, 2024 By in globalization, Shameless Self-Promotion, wine, wine tourism 5 Comments

The Portuguese translation of my 2018 book Around the World in Eighty Wines is here. A Volta ao Mundo em 80 Vinhos was released last month by the Brazilian publisher Editora Valentina.  The new book is available from the publisher as well as through the usual online sellers including Amazon.com here in the United States.

What’s the book about? Well, here’s a brief excerpt from the summary to test your Portuguese language skills! (The English language summary can be found on the book’s Amazon.com page.)

Inspirado no clássico romance de aventuras de Júlio Verne, Mike Veseth nos leva à sua Volta ao mundo em 80 vinhos. A jornada começa em Londres, metrópole histórica da enologia. Logo viajamos pela França e pela Itália, para, em seguida, darmos uma guinada em direção a irresistíveis relatos sobre o vinho na Síria, na Geórgia e no Líbano. Toda taça de vinho conta uma história, e assim cada um dos oitenta vinhos aqui selecionados tem algo importante a revelar. Sem mais delongas, seguimos pela África do Norte até a Argélia, um dos maiores exportadores de vinho do mundo, e atravessamos o Mediterrâneo para chegar à Espanha e a Portugal. Acompanhando as rotas comerciais portuguesas, desembarcamos na Ilha da Madeira e depois na África do Sul, onde fazemos um rápido desvio para saborear o mais famoso Pinot Noir do Quênia. Como assim? Pinot Noir no Quênia? É isso mesmo? …

Authors don’t get rich from translation rights, but it’s exciting to see the new edition because it promises to expand the global audience for my book. Brazil and Portugal are important wine-producing and consuming countries and the Portuguese-speaking world is, well, worldwide. It seems like I find Portuguese and Brazilian influence wherever I go. Europe, Africa, Asia, the Americas, everywhere!

A Volta ao Mundo em 80 Vinhos is the third of my wine books to be available in translation. It joins “Вокруг света за 80 бутылок вина.”  (the 2019 Russian translation of Around the World in Eighty Wines) and “Războaiele Vinului” the 2017 Romanian translation of the 2011 edition of Wine Wars,. on the Wine Economist foreign-language bookshelf.

“Obrigado” to Editora Valentina and my other international publishers for their creativity and hard work. Thanks, as well, to all the readers for their support.

Is Wine a Good Value?

August 13, 2024 By in economic crisis, Economic impact, wine, wine markets, wine price 4 Comments

These are challenging times for many (but not all) consumers. Rising housing and interest costs are squeezing budgets. Pandemic-era stimulus check bank balances are going or gone. Student loan payments, paused for a time, are back again.

Faced with tight budget constraints and rising debt costs, consumers are struggling to cut costs without sacrificing their standard of living, which means they are more and more focused on value for money. Perhaps the most obvious indicator of this trend is the surge in purchases of store-brand supermarket products at the expense of similar but more expensive name-brand products. But, as the financial news reports, the changes in buying patterns go far beyond that.

Do You Want Fries with That?

Two recent news reports suggest that consumers want value, not just lower prices. A Wall Street Journal story about casual dining restaurant chain Red Robin (see article link below), noted a two-prong strategy to get diners back. Step one was to improve food quality. Step two was to expand the number of “bottomless” offerings so that there is a sense of abundance and value, even when (like me) diners rarely ask for free extra servings. Menu prices have not declined, but business traffic is up. Value sells

The Economist newspaper’s “Schumpeter” business columnist recently compared fast-food king McDonald’s value strategy with casual Mexican chain Chipotle (see article link below). McDonald’s has struggled in the post-pandemic era and recently introduced $5 meal deals in an attempt to regain its lost reputation for good value.  Chipotle, on the other hand, has actually raised its prices. Which strategy do you think would be more successful?

Chipotle wins, at least according to the Economist columnist, who argues that Chipotle is better value despite being more than twice as expensive as the McDonald’s meal deal. Maybe, as the column notes, the demographics of the two food chains are too different to make a comparison valid. But perhaps restaurant dinners look beyond price in calculating value. Schumpeter reports having two generous meals from his Chipotle order, but not wanting to even finish the salty McDonald’s $5 meal.

Price vs Value?

If value for money is a rising priority for many consumers it is fair to ask if wine provides good value? Or is wine’s value proposition one of the reasons the industry is facing headwinds these days?

This is an awkward question because different people have different ideas of what makes something a good value and also because wine comes in so many different price/quality combinations. When I asked my university students to do an economic analysis of the wine wall at a local Safeway store, for example, they found wines as cheap as about $2 per bottle equivalent and as expensive as about $225 per fancy glass bottle.

How can you generalize when there is such wide variation? One way is to look at average cost per serving of wine and other alcoholic beverages. Every study that I have seen suggests that wine is more expensive per serving than either beer or spirits using average price data. So there is reason to believe that consumers might see a value problem with wine.

The way that wine is packaged is a value problem, too. Many consumers hesitate to open a 750 ml wine bottle for only one or two glasses because they are afraid that what’s left will quickly go bad, making the bottle purchase an even worse deal than the per-serving averages suggest. (By comparison, beer comes in single-serving containers and spirits can keep for a long time, so they don’t suffer the same wasted money problem.)

Well, you might say, if this wine is too expensive, trade down to cheaper brands. Indeed, wine can be very cheap (per bottle or per serving) if that’s what you really want. But, good value isn’t the same as cheap price, as McDonald’s problems show.

And, indeed, consumers have for several years moved away from inexpensive wines, calculating perhaps that they are not worth even the low price charged. The premiumization trend has plateaued, too, suggesting that perhaps higher price doesn’t always mean better value.

It’s in the Bag?

If consumers are feeling the budget squeeze (and many are) and looking for value in wine as they are, apparently, in fast food and casual dining, where will they go? Some will abandon wine and indeed cut ties with beverage alcohol, generally. Some will drink less but focus on quality when they do. Others will try to find the spot on the wine wall with the best value proposition. Where is that?

NIQ market data reported in Wine Business Monthly finds only a few bright spots on the wine wall, one of them is for “premium” 3-liter bag-in-box wine selling at about $5 per bottle equivalent.  Sales of wine in this format have held up pretty well while sales of glass bottle wine at about the same price point have fallen. Maybe that Red Robin sense of abundance applies here, too.

Clearly, the economic side of the wine market equation, with its focus on disposable income, consumer budget constraints, and value for money, is not the whole story when it comes to today’s challenging environment. But I am convinced that it is part of the story and one, perhaps, that should be taken more seriously. The people who are having trouble selling other consumer goods have got the message.

What is wine’s value proposition? Food (or maybe drink) for thought?

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Blake Gray’s recent Wine-Searcher.com column is one example of what a value-driven wine marketing strategy might look like.

Here are links to the articles referenced above.

Economist newspaper “What Chipotle and McDonald’s say about the consumer slowdown.”

Wall Street Journal “Bottomless Fries, Floats, and Broccoli. One restaurant chain’s bid to get diners.“

Collio DOC: Wine, Brand, & Identity in Italy

August 6, 2024 By in Italian wine, wine, wine markets 2 Comments

[This is the third and final article in a series inspired by our recent visit to Collio DOC in north-east Italy. Click here to read the first report and click here to read the second.]

What does it take for a wine region to stand out in today’s crowded market? Excellent wine, of course, but good wine isn’t enough because there are lots of quality wines around the world; consumers need a reason to buy one instead of another.

Brand and Identity in Wine

What else does it take? There are many ways to think about it, but in my book Wine Wars II, I focus on two necessary (but perhaps not sufficient) factors: brand and identity. Brand is the image that distinguishes your wine from the competition. Identity is the quality that defines the brand.  Many wines suffer from the lack of a memorable brand. Others may have a brand, but its power is limited because it doesn’t actually stand for anything. Put wine, brand, and identity together and much can be achieved.

Sometimes an iconic wine can define a region, giving it a brand and identity.  The market for wines from Bolgheri on the Tuscan coast, for example, was shaped by Tenuta San Guido’s famous Sassicaia, Bolgheri, Sassicaia, Super-Tuscan.

Sometimes a singular event can provide the spark. Here in the United States, for example, the Oregon wine industry’s rise to prominence was at least partly due to success at the Wine Olympics of 1979. I wrote about this in the Wine Economist on the occasion of the Eyrie Vineyards’ fiftieth birthday:

The Wine Olympics 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 little-known 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.

Oregon wine was a thing, the Willamette Valley was the brand, and Pinot Noir was the identity. Oregon produces other good wines besides Pinot Noir. And Pinot Noir grows in other parts of Oregon. But the wine, brand, and identity were established anyway.

Building Brand Collio

Collio DOC, which hugs the Slovenian border in north-east Italy, has long been known for its excellent wines and it is home to many strong private wine brands. Sue and I visited Livon on our recent trip, for example, enjoying the delicious wines and the amazing view from the tasting room deck. The sleek wines are easily identified by the distinctive art nouveau-style label, which is just risqué enough to have been banned by authorities in at least one state in the American South!

A strong regional brand benefits all producers, so the Collio Consortium, which celebrates 60  years in 2024, has worked diligently to establish the image and reputation of the region and its wines.

Sue and I encountered the “SuperWhites” campaign about 20 years ago at an event in Portland, Oregon (not “Porland” as printed on the event poster shown at the top of this page). Sponsored by Slow Food Friuli and supported by a range of regional organizations, the promotion was inspired by the success of “Super Tuscan” red wines. The idea is that Friuli (and Collio) are to Italian white wines what the Super Tuscans are to Italian reds.

Although the Super Whites theme seems to have run its course, the commitment to collective effort persists, along with the color of the Collio wine region, bright yellow, is still very much alive. (I think of it as Tour de France Yellow Jersey yellow, but that’s just me). Yellow is Collio’s color, featured in all the promotional literature, the capsules found atop many of the wines, and even a bright yellow Vespa scooter that seems to show up in many photos of the region. If you are in Collio and you see yellow,  you can’t help but think Collio wine.

More recently there has been an effort to promote a trademark Collio wine bottle shape, which is also shown in the photo above. The distinctive bottle actually requires a special cork to seal it properly. Adopting it is a serious decision from a practical standpoint.

The Collio bottle shape is instantly recognizable on store shelves and when you look around at what is on tables at a restaurant. Although its use is strictly voluntary, not mandated by consortium rules, we saw it almost everywhere and sensed a certain pride in the identity. It makes a strong statement about the Collio brand project.

Collio’s Identity Quest

If Collio has been purposeful and successful in building a regional brand, the road to a specific identity to back up the brand is less clear. Indeed one person we met told us he thought that Collio was still searching for an identity.

Thirty or forty years ago Collio was pretty much synonymous with a wine they called Tocai, made from the Tocai Friulano grape variety. The grape variety’s name is still the same, but the wine can’t be called Tocai anymore because of objections from Hungary’s Tokaji region. Now the wine is Friulano and if you ask for a glass of local white wine at a bar or restaurant, it’s what you’ll get (and happily drink, I think).

Having lost control of its signature wine’s name, some winemakers in Collio looked in a different direction for a regional identity. The result, we discovered when we visited in 2019, was an emphasis on white wine blends under the name Collio Bianco. The wines we tasted on that trip were terrific. White wine blends are under-appreciated. But aside from their high quality, the wines didn’t have enough in common to be the foundation of an identity. Some were blends of native grape varieties. Others were blends of traditional grape varieties like Chardonnay, Sauvignon, and Riesling. Others combined native and traditional grapes.

The Collio wine identity remains a work in progress and perhaps that’s how it always will be. What all the wines really share is not color or grape variety but sense of the place, shaped by the local ponca soils and hillside vines. If I had to pick a grape variety it would probably be Tocai Friulano, but why do that? It seems like it would exclude so many great wines and accomplish very little.

No, I think Collio isn’t any particular wine. As we suggested in the first two articles in this series, it is best to think of it as a particular place and a deep experience. You don’t just drink Collio DOC, you experience the place through the wine. I know that that’s inconvenient when it comes to marketing, but important indeed when it comes to the wine.

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Sue and I recently received a very thoughtful gift, a copy of The Food of Italy by Waverly Root (1971). We turned quickly to the section on Friuli and found this:

“Our wines,” laments a writer from Friuli, “are more exquisite than renowned.”

More than 50 years have passed and I think the wines are even more exquisite, if that’s possible. Renowned? Not as much, but the word is getting out there and Collio’s reputation is fast catching up to its reality.