Wine 2021: The Good News is the Bad News Could Be Much Worse

Australia’s export dilemma.

As the door to 2021 slowly swings open, the landscape looks both familiar and transformed at the same time. When the U.S. wine industry entered 2020, for example, the problems seemed to be stagnant demand on one side and excess wine grape supply on the other. Not a good situation for the world’s largest wine market, but not something beyond our ability manage, either.

Those problems are still with us, although they’re a bit lost in the fog. Structural wine production capacity is still too large, but this is disguised a bit by a smaller 2020 harvest in California and widespread smoke damage, which took some grapes off the market.

Overall wine demand is still under-performing, too, but that is hard to gauge exactly because of the way that wine channels have been disrupted by the covid pandemic in general and bar/restaurant restrictions in particular.  Consumers are buying much more through retail channels, a good deal more direct-to-consumer and much less in the on-trade. Whatever the net impact, which seems to be negative, the effects on individual wineries in particular sales channels is significant.

The Unified Sine & Grape Symposium‘s “State of the Industry” session is about two weeks away so those of us on the panel are working to put our thoughts about 2021 in order. Here are some of my working notes. The theme here is that, while there is plenty of bad news going into 2021, if you take an international perspective on the U.S. situation, it quickly becomes clear that things could be much worse. If that sounds like a “glass half full” perspective, well it is.

Take the loss of on-premise sales.  These lost sales are costly indeed, but producers in Europe had it much worse because they depend much more on bar and restaurant sales. No wonder their industries are hurting to badly and that crisis distillation is back in some E.U. countries.

Unlucky Australia

If people in the U.S. wine industry are looking for something to be thankful for, they might consider how lucky they are not to be Australia. The U.S. industry has been caught in the trade war crossfire to be sure. Importers and distributors have been hit by U.S. tariffs on many European wines, for example, and China has imposed tariffs on the relatively small amount of U.S. wine sold there.

As if matters weren’t bad enough, the U.S. recently imposed 25% tariffs on French and German still wines above 14% abv, which had been spared in earlier rounds of the trade wars. U.S. firms that import, distribute, or sell these wines are collateral damage in the bigger trade fight, which has nothing to do with wine. These are daunting challenges, to be sure, but nothing in comparison to what Australia is experiencing.

The Australian wine industry invested heavily in opening the door to the Chinese market and moving up-market once inside. And they were remarkably successful. As you can see above in data from Wine Australia, China was by far Australia’s largest export market by revenue in 2019, accounting for $1.3 billion of the $2.9 billion of wine exports. China bought almost three times as much as the #2 export market, the United States.

Australian wine is #1 in China, too, measured by value. Australia overtook France in the Chinese sales league table in 2019.

This was good news for Australian producers back with economic relations with China were happy ones, but now a variety of tensions exist and China was imposed up to 212% tariffs on Australian wine. I don’t know if sales will go to zero immediately, but that is a lot of tariff to absorb. Although anti-dumping measures are cited in this case, the real conflict is elsewhere. Economist have long held that anti-dumping tariffs, ostensibly designed to deal with damage from predatory pricing, are often subject to political abuse.

Australian producers hope to be able to divert previously China-bound production to other Asian markets and some of it may end up in the  U.S. and U.K., too. But realistically there is just too much wine for these markets to absorb and margins in the pivot markets are unlikely to match those in China.

But things could be even worse. What if Australia was even more dependent on Chinese market? The turn of the political screw would be even more painful then. And that is what happened in the past to Moldova and to Georgia when their biggest wine export market, Russia, decided to use wine as political tool.

The Good News is That the Dollar is in the Dumpster

You can find another good news story by looking at the foreign exchange markets.  Typically when there is any kind of crisis around the world there is a rush to the security (and liquidity) of the U.S. dollar. Uncertainty drives the dollar in turbulent times. Or at least that’s what we thought.

A strong dollar translates into cheaper imports, which would not have helped in any way restore domestic balance in the U.S. wine market. A strong dollar isn’t the worst thing for domestic producers, but the negatives outweigh the positives for many firms.

As I noted in a Wine Economist column back in August, this crisis is different and the dollar didn’t soar, it plunged as this graph (above), which shows the dollar versus the euro, indicates. And then, after bouncing around for a while, it plunged again.

Now this is bad news for consumers who want to buy imported wine because a cheap dollar buys less on international markets, so European wines, many already subject to U.S. tariffs, are even more expensive. But it is good news for U.S. wine producers who compete against euro-priced imports. The cheap dollar gives them a cost advantage in the domestic market. There is also a theoretical advantage in export markets, but honestly those markets are pretty congested right now with lots of unsold wine (some of it from Australia) looking for a home.

But foreign exchange news isn’t completely sunny for U.S. wine because the dollar isn’t falling against all currencies. As this graph shows, the Argentina peso is even weaker, so the U.S. dollar steadily increased in relative terms, making wine from Argentina a fierce competitor where price is the key factor, especially bulk wine trade.

Economics is often called the dismal science and these examples of good news have a decidedly glass-half-empty feel. Stay tuned for glass-half-full analysis in coming weeks.

Pandemic Mode 2020 Harvest: Southern Hemisphere Wine Lessons

 

One way that wine differs from beer is that whereas beer can be produced pretty much continuously throughout the year, there is only one opportunity to make wine. A crisis that comes at harvest time is therefore especially disruptive and unwelcome. And that”s exactly what happened to wine producers in the Southern Hemisphere this year.

webinar

The International Organization of Vine and Wine (OIV) recently organized an important webinar on the experience of Southern Hemisphere wine producers harvesting their 2020 vintage just as the coronavirus pandemic threat became clear and lock down policies initiated. View a recording of the webinar by clicking on the image above.

Presenters (see list below) from Australia, New Zealand, South Africa, Chile, and Argentina each highlighted the particular problems that they faced and how they managed these challenges. The stories are very different with many lessons to learn and puzzles to ponder.

After the five presentations (at about 1:11 on the video) moderator António Graça asks each presenter to summarize the most important lessons in the form of a tweet.  The discussion that follows focuses on practical problems and the search for solutions. The analysis of successes and failures is worth your attention.

One of the clear lessons cited by several speakers is that communications must be clear, transparent, and omni-directional. Everyone needs to be on the same page. One of the failures cited by two speakers was the inability to convince government regulators of the importance of the wine sector in the national economy and therefore the need for more favorable treatment and accommodating protocols. In part it’s that “we only get one chance” thing — at some point harvest delayed is harvest wasted.

The webinar is required viewing for winery businesses and organizations everywhere — in the Northern Hemisphere because we should learn from our colleagues south of the equator and for Southern Hemisphere producers because this may not be the last time such a crisis is experienced.

SPEAKERS

  • Tony Battaglene, Australia /  Chief Executive of Australian Grape and Wine Incorporated
    Jeffrey Clarke, New Zealand / General Manager Advocacy & General Counsel of New Zealand Winegrowers
  • Yvette Van Der Merwe, South Africa / Executive Manager, South Africa Wine Industry Information and Systems (SAWIS)
  • Aurelio Montes, Chile / President, Wines of Chile
  • Daniel Rada, Argentina / Director, Argentine Wine Observatory / Professor of International Economics, National University of Cuyo, Argentina

MODERATOR

  • António Graça, Head of Research and Development at Sogrape Vinhos SA, Secretary of Sustainable Development and Climate Change experts group – OIV

Flashback: Spanish Wine Challenges & Opportunities

I am in virtual Madrid today to talk about the changing global wine market on a program that also includes OIV director general Pau Roca and Dorian Tang of ASC Fine Wine in China. Zoom brings the three of us together from across the global wine map to talk with our on-line audience in Spain, Portugal, and many other places.

Preparing for this talk got me thinking about the lessons I took away from a trip to Spain five years ago for an in-person wine industry meeting in Valladolid. I think the message is still relevant, so I reprint it here in a “flashback” column.

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Wine Economist (April 25, 2017). Sketches of Spain is the title of the 1960 Miles Davis/Gil Evans album that deftly walks the line between classical and jazz genres, with Davis’s virtuosity shining throughout.

Sue and I have recently returned from a visit to Spain, where I spoke at the General Assembly of the Spanish Wine Federation (Federación Española del Vino or FEV), so Spain and Spanish wine are on my mind and I have been puzzling over how to write about our experiences and all that we learned. Such a big country! So many impressions! The Miles Davis album solved the puzzle.

Davis and Evans gave us a few powerful sketches of Spain and its music, not a detailed musical portrait, which would be impossible in the context of a ’60s-era 33-rpm vinyl recording. A perfect choice! In this and the next several weekly columns I will try to provide sketches of the Spanish wine industry, which I hope you will find useful, leaving a more detailed portrait for another time and place.

Sketch 1: The Spanish Wine Supertanker

They say that it is not easy to turn around a big ship because of all the momentum it has to continue on its path and this might be a good metaphor for Spain. Spain is certainly big when it comes to wine. Spain has the largest area of vineyards of any country in the world and is the third largest wine-producing nation (after Italy and France). Spain produces nearly 70 percent more wine by volume than the United States, which is number four in the global wine table.

The Spanish wine industry has devoted enormous effort to changing wine market direction, investing in more productive vineyards planted to grape varieties like Tempranillo that are more attractive to global wine buyers, and in new or updated production facilities.

The wineries we visited have made the transition and are now sailing in the right direction. As I said to the General Assembly audience, it seems to me that Spain has all the pieces in place to succeed in the new global wine market environment that has emerged, where value matters much more than sheer volume. I am an optimist about Spanish wine. But I am also a realist …

Sketch 2: Breaking the Glass CeilingFEV2

Improving Spanish wine is one thing (a good thing!), but achieving greater success in the global market is another because of reputational momentum.  Spain’s wine reputation has not caught up with its reality in many markets. Citing data from a Nielsen Company survey of U.S. on-premises wine drinkers (thanks to Danny Brager for his help), I noted that Spain was stuck under a “glass ceiling” in terms of consumer perception.

Italy and France — these are the countries that American diners think of first when they consider imported wines. Spain, despite its status as the third largest producer, ranks far below with perception roughly on a par with Australia, Argentina, and Chile and only a bit above tiny New Zealand, which is number 14 on the world wine production table, lodged between Romania and Hungary.

Spanish producers would love to break through the glass ceiling to achieve market status of Italy and France, but — let’s face it — everyone wants to do that.

A more interesting question for Spain, I proposed, is why it does not rank higher above Argentina, Chile, and New Zealand. Do they make more wine than Spain? Better wine? Do they have better generic market promotion programs? The answer is no in each case. What do these much smaller countries have that Spain does not that allows them to punch so far above their weight? This got my audience thinking, which is always my intent.

Sketch 3: Spain at the Crossroads

Hard thinking is necessary because Spain’s wine industry is at a cross roads of sorts. A graph of domestic vs export sales of Spanish wine shows that an important line has been crossed. Domestic wine consumption continues to fall in Spain as in other Old World producer countries. The opponent is not so much France and Italy as spirits and beer and changing consumer habits generally.

Wine exports are rising and now exceed domestic sales. This is important since the industry would be in crisis if exports did not replace lost domestic purchases, but that doesn’t mean that slowly losing your most biggest market is not a cause for concern. It was rare for us to meet a wine producer in Spain who had as much as 50 percent domestic sales.

Global markets are congested and competition for high value sales will only increase when Brexit’s full impacts are finally felt.  Reversing the decline of the domestic wine market is Spain’s next big challenge.

Fortunately, I think there is an realistic opportunity for domestic wine sales growth. Spain was hit very hard by the global financial crisis and the austerity policies that followed in Europe. Only now, ten years after the crisis, is Spain’s gross domestic product approaching its pre-crisis level. A lost decade! No wonder exports have been the focus.

But growth has picked up in the Spanish economy and optimism is in the air, something Sue and I could feel on the streets of big cities and small towns alike. Beer is a tough opponent, but perhaps this is Spanish wine’s moment at home as well as abroad! More to follow in the weeks ahead.

Thank You Notes

Sue and I would like to send out big “thank you” notes to Pau, Susana, José Luis, and Eduardo and everyone else at FEV and to all the people we met at the General Assembly in Valladolid.

FEV organized a series of winery visits for us in the two weeks following the General Assembly (I will report on this fieldwork in future columns) and we would like to thank everyone who took the time to meet with us and share their stories. Here is a list of the wineries we visited:

Wine 2020: A Guide for the Overwhelmed

I’ve been thinking about what the global wine industry will look like when 2020 finally draws to a close and I’m feeling overwhelmed. So many challenges. So much to digest. Maybe you feel overwhelmed, too?

I did an internet search for “Tips for the Overwhelmed” and, well, it only made things worse.  So many tips for so many problems. One website had 44 ideas for what do to when you are feeling overwhelmed. Too much!

Here’s what has provoked these thoughts. Rabobank’s Stephen Rannekleiv and I will be having a conversation about the state of the wine business on November 4 in the first of a series of webinars on challenges and opportunities for wine. The webinars are meant to develop ideas that will be discussed at WineFuture 2021, an important global wine industry virtual conference set for February 23-25, 2021. (Use the links to learn more about the developing webinar schedule and the upcoming conference.)

Pre-Existing Conditions

My go-to coping mechanism has always been to break down problems into component parts, which can be somewhat easier to deal with, and then try to put them back together again. This is the break-down column where I’ll look at the challenges the wine industry faces. Next week’s Wine Economist will try to put things back together. As always, use the comments section below to suggest things I’ve left out or got wrong.

As we entered 2020, global wine confronted a number of serious challenges including …

 

Stagnant Long-Term Wine Demand.  As I noted in 2019 (in a column titled Global Wine’s Lost Decade) the relatively strong growth in global wine demand of earlier years peaked in around 2007-8 and has been relatively stagnant since then. (See OIV data above.) There are a varieties of demographic and economic theories for this condition, but the important fact is that no important wine region (with the possible exception of New Zealand) can be confident today that rising demand will smoothly absorb increased production.

In a way, the positive-sum game of the past has been replaced by a zero-sum situation depending on how the market is defined. That’s a big change.

The American wine industry entered 2020 with a lot of wine in the tanks and stagnant overall wine demand. Although wine sales revenues were increasing modestly, due to premiumization, the volume of sales, especially at lower price points, has fallen. Younger generations of consumers were not picking up the slack as baby boomers reduced consumption.  Hard seltzers and similar products accounted for most of the growth in beverage alcohol sales.

Climate Change Challenges. The supply side of the global wine industry is increasingly affected by climate change, both the global warming that we normally think of when “climate change” is mentioned and also the increased instability of weather that accompanies it. The 2017 global wine grape harvest was the lowest in a generation due to unfavorable weather conditions in key regions, for example. The 2018 harvest, however, was abundant.  Meanwhile global temperature records continue to be set year after year.

The bottom line is a boom-bust pattern due to climate change within a general environment of excess supply and rapidly evolving growing conditions.

2020 Perfect Storm

The events of 2020 (so far) have added additional challenges and headwinds. Chief among the events are …

The Coronavirus Pandemic  and Channel Shifts. The public health impact of the coronavirus pandemic is the most important thing, of course, but the closures and lockdowns designed to reduce contagion disrupted wine sales channels dramatically, too. There was a major shift in where people were located, with work-from-home replacing on-site work for many. Home was also the default location for those who lost jobs due to closures, suffered reduced employment hours, or simply needed to be at home to tend to family members including children engaged in remote learning.

Eating and drinking are now more home-based, too. Bars and restaurants were ordered to close or, if allowed to remain open, experienced vastly lower customer counts.  These factors resulted in a dramatic channel shift for wine sales, with on-premise replaced by booming off-premise sales. Overall wine consumption decreased little if at all, depending on locality, but the composition of demand changed, especially favoring high volume brands. Wineries that depended disproportionately on cellar door and on-premise sales were forced to pivot quickly to direct-to-consumer sales and other channels.

The Recession and Economic Policies.  Fear of contagion plus the policies necessary to safeguard public health created a global recession. Heroic economic stimulus in many regions lessened the short term impact of the initial economic crisis, but it is unclear that stimulus can be sustained as the health crisis continues.

There has been much discussion of the “shape” of the recession, with optimists anticipating a short V-shaped downturn and pessimists fearing a long Japanese-style L shape. At this point the two shapes that seem most relevant are W — initial decline and recovery followed by a second wave decline — and K — quick recovery in some sectors such as finance but continued decline in others, increasing economic inequality.

Needless to say, wine demand is conditioned by who has lost or gained income, how much, and how they see the future.

Wild Cards

Every important wine region has wild cards that make the situation more complex. Chile faces social unrest, for example, and Argentina must deal with financial risks as it walks the tightrope between international debt default and domestic financial crisis. Australia has entered its first recession in a generation and finds relations with China, a key market, under unwelcome pressure.

Europe and the UK seem locked in a Brexit death spiral, with wine caught in the middle. Wine is also in the crossfire in the EU-US trade war tit-for-tat, with US tariffs in retaliation for Airbus subsidies now followed by EU tariffs in retaliation for Boeing subsidies.

Wild cards abound in the US starting with wildfires in wine country and ending with the election, which has drawn every topic into the culture wars. What a mess! The wildfires, which seem to grow more destructive every  year in terms of direct impacts on vineyards and cellars, smoke taint issues for grapes and wine, and impact on wine tourism operations.

Winegrowers in the US are also anxious to know how the Constellation-Gallo deal, which should close in November, will work out. The deal is finishing in a wine market environment that looks very different from the one when it was first struck.

Add all these factors together and, well, it is no wonder that  you feel overwhelmed.  Pretty much no matter where you are in the world of wine or what position you have in the supply chain, you confront change and challenges on multiple fronts.  Tune in next week when I will begin a short series of columns that try to sort out what the future might hold.

Wine, Coronavirus, & the Falling Dollar

xratesWhat is going to happen to the value of the U.S. dollar as the coronavirus crisis unfolds? That was the question that a couple of wine economists (I was one of them) were asked in a zoom meeting back in May.

The dollar’s going to stay strong, we both said. That’s what happens in a crisis. Investors rush to the safety and security of the dollar whenever there is uncertainty and risk. Ironically, the dollar sometimes rises even when the U.S. is the source of the uncertainty, but that’s another story.

Up and Down Economics

Zoom ahead a few weeks to the start of August. The dollar’s value unexpectedly fell dramatically in July as this chart from x-rates.com shows — the largest monthly drop in a decade. The sudden exchange rate change will affect the economy directly and indirectly in many ways — some even believe that it has contributed to the somewhat puzzling situation in the stock market, where values have risen recently despite bad economic and pandemic news. The cheaper dollar makes dollar-denominated  financial assets cheaper for foreign buyers, who look for capital gains when the currency eventual rebounds.

What happened? Why? And why does it matter for the wine industry?

Some people believe that a strong dollar is good and a weak dollar is bad, but the truth is that exchange rate shifts create many positive and negative forces and the net effect depends on the economic environment at the given point in time and  your particular circumstances. The strong dollar of the last few years, for example, made wine imports cheaper in dollar terms and discouraged wine exports — both big negatives for U.S. growers and producers.

But the strong dollar also tended to reduce the cost of equipment and supplies used in U.S. wine production including vineyard and cellar machinery, bottles, capsules, corks, and so on. The strong dollar also indirectly benefited the U.S. companies that import and distribute foreign wine and the on- and off-premise firms that sell it. Wine has a long supply chain and so there are complex exchange rate effects.

The falling dollar tends to reverse all this by increasing the cost of imported wine and wine production supplies and making U.S. exports relatively cheaper abroad.  If you run a vineyard in California, the reduced competition from imports is good news. If you run a distributor that specializes in imports this is more bad news in a year with lots of bad news to digest.

Elementary, My Dear Watson

Although the falling dollar caught me by surprise because I focused on the crisis effect, others who watched exchange rate fundamentals might have seen it coming. That’s because there were indications that the U.S. dollar was over-valued and ripe for a fall at some point.

When we say that a currency is over-valued, we mean that the exchange value is such that the currency purchases more abroad than it does at home. If you travel to Europe, for example, and your euro purchases seem cheap in terms of their dollar equivalent, it is an indication that the dollar is over-valued (and the euro under-valued).

bigmac

The Economist newspaper keeps track of how much currencies are over- or under-valued using their famous Big Mac index. As this graph shows, as of June 2020  the Economist index suggested that U.S. dollar was over-valued compared to all but three (Sweden, Lebanon, and Switzerland) of the currencies that the newspaper tracks.

The British pound was 25% under-valued relative to the dollar. Other wine country currencies: Canadian dollar (-11%), Euro (-16%), Australia (-19%), New Zealand (-23%),  Argentina (-38%), Chile (-39%), and South Africa (-67%). Logically, the U.S. dollar would need to fall quite a lot to restore equilibrium between the currency’s internal and external purchasing power.

In my experience, the Big Mac index is a reasonably good predictor of long-run exchange rate tendencies, but there are many other factors that impact the exchange rate in the short term. In particular, the flight to safety that many of us expected seemed very likely to overwhelm the trade-based adjustments that the Big Max index is based on.

None of the Above

But an article in last weekend’s Financial Times suggests that there is more going on than  adjustment based on “burgernomics.”  Faith in the U.S. as a safe harbor in the storm has weakened, according to the article, because of what is seen as a very poor response to the pandemic. The coronavirus continues to spread, the economy remains very weak, the Federal Reserve is running short of tools, and Congress is gridlocked. And have you heard that there is an election coming up? The eurozone looks like a calmer, safer haven by comparison.

Safer yet, in some eyes, is gold, which isn’t tied to any particular country. Buying gold is a way to vote “none of the above” regarding major currencies. (There’s also Bitcoin, but that’s another story;)

The price of gold hit a record high of $1983 per troy ounce last week. The high price is the result of some investors looking for safety and others making speculative purchases. Demand for gold for use in jewelry and so forth is down because of the pandemic’s impact on sales of the finished products.

Looking ahead, it is difficult to know where the dollar will go next. Financial markets tend to over-shoot — to zoom too high when they are rising and over-state declines.  So it will take a while to know whether July’s dollar decline will persist or if the currency will bounce back quickly.

So pay attention to the risks that exchange rate variability produces. Many wineries will find their exposure to exchange rate risk is small and difficult to identify. But if you have substantial foreign currency costs or revenue streams, you might think about hedging strategies to insure to some degree against unfavorable movements. And everyone ought to consider counter-party risk: are the people who owe you money exposed to increased risk? Will it affect their ability to fulfill their obligations?

 

 

Wine, Tariffs, & Globalization

 

The wine trade has always been as global as transportation technology and political economy have allowed. So it is no surprise that the economist David Ricardo sought to make his theory of international trade based on comparative advantage clear and obvious by choosing an example that all his readers would appreciate — Portuguese wine exchanged for British wool.

A World of Wine

If you want to get a sense of wine’s global reach today I suggest you visit your local upscale supermarket or wine shop and survey the landscape there. I had my university students do this back in 2011 and reported the results in a Wine Economist column.  The local Safeway store carried about 750 wines from a dozen different countries back them, which caught the students by surprise. The store has expanded its wine wall since then, with even more offerings, and the supermarket across the street has an even larger set of wine choices. Globalization delivers a world of wine to your doorstep!

Global trade in wine, both bottled and shipped in bulk, is incredibly important to wine producing countries. The largest producers — France, Italy, Spain, Portugal, Argentina, Australia, New Zealand, Chile, South Africa — could not possibly sell all the wine they produce in their domestic markets. The collapse of global wine trade would be a global wine catastrophe.

And the trade in wine isn’t the whole story. Global markets exist for corks, capsules, winemaking services (think “flying winemakers”), and bottles, too. We’ve visited wineries in South Africa, for example, that import glass bottles from Europe and then export the finished wine to the UK, China, and the US. That’s globalization! Chinese glass has an even broader global reach.

Peak Wine Globalization?

By some measures globalization generally — taking into account goods, services, and people — reached a peak about the time of the global financial crisis and has since shrunk as a percentage of global GDP. Global wine resisted the de-globalization trend, however, but perhaps now is catching up.

Some of the macroeconomic drivers of wine imports and exports such as rising disposable incomes and stable exchange rates have been impacted by the Covid recession. And of course Covid restrictions and behavioral changes have negatively affected both on-premise wine sales and travel and tourism vectors, too.

There are attractive pockets and niche markets for wine sales all around the world and smart producers have sought them out. But the three big wine targets in recent years have been the UK, US, and China and each of these has become more challenging.

The UK issue is Brexit and it is shocking that there is so much uncertainty about the nature of future trade arrangements with just a few weeks to go before the exit from the EU is final. Britain’s unsuccessful attempt to navigate the twists and turns of Covid have pushed the country into a recession that is likely to grow worse before it gets better — a bad thing for income- and price-sensitive wine demand. Add to this the possibility of a botched Brexit and you might see Britain’s status in world wine trade diminish substantially.

Tit for Tat

The US market is suffering from Covid and recession problems as well and its own set of trade issues. The Trump trade wars have increased tariffs on wine imports from the EU, for example, but also generated retaliatory tariffs on US exports to China.

Wine has been caught in the crossfire in the Boeing-Airbus trade dispute, as The Wine Curmudgeon recently reported. The WTO has ruled that the US can impose tariffs on EU products in response to Airbus subsidies and that the EU can put tariffs on US products because of subsidies to Boeing. Wine figured prominently on the US tariff list, but the EU plans to focus on US spirits instead of wine, with new duties on vodka, rum, etc. on top of previous tariffs on U.S. bourbon.

How did the US wine industry dodge the tariff bullet in this case? Trade policy is sometimes very personal when you think about it. EU tariffs on US wine would fall heaviest on California producers — think for a moment important politicians from California. (Does the name Nancy come to mind?) Not necessarily someone the EU wants to upset.

Tariffs on US spirits fall heavily on Kentucky bourbon producers. Can you think of an important political leader from Kentucky that EU officials might enjoy roughing up a bit? Maybe some guy named Mitch? Just thinking out loud …

China vs Oz

And then there’s China. Down in Australia there is more than a bit of concern about wine trade with China. China has grown to be Australia’s largest wine export market, so rumors that the Chinese government might impose tariffs on or even ban imports of Aussie wine entirely are serious concerns. It is not clear that the US and UK, the other big export markets, could easily absorb the resulting flood of  unsold wine.

Since tariffs are as political as they are economic, there is hope that, with a changing US administration, the troops in the wine trade wars might stand down and a truce be agreed. This could start with both sides backing down over the Boeing-Airbus duties. That would certainly be a good outcome and I don’t think it is impossible.

No Easy Fixes

But tariffs aren’t the only factor preventing a return to the previous era of wine globalization as noted above, so don’t expect a quick fix. International producers seeking to penetrate the US market in particular need to be aware of how much the on-trade to off-trade shift has changed which wines American consumers buy, where they buy them, and how much they are willing to pay.

The process of restoring wine’s global reach seems likely to be a process and probably a slow one, with some firms and regions more successful than others. The faster the global economy returns to health, the faster the clouds will clear for global wine.

The New Wine Wars

We are celebrating  the tenth anniversary of the publication on my book Wine Wars here at Wine Economist world headquarters and I want to use this opportunity to reflect on how the wine world has changed since 2011. As I explained in last week’s column, Wine Wars is organized around a trio of strong forces that together (along with other factors, of course) shape the wine sector and many other industries, t00.  In very simple terms …

Globalization drives change. Commodification is a commercial response to these disruptive forces. Together globalization and commodification provoke grass-roots reactions that I call “the revenge of the terroirists.”  I think the framework still applies. But things have indeed changed. Here are some notes.

Wine and Globalization

Globalization continues to be a driving force in the world wine sector. Indeed, I think it is safe to say that more different wines from more different places are now available to more different consumers than at any point in history. World wine is truly an embarrassment of riches! Wherever we have travelled in the world of wine we’ve met producers anxiously seeking new opportunities.

But while the globalization pulse remains strong, there have been important qualitative and quantitative shifts. The first is that the fundamental nature of the market has changed from positive-sum to something much closer to zero-sum. As I was writing Wine Wars the world wine market had just come to the end of an era of expanding global wine consumption. I am not sure any of us where really aware of this sea change at the time. It was easy to blame the down-tick in consumption on the global financial crisis. But the recovery up-tick didn’t follow.

As this OIV graph shows, in place of rising year-on-year global wine consumption, we  entered what I have called global wine’s lost decade. (The most recent OIV data, which will be released later today, show dramatic further consumption decline in 2019 and 2020.) Global wine consumption reached a high plateau and flat-lined. Demand bumped up and down a bit from year to year, but that rising trend line that was so powerful before had vanished.

This doesn’t mean that wine demand was flat everywhere, of course. Among the major markets, structural demand declines in the old world — Spain, France, and Italy — was offset by rising demand in some new world markets, especially China (from a low base) and the United States (slow growth, but still growth).  I profiled what were then the three most important wine markets in Wine Wars: the UK, Germany, and the United States. Today you would need to add China to that list. In Wine Wars I speculated about what the rise of China might mean and some readers wondered why I even asked the question. There are still plenty of questions about China and wine, especially since recently sharp declines in both production and consumption in China ,but no one seriously doubts its importance any more.

Caught in the Crossfire

Global wine has changed in another important respect. Globalization in pre-Wine Wars was all about expanding international trade. Free trade agreements were the order of the day and the more of them that a country could negotiate the better. Chile was a big winner in this competition and its wine industry benefited enormously from easy access to the most important markets.

Now wine is caught in the crossfire of tariffs and trade barriers. The U.S. has imposed tariffs on some European wines, for example, and China has raised  trade restrictions on wine from both the U.S. and Australia. U.S. wine sales in China were relatively small, so the economic loss was limited, but China was Australia’s #1 export market and the pain is hard to over-state. In the meantime, the British withdrawal from the European Union — a.k.a. “Brexit is Brexit” — has thrown sand in the wheels of what was once a very efficient set of trading arrangements.

What is interesting about the new political economy of wine tariffs and trade is that it isn’t really about wine at all. Wine is simply caught in the cross-fire in other disputes. Why pick on poor innocent wine? Probably because wine has a clear identity and national association. Sanctions on wine from a particular place send a clear message. And of course with so many wines available from other places, the harm to consumers who are willing to accept substitute products is pretty limited.

Globalization is built on many complex structures including especially global communications networks, so it is easy to forget about supply chains and logistics until they break down — and that’s the most recent challenge that wine and other global goods confront. Global supply chains have recently shown themselves to be less reliable and most costly than many supposed when plans were made just a few years ago. The benefits of global reach must always be weighed against the security of local linkages. How much this trade-off has changed and to what extent it will impact the global wine sector is still to be determined.

Wine and Commodification

Commodity wine is only one side of the industry, but it has been an area of growth in the decade since Wine Wars first appeared. One way to appreciate this is to look at wine branding trends. There are many different types of brands, of course. Champagne is a brand, for example, and the producers are diligent in protecting their brand’s intellectual property. More broadly, there are collective brands (appellations, AVAs, etc.) and private brands (Mouton Cadet, Barefoot, etc.). Brands are successful when they encourage demand by providing an indicator of consistent value and quality.

As the market has become more congested, brands have become more important and evolved in interesting ways. One of the most important trends, which Wine Wars anticipated, is the rise of private label wines (which some call “exclusive label” wines in a nice bit of marketing). The maker’s brand is generally replaced or supplanted by the seller’s brand.  British supermarkets like Tesco made private label wine an important category and now it is everywhere. Here in the U.S. Costco, Walmart, and Target have their own wine brands, for example. But the phenomenon isn’t limited to large-multiple sellers. The upscale supermarket down the street (which appeared prominently in Chapter 3 of Wine Wars) is part of a small local  chain (nothing like Kroger’s vast network), but it has its own private label Champagne.

As the wine market has stagnated over all in many regions, the demand for private label wine has grown. Buyers look for value, retailers see higher margins. Growers and producers get the business they need even if they don’t control branding.  Some of these wines are very high quality. Others, of course, are drawn from lots of generic bulk wine from sources that vary from year to year and lot to lot depending upon price among other factors.

Take It To the Limit

What happens if the trend towards generic wines is taken to its logical extreme? In Wine Wars I joked (sort of) that we’d be left with Bud Red and Bud White — a threat that is more potent today with wine-in-cans gaining popularity. But I could never have imagined that we’d be staring at the specter of hard seltzer!

Wine today competes for a share of the stagnant overall beverage alcohol market. That means the growth in total wine sales need to come from other alcohol categories. And the toughest competitor in this space — the one that has been eating market share for lunch — is hard seltzer, a.k.a. flavored alcoholic fizzy water. I may be wrong, but this seems to me to be the real least common denominator threat to the idea of wine that most readers of this page likely share. Yes, I know that we’ve always had products like wine coolers, which may have served as a first step on the wine ladder. But if hard seltzer is the first step, I’m not sure what the second step might be!

Ultimately Wine Wars counted on what I called “the revenge of the terroirists” to keep wine from jumping the branded goods shark. How has that worked out? Come back next week for my thoughts.

Thanksgiving Flashback: Black Friday Wine

beaujolais-nouveau-e1477026349777Thursday is Thanksgiving Day here in the United States and it is a time for remembering and being grateful. I am grateful for friends and family and for all the wonderful wine choices we have today. As for remembering, here is an abridged version of a Thanksgiving Wine Economist column from 2009.

The Black Friday Wine?

I called Beaujolais Nouveau a “Black Friday wine” back in 2009 because good sales were critical for producers and distributors who wanted to finish the year profitably “in the black.” Success was certainly not guaranteed back then, with the global financial crisis still casting its dark shadow over wine sales.

A lot has changed in 10 years. The economic crisis has passed, for example, but the current trade war, with its 25% tariff on French still wines below 14% abv has come at a bad time for Nouveau. Some of it arrived on U.S. shores just in time to pay the extra tax. Yikes!  The Georges DuBoeuf we found at the local market is listed at 13.8% abv, just below the 14% abv line where the tariff would disappear.

Indications are that suppliers are absorbing some of the additional cost in order to preserve their market. That makes sense since the selling window for Nouveau is relative narrow. No one is very interested in old (last year’s) Nouveau.

The DuBoeuf’s price — $10.99 — is about the same as last year, suggesting slimmer margins somewhere along the product chain in an effort to keep price down. Will this be a Black Friday? Too soon to be sure.

Here’s a blast from the 2009 past. Happy Thanksgiving!

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(November 23, 2009) Although the United States is not the only country to set aside a day for giving thanks, we like to think of Thanksgiving as our distinctive holiday. It was conceived as a day for deep reflection, but Thanksgiving has evolved into a long weekend of over-consumption and discount shopping. Some of my friends really prefer to celebrate Black Friday, the day after Thanksgiving, when the holiday shopping season formally begins and retailers find out if they will be “in the black” for the year based upon early sales data.

If you plan an Old Time giving-thanks Thanksgiving, then Nouveau is not for you. If wine were literature, my friend Patrick points out, Nouveau would be the trashy paperback novel you read at the beach. Nothing wrong in that — everyone needs an escape once in a while.

The grapes for Nouveau are picked in late September or thereabouts and the only thing that prevents instant sale is the necessity of fermentation and the mechanics of distribution.  It’s still a bit sweet when it’s bottled and sometimes a bit fizzy, too, when it arrives with great fanfare on the third Thursday in November (a week before Turkey Day). Best served cold (like revenge!) it is the ultimate cash flow wine.

Black Friday Wine?

Nouveau is not very sophisticated, so why do the French, who otherwise are known to guard their terroirist image, bother with it? The Beaujolias producers make very nice ordinary (non-nouveau) wines; character complexity, you can have it all and for a surprisingly low price.

Ah, but that’s the problem. Sitting close to prestigious Burgundy, the Beaujolais cannot command high prices for their wines, good as they are, so they must try to make money through turnover more than markup. They churn out millions of bottles of Nouveau to pay the bills.

At the peak of the bubble in 1992 about half of all wines made in Beaujolais were Nouveau. The proportion remains high even today. Ironically, Nouveau often sells at prices as high as Beaujolais’ more serious wines because it is marketed so well. So it is hard to see why you’d want to buy it instead of the region’s other wines. It’s easy, on the other hand, to see why you’d want to sell it.

Beaujolais Nouveau, it seems, is France’s Black Friday wine! If the makers can sell their Nouveau, then maybe the bottom line for the year will be in the black. If the Nouveau market fails, well that red stain on the floor won’t be just spilled wine.

Nouveau is therefore generally marketed around the world with more than the usual urgency (just as those Black Friday sales seem a little desperate at times) — and not just because young wines hit their “best by” date pretty quickly. This year things are even more stressful than usual, as you might imagine, with the economic crisis still on everyone’s minds and 10+ percent unemployment here in the United States.

An American Wine?

Beaujolais Nouveau sounds like the perfect wine for American consumers brought up on 2-liter jugs of fizzy-sweet Mountain Dew and Diet Coke. If you were kinda cynical, you would think Nouveau was an American wine … made in USA.

And it is, in a way. Although the wine obviously comes from France (and there is actually a long tradition of simple and fun early-release new wines in France and elsewhere), I think it is fair to say that the Nouveau phenomenon is an American invention.

W.J. Deutsch & Sons, the American distributors, really put Beaujolias in general and Nouveau in particular on the U.S. wine market map when they became exclusive distributors for Georges Duboeuf some years ago. They took this simple wine and made it a marketing event. To paraphrase an old Vulcan proverb, only Nixon could go to China and only the brilliant Deutsch family could sell Nouveau!

In fact they were so successful that they partnered with another family firm — the Casella family from Australia — and created a second wine phenomenon tailored to American tastes: Yellow Tail!

So although Nouveau is an American wine of sorts and might be perfectly crafted for this American holiday as we actually celebrate it on Friday, I’m going to pass this year (on Thursday, at least) and see if I can nurse some thoughtful reflection from my holiday glass instead. Cheers, everyone! And thanks.

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2019 update: I passed on Nouveau back in 2009, but I will try some of the 2019 vintage over the holiday weekend this year. Hmmm. I wonder if I can find it in a can

Happy Thanksgiving to all!

Wine, Recession, and Coronavirus: This Time is Different?

94528e9a-5845-4871-bef5-3285eca66dd5Last week’s Wine Economist column was a working draft of my analysis of how the coronavirus pandemic might impact the wine industry.  One focus was on the possibility of a recession in at least some parts of the world and slowing economic conditions generally.

An economic downturn would certainly impact the wine industry. Wine is, after all, a discretionary good for most consumers.  I haven’t heard of anyone filling their Costco wagon with wine the way they have done with toilet paper, although I have seen reports of people stocking up for an anticipated quarantine period. People don’t stop drinking wine during times of economic uncertainty, but they do buy less and many scan the shelves more intensely looking for lower prices. The coronavirus alters the menu of wine-drinking occasions, which will have an impact, too.

Rising Recession Probability

Recessions now seem very likely in parts of the Eurozone (the three biggest economies — Italy, Germany, and France are all on the brink). A recession in Japan and perhaps Australia is also likely.  Economic growth is projected to fall in China and a insiders are thinking the unthinkable — that the economy could not just slow down, but actually shrink as manufactured exports and domestic consumption both fall. Data on the first two months of the  year paint a dark image.

Indicators are flashing red here in the United States, too. The stock market’s long bull run ended last week when equity prices fell by a total of more than 20% from their all-time highs.  The Treasury bond market has been under intense pressure and a liquidity event cannot completely be ruled out. Corporate junk bonds are increasingly suspect as investors dump their riskiest holdings to cover loses elsewhere.

Significantly, we have seen truly historic economic interventions designed to head off economic collapse. The Fed’s $1.5 trillion liquidity injection is one example and Sunday’s announcement that it cut its benchmark interest rate target to near zero while also lowering the discount rate is another.. Yes, that’s trillion and zero. Quantitative easing is back, too, in a very big way.

President Trump’s national state of emergency declaration and the follow-up economic stimulus package are also noteworthy. The German government announced an economic stimulus “bazooka” and the end of their zero deficit policy. The list goes on. Some officials say they aren’t really worried about a recession. But it is obvious that they are.

Global financial markets opened with a thud on Monday following the Federal Reserve’s surprise announcement, dropping dramatically on the economic stimulus news and ended the trading session down more than 12 percent. Markets are forward looking for the most part and the big economic actions taken around the world seem to have used up all the ammunition to fight a recession foe. What’s left in case things get worse? I wonder where the markets will be when this column is automatically published early Tuesday morning?

cavatappiMeanwhile, borders are closing, shutting down the flow of people and some services between countries while quarantine measures increasing limit activity within them. Spain has followed Italy into lockdown and other countries seem likely to adopt containment policies too.

The impacts are both global and local — a recent Financial Times article reports on the small business situation in Seattle, home of the first major U.S. outbreak.

Economic forecasters have raised the probability of a recession here in the U.S., although estimates vary and depend on many factors.  If you take each sector into account, as the Wall Street Journal did over the weekend, the lost sales and incomes add up quickly. And then you have to factor in the impacts that don’t show up in the headlines. You know something’s really wrong when the NBA, NHL, Champions League, March Madness, SxSW, and Formula 1 all cancel or postpone events. 

So the wine industry needs to prepare for the recession that may already be here in a practical sense (technically it takes two consecutive quarters of economic decline to meet the definition of a recession). But this recession is likely to be different from the financial crisis of 2008 or the dot com bust before that. It is important to be ready for what’s happening now and not prepare to fight the last war.

cwinePast is Prologue?

There are too many potential impacts to attempt a comprehensive analysis here, so let me focus on just one area of concern: shifting patterns of direct-to-consumer sales.

Demand for wine fell significantly during the Great Recession and a lot of our discussion was about trading down. Consumers kept buying wine, but they moved down a shelf or two some of the time to save money. And they shopped the online discount sites where upscale wineries tried to quietly get rid of their excess inventory.

One of the main lessons that we learned from the Great Recession was the importance of direct-to-consumer sales and the power of the tasting room and wine club to generate margins when managed properly. Wine businesses made direct sales a bigger part of their strategy. Tasting rooms, wine clubs, personalized service — right down to that birthday phone call. Cooper’s Hawk, a surprisingly large wine business built around a tasting-room themed upscale casual restaurant chain, has nearly 300,000 wine club members. Amazing.

One thing that is different about today is that potential consumers seem to be shunning retail spaces as “social distancing” practices are adopted. Tasting room sales are down significantly, according to some reports, and Washington state wine leader Chateau Ste Michelle closed its facilities to visitors. In California, the government has suggested that tasting rooms and other non-essential businesses temporarily shut their doors.

As more and more people are tested for the coronavirus there are likely to be staff shortages, too. This isn’t just wine’s problem, but it is a problem because a revenue stream than many wineries rely upon is interrupted.  What to do?

Is There an App for That?

Other retail sectors are looking to the internet to help them connect with consumers who hesitate to make physical contact and this seems to be a smart move for wine businesses, too. The cornoavirus is only going to make web-based storefronts and mobile ordering a bigger element of any wine business strategy. But web sales are different and it is not enough to simply stock your internet shelves and open the virtual door. You are going to need hooks to attract and hold customers.

Selling on the web invites quick and easy price comparisons. Price, which is always a factor, may become even more important since buyers are not in your tasting room to receive a warm welcome, personal attention, and samples of that reserve wine you keep under the counter for special guests.

Many businesses that entered the pandemic in weak shape will be victims of falling demand, supply chain interruptions, or financial collapse. We have already seen notices in Seattle of restaurants that are permanently shutting their doors.

Everyone hopes that the coronavirus pandemic will fade in a few weeks or months. Even if we are lucky and that timeline holds, a lot of economic damage will have been done and we will start to know if consumers will go back to their old patterns or if (and how much) things have really changed. What will we learn from this crisis? How will it shape longer term behaviors and strategies? Lots of questions and not yet many answers.

If  you are looking for clues about what might happen in the U.S. and European markets when the coronavirus threat starts to pass, I recommend reading a recent Rabobank report about anticipated changes in the Chinese wine sector.  China was hit first and hardest so far by the coronavirus and its experience might provide insights about what comes next in other regions.

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About that bottle of “Coronavinus” wine shown above.  Apparently it is real. I found it on a Spanish website selling for €19.

Wine Goes Up the Down Staircase (Coronavirus Recession Edition)

41f8v8blzal._sx301_bo1204203200_Wine consumers today seem to be going “up the down staircase” (to evoke the clever title of Bel Kafuman’s best-selling 1964 book). They are buying more expensive wine at lower prices. That sounds crazy! Read on for analysis and a look back to what happened in 2009.

The COVID-19 Wine Boom

Recent consumer trend  data from Nielsen and Wines & Vines Analytics present a complicated picture of off-premise wine consumer behavior for March and April 2020. Wine sales at supermarkets and other retail outlets have boomed, as you know. The initial pantry stocking frenzy was followed by a growth plateau, but high growth rates have returned in recent weeks.

The dollar value of off-premise wine sales in the Nielsen-measured channels has risen at a 30% rate since the COVID-19 crisis began compared to the same period last year. Wine sales in the week ending March 21 surged to 66% more than the previous, year which is amazing.

The rise in off-premise sales is partially offset by the collapse of the on-premise (bars,  restaurants) channel. Net sales are up, but not by as much as you might imagine. Nielsen estimates that off-premise sales need to rise by roughly 22% (by volume) to offset the falling on-premise sales. Wine volumes are up 27.7% since March 7, so that’s a 5% net volume gain.

Less is More? Or is More Less?

Since sales volume is up 27% and sales value has risen 30%, it is clear that unit sale price has increased and this is true because of the distribution of purchases in different price points.. While sales have increased in all price categories, the fastest growth is for wines $11 and higher. Interestingly, the highest percent growth rate is in the $20 to $24.99 price category.

Some speculate that this rise is driven in part by consumers who are substituting retail wines for the ones they would otherwise have purchased at a restaurant. A $25 wine purchased at retail and consumed at home (perhaps with a home-delivery restaurant meal) might seem like a bargain compared to a similar wine with a higher mark-up on a restaurant wine list. Bottom line: consumers are moving up the wine wall, but paying less at the same time.

Online wine purchases are booming, too, but the reported pattern is different according to shipment numbers for April 2020 from Nielsen’s partnership with Wines Vines Analytics in collaboration with Sovos ShipCompliant. Sales volume increased by 45% compared to the previous  year. But sales value rose by only 15%, which means that average unit price has fallen. 

Indeed, the average bottle price in this sales channel fell from $42 to $33. Some of this might be due to changes in the commodity composition on online purchases, but readers of this column probably guess that discounting also plays a part. Here at Wine Economist world headquarters our email inbox is filled with sales offers that start with free shipping and continue with increasing levels of discounts.

Napa Discounts 

Significantly, according to the Nielsen data, Napa Valley wines, which are the Big Dog in the DtC market, had the largest average price reduction. Our friend Allan found a Napa winery in obvious financial difficulty that offered full cases of their California- and Napa-appellation wines for the price of one or two bottles.  Some of the deals like this are shared with club members, but some are kept quiet indeed to avoid reputation erosion.

So it is up the down staircase. DtC buyers are snapping up expensive wines at discount prices. Many thanks to Nielsen’s Danny Brager, Senior Vine President Beverage Alcohol Practice, for sharing data and insights.

Up and Down in 2009

Consumers also looked for ways to go up the down staircase during the global financial crisis a few years ago. Here are two Wine Economist columns from 2009, when internet sales were less of a factor, that examine how wine consumers were shifting their buying strategies during the global financial crisis: Wine, Recessaion, and the Aldi Effect and Extreme Value Wine Goes Mainstream.

Significantly the bargain-seeking changes we saw then didn’t really disappear when the economy improved. Wine buyers continued to search out bargains, at both low and high price points even as “premiumization” swept through the market. Hey, that’s up the down staircase again!wine_awards_factsheet_thumb_9.13.17

Wine , Recession and the Aldi Effect

January 13, 2009

Aldi stores are about to expand in the United States, drawn here by the recession according to an article in today’s Wall Street Journal “Aldi Looks to US for Growth” ).  I wonder how this will affect the wine market?

A Tough Nut to Crack

Aldi is a German “hard discount” store chain.  A “hard discounter” sells a limited selection of house-brand goods at very low prices in small, bare-bones outlets.

Hard discounters are a niche, albeit a growing one, in the U.S.  Wal-Mart is a successful discounter, of course, but not a hard discounter because it still features many mainstream branded products, its prices are higher and its stores a bit more plush.  Aldi and other hard discount stores drove Wal-Mart out of Germany, according to the WSJ article, but the U.S. market has been a tough nut for the hard discounters to crack. American consumers are primed to buy brand-named products and they like lots of choice, marketing experts say, and so tend to resist the house brands that hard discounters feature, which has limited their penetration here.

Germans are more willing to sacrifice brand names for low prices, apparently.  Aldi and other hard discounters are dominant powers in German retailing. The WSJ reports that 90% of German households shop at Aldi stores and 40% of all grocery purchases are made in hard discount outlets.

Divide and Conquer

Interestingly, there are actually two Aldi store chains in Germany.  Aldi is short for Albrecht DIscount. The Albrecht brothers  who founded the company after World War II fell out over the issue of tobacco sales in their stores.  They divided the German market between them (Aldi Nord and Aldi Süd) and then, eventually, split up the world market too.  Here are links to Aldi USA and Aldi International websites if you want to learn more about this retailer’s local presence and international reach.

Wine is an important product in Aldi’s German stores, as you can see from the wine selections featured on their website.  I believe that Aldi is the largest single retailer of wine in Germany.

Since Germans are rich and Germany makes great wines, you would think that Aldi must sell mainly fine wines, but you would be wrong.  Aldi’s median  German wine sale is red not white, imported from a low cost producer, sold  under a house-brand name, packaged in a box or TetraPak and priced at around one euro per liter.

You could say that it is Two Buck Chuck (TBC) wine, but in fact TBC is more expensive.  TBC is to Aldi wine as Wal-mart is to Aldi itself. (Note: Wal-Mart now has its own brand of two dollar wine, which makes this comparison even more appropriate. It is called Oak Leaf Vineyards and is made for Wal-Mart by The Wine Group.)

The Aldi Effect

Aldi figures that the recession is its moment to press more vigorously for U.S. market share.  Data indicate that consumers are much more cautious now, so perhaps they won’t be so picky about brand names and will, like their German cousins, be willing to trade down for a lower price. The Financial Times reports that Aldi sales in Great Britain are up 25 percent! Aldi plans to speed up store openings in the U.S. and to expand into New York City. New York!  If you can make it there … well, you know.

The good news here is that Aldi’s U.S. push may also help drive wine deeper into the U.S. consumer mainstream.  You can say all you like about the quality of Two Buck Chuck but it sure did help expand the wine culture in the U.S. and some (but not all) my TBC-drinking friends have moved upmarket for at least some of their purchases. The wine may not be to everyone’s taste, but its market impact has not been all bad.

Will Aldi Succeed?

Will Aldi’s drive be successful?  There is reason to think it will be. They seem committed to tailoring their hard discount operations to local market conditions, which is important because markets have terroir as much as wine.

But there is a more important reason.  Both German Aldi chains are present in the U.S. now, although you are probably not aware of them.  Aldi Süd operates on under the Aldi name, of course, with the same logo as in Germany.  The owners of Aldi Nord invested years ago in a different chain, based in California and intentionally tailored for thrifty but upwardly mobile U.S. consumers. It’s an upscale Aldi Nord and it has been very successful here.

Perhaps you’ve heard of them.  They have limited selection, smaller stores, lots of house brands, and low prices.  They even sell a lot of wine.  The name?

Oh, yes.  Trader Joe’s!

Extreme Value Wine Goes Mainstream

November 1, 2009

groc_receiptOur friend Jerry doesn’t seem like the kind of guy who would go digging around in the closeout bin or shopping for wine at Aldi — too classy for that — but there he was at Joyce and Barry’s house on Friday showing off his latest finds: cheap wine from a Grocery Outlet store.

The wine wasn’t so much good or bad as simply intriguing — is it really possible for a sophisticated wine enthusiast like Jerry to be satisfied shopping for wine at an “extreme value” store? Only one way to find out, so we got in the car the next day and headed for the strip mall.

Searching for Extreme Values

Headquartered in low-rent Berkeley, California, Grocery Outlet bargain market is America’s largest extreme value grocery chain with more than 130 independently owned stores in six western states. It has been in business since 1946. Prices are low, low, low.

Grocery Outlet stores here in the Pacific Northwest are supermarket sized spaces filled with off brand and closeout products along with a wide enough selection of fresh goods to allow families to do all their grocery shopping in one place. They are nice if not especially fancy stores. I can see why budget-minded families shop there.

Mystery Wine

The wine corner at the nearest store was large and well-stocked. Most of the brands were mysteries (one was even named “Mystery” as in “Mystery Creek” or something like that), although a few third and fourth tier products from recognized mass-market makers were available. Mainly, I think, these were leftover wines closed out by distributors to raise cash or make room for incoming shipments along with no-name brands “dumped” under a bogus label.

The wines came from all over — California, naturally, Australia, France, Italy, Chile. There was even a $3.99 “Champagne” from Argentina. Honest — it said “Champagne.”

Prices were suitably low — most of the wines sold for $2.99 to $5.99. It isn’t hard to make money selling extreme value wine when you can buy up surplus bulk wine for just pennies a liter and package it up for quick sale.  Extreme value retailers are the perfect distribution channel for wines like these.

As you can see from my receipt, I walked out with three bottles of wine for a total of $13.97 plus tax. “By shopping with us you saved $28.00.”  That would mean an average of 67% off the retail price.

Unexplained Tales from Down Under

I wasn’t really surprised at what I saw as I surveyed the wine wall. Then, slowly, a different kind of wine mystery began to unfold.

Sue must have sharp eyes because she picked out the first surprise. Sam’s Creek Marlborough Sauvignon Blanc 2008 for $3.99.  That’s awfully cheap for a New Zealand wine here in the U.S. I’ve read about heavily discounted NZ wines in Great Britain but not here in the U.S. — until now.

New Zealand is a high cost wine producer that has succeeded in charging a premium price for its wine. Indeed, NZ earns the highest average export price of any country in the world despite surging production that threatens to create unmarketable surpluses. Everyone worries that one day the export limit will be hit and prices will start to tumble from $12-$20 down to, well, $3.99. Is that what this Sam’s Creek wine really means? The end of NZ wine’s premium price?

Frighteningly, Sam’s Creek isn’t a no-name closeout wine. The label says that it is made and bottled by Babich, one of the famous names in New Zealand wine, and the internet tells me that Waitrose sells it for about $10  in Britain. I wonder if the unsold British inventory has somehow made its way here?

Prestige Wine at Extreme Value Prices

Two more bottles raised more questions about New Zealand wines. I paid a whopping $5.99 for a 2008 Isabel Estate Marlborough Sauvignon Blanc.  I almost overlooked it, but the label caught my eye. Isabel Estate is one of the most famous Marlborough quality producers, exceedingly well-known in Great Britain where this wine sells for about £10, but not so widely distributed here in the U.S., I think.

How did it get here and who among the Grocery Outlet clientele would recognize its quality sitting there surrounded by cheap and cheerful closeouts?

The third wine makes the puzzle more complicated. It is a 2004 Te Awa Merlot from the Gimblett Gravels of Hawkes Bay. Te Awa Farm is another famous NZ producer and, while this wine — a estate product from a distinguished producer in a famous region — may be slightly past its prime and therefore a typical closeout risk, it is still very surprising to see it sold at a place like Grocery Outlet for $3.99 rather than the $16-$20 retail price.

These three New Zealand wines may be random surplus wines found in the sort of place where random wines go to be sold. Or they may be indicators of important changes in the world of wine. Kinda makes you wonder, doesn’t it?

Wine markets are all about supply and demand. It is pretty clear that a supply of interesting wines has appeared along with the rock-bottom remainders at extreme value stores like Grocery Outlet, pushed along, no doubt, by the slump in fine wine sales.

What about demand? And what does Grocery Outlet tell us about the wine market more generally?