No Sale: Liv-Ex Report on Low Interest Rates & Bordeaux’s Dismal New Normal

bigstock-no-sale-280I have sometimes made fun of my wine collector and investor friends, saying that they are engaged in what Thorstein Veblen might have called “Conspicuous Non-Consumption.” They buy some fine wines for the purpose of not enjoying them in the glass, or so it seems at times.

Owning the wines and visiting these great wines in their climate-climate-controlled secure storage lockers is pleasure enough. Drink them? Horror! Then they’d be gone! OK, I know it is more complicated than this, but  you get the idea of the joke.

Not For Sale

Now a fascinating report from liv-ex.com, the fine wine market trading platform and research center, suggests that non-drinking of great Bordeaux wines must be considered along with another phenomenon that would make even Veblen scratch his head: producers who make a business of not selling their wines. Or not selling very much of what they produce.

livex“Final Thoughts on Bordeaux 2015” is the title of a Liv-ex report that tries to make sense of the recently concluded Bordeaux en-primeur campaign. This year’s market for 2015 wines was unusually complicated, the report indicates. Vintage quality varied greatly by sub-region, for example. And while critics gave the wines high markets overall, they didn’t do so consistently, which is important since the speculative value of a 97 score (Suckling’s overall rating of the vintage) is very much greater than 94 points (Wine Spectator‘s evaluation).

Add to this exchange rate changes in the run up to the Brexit vote and you have a recipe for confusion. But all of this doesn’t really explain the fact that seller prices were well above what the market expected and so not much wine changed hands (at least compared with a few years ago). The opportunity to re-set the market, which the Liv-ex analysts had anticipated, was apparently wasted.

High Taxes, Low Interest Rates

This wasn’t a universal situation, the report makes clear. 2015 was the best vintage ever for some producers and the market accepted the higher prices. And some producers offered necessary discounts to move their stocks. But many raised prices and seemed content with meager sales and big retained stocks. Why?

The answer, according to Liv-ex, is complicated and begins with today’s historically low interest rates, which make the cost of carrying inventory low. Fine, but don’t they need to sell wine to pay costs? Yes, Liv-ex explains, but the margins on the grand vins are very high and so most costs can be covered quickly with an initial tranche of sales. Second- and third-wines provide additional cash flow.

France’s high tax rates are also mentioned — postponing revenue is also postponing taxation (possibly until a more business-friendly administration takes office).

A Different Economic Model?

But perhaps the biggest factor, which contributes to the “new normal” that Liv-ex sees, is a change in the economic structure of the business. Profits from making and selling wine are now less important than maintaining and advancing the capital value of the chateau itself. Selling wine at a lower but very profitable market price is old news. Raising price to enhance reputation and capital value is the new strategy.

The Liv-ex study notes that

“Priorities have shifted from making sales and generating cash flow to trying to maximise prices (of the grand vin in particular) and by extension the capital value of their properties. Indeed, …  the motivation to generate profits is dwarfed by that of keeping land values high. … Owners have achieved this by releasing smaller quantities onto the market and spreading their production across a second and sometimes a third label.  … Many commentators ascribe this trend to deep pockets. It is true that most top chateaux these days are owned by billionaires and insurance companies, but this has always been the case. The main motivation for the strategy is exceptionally low interest rates.”

The combination of the factors described here combined with similar incentives for the negoçiants results in prices generally above what consumers are willing to pay, the Liv-ex study concludes. The 2015 Bordeaux market was an improvement over 2014, but this is a “low bar,” the study says. “Moreover, for as long as the current environment — distorted by low interest rates — persists, there will continue to be a standoff … ” between supply and demand.

Hotelling’s Rule Alternative

The Liv-Ex researchers study Bordeaux closely, so their theory is probably correct, but as I read the report I couldn’t help thinking of one of the most famous microeconomics theories of the first half of the 20th Century: Hotelling’s Rule, named for Harold Hotelling. Hotelling was interested in the rate at which a firm exploits a finite resource that it owned, assuming the usual (for economic theory) perfectly competitive market environment.

To over-simply, the objective is to maximize the present value of the finite resource and so the short-run production decision depends on whether market price is expected to rise faster or slower than the rate of interest. If price is expected to rise faster than the rate of interest, it paid to hold back production for the future. If price is expected to rise more slowly than the rate of interest, then selling now and investing the returns makes more sense.

Under theoretical conditions, the equilibrium occurs when market price rises at an exponential compound interest rate.

A given vintage of a particular wine is indeed a finite resource to be sold today or sold tomorrow. Interest rates today are extremely low and so only very modest expected price increases are necessary to induce a winery to hold back stocks. At zero interest, prices need only remain steady to make stock-building a viable strategy.

The incentive to retain inventory is stronger than this, in fact, because the Bordeaux fine wine market is not perfectly competitive and restricting supply of a particular classified wine raises its current price. So in fact withholding stock may allow a wine firm to have its revenue “cake” today (scarcity premium for the wine that is sold) and eat it tomorrow, too (in the form of future sales of the retained inventory at prices above the low compound interest bar).

All else being equal, when market interest rates inevitably rise, this will shift the calculation towards current sales. But in the meantime, No Sale is the name of the game.

Logical Extreme: No Sale

I don’t think this application of Hotelling’s Rule is a better explanation than the Liv-Ex analysis or inconsistent with it, but it does open up a different way of thinking — looking at the situation in terms of the present value of the income stream.

It is possible to take this way of thinking too far, however, which is what New York Times columnist Frank Bruni hilariously did earlier this year when he wrote an “April Fools” column about college admissions. He announced that Stanford University had taken selective admissions to its logical extreme … and admitted zero percent of its applicants!

Because it was now totally unattainable, Bruni reported, Stanford was even more ardently desired than before and admission applications and strategic financial donations poured in. In Bruni’s fictional world, zero admission “sales” maximized Stanford’s reputation and revenue stream. Wow!

I wonder if that would work with wine? Whatever you do, don’t let the folks at Lafite, Latour and Margaux read Bruni’s column.

Flashback Friday: What Was Revealed at Riesling Rendezvous

Riesling Rendezvous 2016 starts on Sunday with a grand tasting on the beautiful grounds of Chateau Ste Michelle in Woodinville, Washington. Riesling Rendezvous is a project of Ste Michelle and the Mosel’s Dr. Loosen that brings together people from the four corners of Planet Riesling for three days of tasting and discussion.

Riesling Rendezvous comes around every three years and this is all the excuse needed for a Flashback Friday feature that returns to a dramatic moment at the 2013 conference.

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2_rr_wineglassI’ve been writing about the problems of marketing misunderstood and misunderappreciated wines for the last couple of weeks and before I leave this subject I want to take time to give you a brief report from the Riesling Rendezvous conference hosted by Chateau Ste Michelle and Dr Loosen in Seattle last month.

Although the public face of the conference was the sell-out Sunday Grand Tasting on the grounds of the Chateau in Woodinville, the real work took place at the waterfront Bell Harbor Conference Center on Elliott Bay. What did we learn about life on Planet Riesling (as Stuart Pigott calls it)?

Small Worlds and Big

Well, its a big world after all — that’s the first insight. We tasted spectacular wines from many corners of the globe and regions of the U.S. and Canada. But it is a small world, too, as global quality standards have risen due in part, I think, to the international exchange of technical information that Riesling Rendezvous and its partner conferences have promoted. The gap between Old and New Worlds has closed dramatically.

You might have enjoyed the scene at the two formal tastings, where about 300 of us sat in front of 20 glasses each of dry Riesling on the first day and off-dry Riesling on the second. We tasted the wines blind and then, one by one, members of the expert panel commented on the wines and tried to place them in terms of origin — Old World or New? Cooler climate or warmer site? Particular time (vintage) and place?

Sometimes the experts were spot on, but I think the organizers might have selected the line up of wines to make the point that Planet Riesling is changing, so sometimes (more often than not, I believe) they were fooled. Fooled, generally, by unexpected quality from an unexpected source, which is a nice way to be surprised.

Ooohs and Aaahs

There were ooohs and aaahs, for example, when one wine was revealed to be from Elesko Winery in Slovakia. Wow, none of us saw that coming, probably because we didn’t have Slovakia on our radar. I remember tasting a few crisp, delicious white wines from this region when I taught in Prague, but beer, not wine, is probably the first thing that comes to mind (despite Austria’s obvious presence) when you think Central Europe.  Very impressive.

Tim Atkin, who moderated the off-dry tasting (John Winthrop Haeger handled the job for the dry wines) seemed to take special pleasure in revealing that a wine that had been firmly placed in the Mosel region by a panelist was in fact made by Ste Chapelle of Idaho (part of the rapidly rising Precept Wine group).

How many cases do you make, Atkin asked Marueen Johnson who represented the winery, probably imagining the sort of hillbilly Idaho wine industry that the old Muppet Movie scene suggested? Forty thousand cases came the reply. Wow, that’s lot, Atkin said obviously surprised (and that’s just Riesling — total production tops 100,000 cases for this, the largest winery in Idaho). It’s a brave new world on Planet Riesling when fine wines can come from such unexpected corners of the globe.

Two Directions at Once

Further evidence of how the Riesling map is changing was provided by two new Chateau Ste Michelle Riesling wines: Anew Riesling, which seeks to broaden the Riesling base, and Eroica Gold, which aims for a more classic style and promises to deepen interest in this category.

Anew, with its elegant bottle (which reminds me of a graceful off-the-shoulder gown) and subtle flower label seems to enter the market as a wine targeting  women, who of course make up the majority of wine drinkers and, for reasons that I’ll explain in a future post, a disproportionate part of the Riesling base. Off-dry but not too sweet,  it makes a tasty aperitif — a nice way to end of day of work and start the evening. Coming from the creators of the hugely successful 14 Hands wine brand, this is a wine that could convert Pinot Grigio drinkers to Riesling fans.

Seafood

Eroica Gold is the newest project of the Ste Michelle – Dr. Loosen partnership and it builds upon and expands the very successful Eroica Riesling line. Eroica has a hint of sweetness and can often be purchased for $20 or less (I’ve seen it at Costco for about $15) — very good value for money and often listed as one of America’s best Riesling wines.

Eroica Gold is riper, botrytis influenced, and, at $30+, more expensive. It aims to take American Riesling consumers to the next stage. Hopefully it will both communicate to American consumers what they might find in European wines and also represent the New World effectively to the Old.

Inevitable Seattle Food Porn

The conference ended with a festive reception at the Chihuly Garden, a blown glass fantasy highlighting the work of Northwest art icon Dale Chihuly, which I mention only because it gives me an excuse to include this “food porn” photo of the seafood buffet. Ahi tuna, smoked salmon, oysters, shrimp, and crab. What a treat!

Riesling may be misunderstood and there certainly are problems to be worked out, but on that warm afternoon in Seattle, with Riesling in my glass and smoked salmon on my plate, life on Planet Riesling seemed a pretty sweet place to be.

What Next? Wine Industry Mid-Year Report & Preliminary Brexit Analysis

economist-cover“What next? was the question I asked to open my report at the Unified Wine & Grape Symposium‘s “State of the Industry” session in January. Risk and uncertainty were my forecast for 2016.

Bernie, Donald, Zika, Brexit. Look out! Anything can happen, I told the audience, although I ended with a Frank Sinatra theme. It could be a “Very Good Year” if we can dodge the many potential hazards.

I wasn’t the only one who was worried. Four speakers in a session on wine industry investment were asked about their expectations for 2016. All four said that the prospects for the U.S. wine industry were bright … unless something happened to the economy.

Cautious Optimism?

We are halfway through the year and the cautious optimism expressed earlier seems justified. The U.S. remains one of the few large economies to be growing, for example, and unemployment rates are low. The June jobs report offered evidence of further recovery. But confidence in economic growth seems very fragile and the Federal Reserve has hesitated repeatedly to raise key interest rates.

One worrisome indicator is the yield curve, which tracks the difference between short- and long-term interest rates. The yield curve has become unusually flat recently, a pattern that is sometimes associated with economic slowdowns. A  recent Deutsche Bank analysis of the yield curve forecasts a 60% chance of a recession in the U.S. in the next 12 months. Yikes!

Interest rates around the world are so low (and sometimes even negative) that policy makers are worried. What if something goes wrong? How can we push interest rates even lower? Would it make any difference if we did? With fiscal policy handcuffed by political chaos in many countries and monetary policy seemingly out of ammunition, there is concern that a crisis in one country could easily spread to others.

What next? That’s still the right question, both in general and when it comes to wine. While the U.S. wine market continues to grow and attract the attention of international competitors, the Nielsen figures reported in the July 2016 issue of Wine Business Monthly suggest caution. Off-premise wine sales increased by a rate of just 1.1 percent overall in the four weeks ending April 23, 2016, indicating a possible deceleration of earlier more healthy growth.

Brexit’s Many Potential Impacts20160702_cuk400

The list of potential challenges and threats is very long but the U.K.’s vote to leave the European Union (a.k.a. Brexit) is at the top of most lists. What does Brexit mean to the wine business? The answer is that it is too soon to be sure, but here is a quick guide to what to look out for and the impact on wine.

The biggest impacts of Brexit to far have been political, with the heads of the Conservative Party and the nationalist UKIP group both resigning (for very different reasons) and Labour’s leader under sharp attack from his own members. Since British tax policy has been a significant burden on wine sales there in recent years, the uncertainty about the who will lead and where she (Theresa May will take over as Prime Minister in the next day or so) will want to go is significant for wine.

The partial political vacuum in England has seemingly increased the influence of Scotland’s talented leader Nicola Sturgeon, who suggests that Scotland might once again consider leaving the U.K. (a Scexit?) in order to remain closely linked to the E.U. Sturgeon has taken strong anti-alcohol positions, which could affect wine policy, although this is way down the list of things to worry about if Scotland breaks away and the U.K. breaks apart.

Financial markets react to news more quickly than the “real” economy and the rise of the U.S. dollar and fall of the British Pound are the most visible effects so far. The Pound has tumbled dramatically as the graph above show and some observers believe that it will continue its descent although this is far from certain.newfx

Short Run: Exchange Rate Effects

The falling Pound is important because, as this table of U.S. exports for the first quarter of 2016 from Wine by Numbers indicates, the U.K. has become a more important market for U.S. wine exports in recent years. The U.K. is second to Canada in U.S. bottled wine exports and first in the bulk wine market.

The falling Pound makes imports from the U.S. and other wine nations more expensive in the U.K. U.K. consumers are notoriously price sensitive, so the falling Pound could produce substantial wine demand impacts, especially if there is a U.K. recession, as many expect, due to falling investment (see below).

brexit

The exchange rate effect will hurt U.S. exports to the U.K., but the biggest impacts will be on other countries that rely upon the British market to a greater extent than we do. Australia, South Africa and of course European wine producers will take a bigger hit.

The problem is compounded by the fact that supermarkets are a critical sales vector in the U.K. and much of the food they sell is imported and will therefore be more costly to source. Supermarket margins are likely to be squeezed as they attempt to pass on higher costs to consumers with uncertain economic prospects.

Don’t be surprised if this puts pressure on foreign wine suppliers to cut their wholesale prices to British supermarket buyers and thus absorb some of the exchange rate impact. That is an incentive to develop alternative markets … such as the U.S. The margin wars are just getting started.

So the wine news is not very good in the U.K., where wine prices are likely to rise, incomes could fall, wine taxes may also increase, margins come under attack, and prohibitionist forces may be strengthened. Bad news for the British who drink wine and bad news for others including U.S. producers  who want to sell it to them.

Long Run: The Vultures Circle

But the biggest impacts are likely to be the long-term structural changes that will be required if and when Britain or England or whoever is left leaves the European Union and the single market. The U.K. is an important wine center both because of the large British domestic market and also because of its essentially unrestricted access to European markets and resources. It is too soon to know how this will change for wine, but it is instructive to watch other sectors to get a sense of the dynamic.

There is already concern about disinvestment in British steel and automobile manufacturing, for example, if resources are shifted into other E.U. zones. Much of British auto production is exported and would be disadvantaged if the U.K. loses its open access to E.U. markets. Voters in Sunderland may eventually rue their strong Brexit support if Nissan moves production (and some of the current 7000 factory jobs) away from its big plant there to new homes in the E.U. heartland.

And everyone in The City, London’s big financial center, is openly concerned, too. London residents voted overwhelmingly to remain in the E.U. in part because of their desire to protect The City’s economic standing (and their jobs), which would diminish if movements of capital and skilled workers to and from the continent were restricted.

Any major disruption in The City will have widespread impacts on wine, especially the on-premise trade but not limited to that. The vultures (in the form of European cities hungry for those high-paying finance jobs) have already started circling.

I am still cautiously optimistic for the U.S. wine economy and for Britain, too, but there are lots of risks to consider. That question — What Next? — still applies.

July 4th Flashback: How the U.S. & Canada Almost Destroyed Wine

patriotic_pourIt is Independence Day here in the United States and that is all the excuse I need for this special Flashback column, which takes us back to 2015 to tell the story of how, in very different ways, the U.S. and Canadian governments almost destroyed their respective wine industries.

My friends always tell me to have a fifth for the Fourth, and I assume they are recommending a bottle of American wine with the required holiday menu of hot dogs, hamburgers and salads. Cheers and Happy Independence Day.

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

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

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

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

How U.S. Prohibition Crippled the Wine Industry

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

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

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

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

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

How Canadian Prohibition Crippled Its Wine Industry

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

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

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

Unintended Consequences

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

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

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

The “Demolition Man” Syndrome: A Vision of the Future of Wine in America?

 

I’ve been catching up on my wine industry reading and one report that grabbed by attention is Rabobank’s May 2016 Industry Note,  “The Premiumization Conundrum”.

The gist of the analysis is that the premiumization trend in the U.S. wine market isn’t simply a case of what Paul Krugman calls “up and down economics” — in this case demand for $10+ wine is up, demand for cheaper wines is down –but rather it needs to be understood in the context of a broader set of wine market changes.

Not Just Up and Down

The Rabobank report examines five important tensions that are part of the premiumization syndrome:

  1. Demand for premium vs. basic wine grapes
  2. Securing long-term premium grape supply vs. managing return on capital
  3. Wholesaler consolidation and retail “chainification” of wine vs. premiumization
  4. Traditional retail vs. DTC vs. NIMBY
  5. Domestic wine vs. imports

As I was reading the Rabobank report I began to wonder how these trends might unfold if continued at their present rates  well into the future. In other words I was doing exactly what economists are trained not to do, which is engage in straight line projection. The future is out there somewhere, but it is almost never on a straight line that connects the last few dots on your time-series chart and then continues on out to infinity … and beyond.

But humor me with a little thought experiment. What might the future look like under the admittedly unlikely “straight-line trend projection” circumstances? Take today’s trends as Rabobank reports and fly them straight out to wherever they take you.

Pondering this thought, I unexpectedly found myself channeling a 1993 Sylvester Stallone, Wesley Snipes, and Sandra Bullock film called Demolition ManStallone plays a police officer named John Spartan who was put into suspended animation only to be awakened 36 years into the future in 2032 in order to catch Wesley Snipe’s bad guy character.

All Taco Bell Now

Stallone’s updated Rip Van Winkle encounters a lot that surprises or shocks him including, as in the film scene above, the inconvenient truth about retail consolidation run amuck. Invited to dinner and dancing at a Taco Bell, he can’t help but think, Taco Bell? Really?

But it really is, as Bullock’s character explains. Taco Bell was the only chain to survive the franchise wars and now all restaurants are Taco Bells. “No way!” Way!

Rabobank’s report notes a number of important trends that, if taken to a ridiculous Taco Bell kind of extreme, might produce something that Demolition Man would recognize. Here are three that I can’t help pondering.

All MoVin Now

The fictional John Spartan goes shopping for wine in 2032 San Angeles and the first place he sees is a big box MoVin store, bigger than the biggest wine-beer-spirits stores of the past, but recognizably the same concept. He continues on in search for a small, specialist shop, but soon runs across another MoVin. And then another and another and slowly it comes to him that just as all restaurants are Taco Bell, all wine is now retailed by MoVin.1353026500232-577831165

How did this happen? Well, as the Rabobank report notes, all of the growth in off-premises retail sales of wine in the U.S. in the last couple of  years has come through retail chains, not independent shops and stores. Take away BevMo, Total Wine, Costco and other multiple retailers (I assume Kroger fits here, too) and Rabobank’s data show off-premises wine sales would be flat.

Follow that trend to its illogical extreme, with the chains seizing market share each year, add logical pressure to consolidate and — hey, presto! — you have a retail wine monopoly.

How did MoVin win this fictional competition over other chains? Because, in this made-up universe, they drew upon the growing consolidation in distribution channels (another Rabobank finding).

Yes, all wine is sold by MoVin in 2032 because they are a wholly-owned subsidiary of NSEW (North-South-East-West),  the only company to survive the vicious distributor wars of 2021.

All Kiwi White Now

There are lots of different super-premium brands on offer at the big box wine store of the future, but the vast array of colorful labels and fictional names actually disguises a certain sameness. Much of the wine comes from the same few large producers, the ones who were able to able to secure reliable quality grape supplies in the grape wars back before 2022, when the last independent North Coast vineyard was swallowed up.

The imperative to lock up vineyard resources is another of the trends that Rabobank spotlights and it is natural to wonder where it will all end. But that isn’t the only source of concern.affiche2

When John Spartan looks closely at the super-premium white wines that he favors (because they pair so well with his favorite Taco Bell fish tacos), he slowly realizes that they are all made by a few large multinational firms in New Zealand. Just as Taco Bell conquered food, the Kiwis were the victors of the white wine wars.

The one constant of U.S. wine import statistics in recent years has been that New Zealand Sauvignon Blanc imports will grow, often faster than any other import category. I keep waiting for the run to end (and I know Kiwi producers who hold their breath and cross their fingers because they are worried, too). But nothing has stopped or even seriously slowed down New Zealand wine imports so far. And you know where that can lead!

You Want Grapes with that Wine?

What about inexpensive wine? Glad  you asked because that’s where John Spartan had his harshest shock — it made him want to give up wine altogether. It seems that as grape supply became less and less secure and falling prices pushed basic grape producers to other crops like almonds and pistachios, wineries were forced to weaken links to particular regions and then to grapes themselves.

Appellations and geographic designations generally are an expensive luxury if you’re not sure if you can buy the grapes you need to maintain a region-specific brand, so they had to go. And then wine companies gave up specific grape variety designations for the wines for essentially the same reason. All inexpensive wines in 2032 are now proprietary blends. No one knows what might be in the bottle, box or can or where it might have come from. Not many seem to care.

Absent place of origin and clearly-identified grape variety components, inexpensive wines evolved into branded alcoholic beverages and, once consumers accepted that, there wasn’t any reason why they had to be made out of grapes any more. The laws were re-written to allow inexpensive wine-like products to be made and marketed and people lapped them up. Wine for the masses endured, but in an ersatz Taco Bell kind of way.

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Or at least that’s where bad economic analysis (and not enough sleep) takes you if you follow recent trends to ridiculous extremes, which I have done here just for fun, but the Rabobank report definitely avoids.

The future? Taco Bell? No Way! That’ll never happen. Don’t worry. Go back to sleep. G’night!

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Thanks to New York Times columnist Thomas Friedman, who indirectly inspired this column. He told the story of the “Demolition Man” Taco Bell scene in his best-selling 2000 book about globalization, The Lexus and the Olive Tree.

 

Wine Tourism in Portugal: Expect the Unexpected

“A World of Difference” is the official motto of Wines of Portugal and it is a good one, too, since Portugal features so many indigenous grapes and distinctive wine styles. Sometimes it feels like a world of its own waiting to be explored.

But I think an even better motto would be “Expect the Unexpected.” Or at least that is the theme that I will use in this column to tie together four recent encounters with Portuguese wine.

Sala Ogival: Wines of Portugal Tasting Room

P1110120It was a beautiful day when Sue and I arrived in Lisbon so we decided to shake off the jet lag by taking a stroll to the Praça do Commércio, the beautiful main square down by the river. We weren’t surprised to see the tourists and families or the many restaurants and cafes with outdoor tables.

But we were surprised to see a “Vini Portugal” (Wines of Portugal) sign on one side of the square. There, inside the Sala Ogival, we found a very impressive tasting room facility that invited visitors to learn about all of Portugal’s wine regions and taste some of the wines.

Various moderated theme tastings were available for modest fees, but a popular option was to put a few euro on a pre-paid card and get small tastes from the wine dispenser machines that were strategically located around the room near information displays for the appropriate regions.

The long central tables were crowded with couples and groups exchanging tastes and conversation. What a great way to draw Lisbon tourists into Portuguese wines and to educate them about regional geography. I understand there is a similar tasting room in Porto. Great way for a national wine organization to leverage a prime tourist location to promote its wine industry.

Castelo de Sâo Jorge: Wine with a View

P1110154You can see the Castelo de Sâo Jorge from pretty much everywhere in Lisbon and, high on the hill, you can see all of Lisbon from the castle. Beautiful weather, beautiful view. All that you need to make it complete is a glass of great wine to sip and enjoy.

So how convenient was it for us to discover the small mobile wine-tasting cart of Wine with a View!

Wine with a View provides visitors with a choice of about a dozen Portuguese wines served in the first give-away plastic glasses I have seen that are not a joke. Red, white, sparkling, Port, and even the local liqueur Ginjinha — buy a glass from the friendly and informative staff and relax and enjoy the view. How civilized!P1110157

The wines are supplied by Bacalhôa, which has vineyards and wineries throughout Portugal and is able to represent the country well. I chose the Quinta do Bacalhôa white, made from grapes at the estate vineyard in Setúbal (we visited the palace there the day before). It was great, but I found it hard to resist the Moscatel du Setúbal, which is one of my favorite Portuguese wines.

Wine with a View hopes to expand to other locations. Wouldn’t it be great if every place with a view had wine available to encourage you to relax and enjoy the moment?

Mateus Palace: Hidden Winery
We took only two “tourist days” on our Portuguese trip: one to visit the castle in Lisbon and explore the city and another in the Douro to visit the historic Casa Mateus and have lunch at DOC, chef Rui Paula’s wonderful riverside restaurant. I knew there would be interesting wine at DOC, but I didn’t expect to find a wine experience at the palace.

The name Mateus is famous in wine, of course, because of Mateus Rosé, which is made by Sogrape and sold around the world. At one time Mateus Rosé was the best-selling imported wine in the United States and it is making a comeback in many markets as both Portuguese wines and Rosé wines have gained traction.

14e50291eafa8c6b4dcefa287a532f61I did not expect to find either wine or grapes at the Mateus Palace. The palace is beautiful and full of history and the grounds and gardens are spectacular — no wonder it is such a popular tourist destination. Out past the formal garden, however, was an orchard and then a large and well-tended vineyard. I guess there are grapes at Mateus. But wine?

I literally stumbled upon the winery and tasting room while trying to find my way back to the car. There, in a long side building, was a tasting room for Lavradores de Feitoria, an association of growers and producers from throughout the region. The Mateus vineyards and the wines made from them are part of this association.

The wines we tasted were very interesting and the Lavradores de Feitoria Rosé was refreshing, as it should be on the warm day. The LBV Porto from Quinta da Costa das Aguaneiras was impressive.

We were invited to enter an ancient door just down the way and we found ourselves in a winery filled with vintage equipment. With the historic palace just ten yards away, this atmospheric room felt like a museum and gave us a tangible sense of the history of wine in this place. A totally unexpected treat.

Seattle: Unexpected Delights

As luck would have it, a Wines of Portugal trade roadshow rolled into Seattle about a month after we returned from my speaking trip to Portugal. We were delighted to be invited to attend and even happier with the Master Class that Evan Goldstein and Eugènio Jardim presented.

At the trade tasting that followed we revisited wines that we had just come to know in Portugal and tried to deepen our knowledge. The white wines really impressed us and the tasting let us experience different representations of grapes and styles that had only recently entered our vocabulary.

You always smile when you come across something unexpected in a situation like this, and it happened when Eugénio poured us a glass of a sparkling red wine — a sparkling Baga from the Bairrada region, where it is the traditional wine to have with roast suckling pig. The wine was a delight and I could imagine how well it would cut through and enhance the juicy pig. Love at first taste.

Portugal and Portuguese wines are both full of surprises. Expect the unexpected, that’s what I say.

The Three Ages of Wine Cork Production: A Visit to Corticeira Amorim

corf_forests

It is impossible to drive through the Alentejo region of Portugal without seeing the dark trees that dot the landscape. Pretty soon you notice the lines on the trunks where the bark has been harvested and then you know for sure that you are in a cork oak (Quercus suber) forest, the densest concentration of these trees in the world (see map above).

Cork’s Medieval Roots

Planting a cork oak tree is a statement of faith in the future. The first harvest must wait for 15 years and then the cork will be of low quality, unsuitable for natural cork closures. The second and better harvest that yields more usable cork comes 9 years later. Only 9  years after that (and every 9 years into the future) can the highest quality cork be taken. Few other things in the world of wine (producing 40-year old Tawny Port, for example) can compare to cork in terms of optimistic forward thinking.

Sue and I visited both Porto and Alentejo during our recent trip to Portugal and Antonio Amorim and Carlos de Jesus of Corticeira Amorim, the world leader in cork closures, invited us to visit their factories in these two regions to see first-hand what I am calling the Three Ages of cork.

Cork is an ancient product — the Greeks, Egyptians and Romans all sealed their wine jars with cork. The harvesting of it is laborious hand work since each tree has its own configuration. Photos of modern cork harvests could easily be mistaken for medieval paintings.Cork1

Industrial Revolution

Stepping into the Amorim factory in Coruche, you get an initial sense of moving forward in time to the industrial revolution. There is still a lot of hand work here. Sorting the processed cork bark pieces, for example, still requires human judgement as they are inspected and graded for quality one at a time. The key to making a profit in cork is to waste nothing, so each cork piece must go to its best use and the waste at each step recycled into a lower-priced product.

Almost nothing is thrown away. One item that was headed for the power-supplying waste burner was a piece of cork that was badly infected with TCA, the source of cork taint. What a horrible smell!  Until a machine can consistently detect all the potential problems with cork including TCA, cracking, insect damage and so on, these workers’ jobs are very secure.

The factory was loud with the clamber of industrial machinery as every task that could be mechanized was mechanized. It gave me a sense of what those 19th century British textile mills must have been like.

Interestingly, the finest corks closures made from the best quality raw material are hand-punched by skilled craftsmen (see photo above). These corks need to be as close to perfect as possible and so far nothing can replace the human eye for seeing just where the cork’s sweet spot is (and what parts should be recycled down the line for other products).

NDtech: Cork for the 21st Century

It would be easy to think of cork just this way — a medieval product made using industrial revolution technology — but this viewpoint misses a lot as we learned when we visited Amorim’s second factory near Porto.

Here we saw many of the same processes as in the south, but the focus was different because Carlos and Antonio wanted us to see the progress that has been made at improving cork closures and addressing the issues that allowed synthetic stoppers and screw cap technology to make dramatic inroads in this market.

Innovative new production processes and seriously obsessive attention to detail have now all but eliminated the incidence of detectable TCA contamination in Amorim corks throughout the product line, which is a big deal and came only after intense and expensive research and process innovation. But that was not good enough and so earlier this year Amorim unveiled its latest innovation, NDtech corks.

Amorim scientists guided us into the controlled environment that you see in the video above and we saw the NDtech (think non-detectible TCA levels) process at work. ndTech really does individually-inspect each and every cork that goes through the process and guarantees then all to be TCA-free at human sensory threshold levels.

Amorim is convinced that the process works and we saw persuasive data about these and other Amorim cork closures. Now the challenge is to scale up to meet the demand for these, the very best corks that can be made.

Three Ages in One Product

I find  it interesting that cork is so many things at once. It is a natural product, of course, but one that is necessarily harvested and then processed by hand and manufactured using machines and processes from a variety of periods. It is also increasingly a technological product.

Making excellent cork closures is complicated as we saw at the Amorim factories and doing so profitably is even more complicated. We were impressed with the way that every scrap and bit of cork is put to use in closures and other cork products and every ounce of value realized. Environmental and economic sustainability go hand-in-hand.

Meeting the challenge of synthetic and screw-cap closures has not been easy for cork producers, who saw a some of their market share disappear. Hard work, expensive research and technical innovation has turned this around, however, and now many consumers and wineries who moved away from cork in the past are taking a new look.

Someone once accused the economist John Maynard Keynes of expressing a view that was inconsistent with his previous statements.” When the facts change,” Keynes replied, “I change my opinion. What do you do?” The facts about cork — especially the TCA situation — have changed in the past few years. No wonder many people in the industry have revised their views on cork.

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Many thanks to Antonio Amorim and Carlos de Jesus for he opportunity to see the three ages of cork with our own eyes and learn about the scientific progress from the experts. This concludes the short series of past-present-future stories from the Alentejo. Come back next week for a look at some unexpected wine tourism opportunities we found in Portugal.

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