Taste the Washington Wine Market

April 8, 2008 By Mike Veseth in alcohol, Chateau Ste. Michelle, Fielding Hills, Supply and Demand, Washington wine, wine markets Leave a comment

Demand meets Supply in Seattle

Mike and Karen Wade of Fielding Hills Winery in East Wenatchee, Washington asked me if I’d like to pour their wines at the big Taste Washington event in Seattle on Sunday. I jumped at the chance, of course, because you hardly ever get to see supply and demand in the wine market at work in such a personal way. I will admit that I enjoyed this opportunity and I might have been a little too enthusiastic at times. I think my boss, Robin Wade, had to restrain me at times from talking up the wines and the winery more than I should. (Robin is my student at Puget Sound during the week, but she was my supervisor on Sunday at her family winery’s tasting table).

Taste Washington is a big event: more than 220 wineries, 70 restaurants and a long list of what I would call “lifestyle product” vendors ranging from Viking, the maker of high end kitchen appliances, to Maserati, the Italian sports car. Click here to download a pdf of the program. People paid $125 to attend the VIP tasting from 2-4pm. Then the doors opened to the “masses,” who paid $85 for unlimited tastings from 4-8pm. Many of the VIPs were industry people – winemakers, distributors, restaurants, wine shops, and so forth. The “masses” were a very mixed group that I’ll discuss below. I guess about 3500 people came in all.

The event is all about giving things away. Wine is sampled, but cannot be sold. Restaurants give samples of food. No cash changes hands once you are inside the room, but I suppose that exchanges can be arranged for future delivery. Apparently someone bought a Maserati ($135,000) off the show floor. There was a moment of silence (while everyone drew a breath) when that was announced.

The Supply Side of the Pour

The list of wineries was long and diverse. Columbia Crest makes at least 200,000 cases each of some of their Two Vine wines, for example, while Benke Cellars, located near us in the exhibition hall, has a total output of just 200 cases. Some of the most prestigious wines in Washington were represented (DeLille Cellars was across the aisle from us and Quilceda Creek was across the room) alongside humble family start ups. Fielding Hills was one of several wineries in a sort of intermediate position: a small family operation, but one with an impressive record of ratings and reviews and hence a built-in audience among wine enthusiasts.

What do wineries gain from giving away wine at tasting events like this? There needs to be a benefit, especially for the smaller wineries who may pour away a couple of percent of their annual production. Some of the large volume wineries seemed to use the event to show that they were about more than just fruit forward popular premium supermarket wines. Chateau Ste Michelle, for example, poured these wines

2005 Boreal, Columbia Valley $30
2005 Ethos Cabernet Sauvignon, Columbia Valley $38
2006 Chardonnay, Horse Heaven Hills $22
2007 Eroica, Columbia Valley $22

and Columbia Crest offered these

2005 Grand Estate Merlot, Columbia Valley $11
2004 Reserve Red Walter Clore, Columbia Valley $44
2005 H3 Chardonnay, Horse Heaven Hills $15

These are very good wines – on average several steps above what you would probably taste for free at the winery. I like the Eroica quite a lot and I wish I’d found an opportunity to taste the Walter Clore. The Grand Estates Merlot is a great value in my opinion.

I spoke with a famous winemaker – he was treated a bit like a rock star – who spent most of his time in close conversation with customers, distributors, and fellow winemakers. He said he thought it was important to be at the tasting and to make personal contact, but he wasn’t sure if it had much effect on sales. He was “preaching to the choir,” he said, talking with current customers and business clients more than making new ones. I wonder if he’s right. I like to say that wine is good but wine and a story is better. A story about talking with a rock star winemaker adds a lot of value to a bottle of wine. Maybe he was just being modest.

Mike and Karen Wade are certain that this event benefits them by connecting them with the trade network and giving wine drinkers who read about their wines in magazines (but often cannot find them on local shop shelves) an opportunity to see what all the fuss is about. I certainly think the wines made a good impression and even created a bit of a buz in the room as word spread. It will be interesting to see how this is reflected in the market.

Spit, Don’t Swallow!

Spit! We were told to encourage people to spit the wine rather than swallow it so that they would not get tipsy so soon. The trade visitors often did spit, as you have to do if you are really going to taste a lot of different wines, but most people didn’t. They did dump out extra wine into the spit buckets, however, which was a good thing. The woman who came around to empty the spit buckets every 15 minutes estimated that she had collected 20 gallons by 6pm.

Like the organizers, I was worried about the alcohol problem. Faced with 200+ wineries pouring maybe 700 different wines – and you with a bottomless glass until 8pm – it is easy to see how things could get carried away. I only talked with a few tasters who had clearly had too much to drink, however. Most people seemed to understand the problem and, even if they didn’t spit, they tried to limit consumption so that they could continue tasting.

The people on the other side of the table were an interesting collection of wine people. The $125 VIP tasters were mostly trade people, as you might imagine, many with well-defined agendas of people to meet and wines to taste. It was fun to talk with them to get an insider view of the event and the business. The $85 general admission tasters were perhaps younger than I expected (many in their 20s) and more diverse in their apparent knowledge of wine. Many were wine enthusiasts, of course, armed with detailed notes and Parker numbers, looking to taste specific wines, interested in every detail from vineyard to barrel.

Others were “image seekers” (to use Constellation Brands’ Project Genome taxonomy – see next post). They didn’t know as much about wine but they wanted to learn. It was fun to meet them because we were pouring a 2005 Cabernet Franc – a varietal many of them had never tasted before – and I enjoyed watching them make up their minds about what was in the glass. Finally I would say that I met some “traditionalists” and even some “overwhelmed” consumers (it was easy to be overwhelmed at this event, to be honest, with so many wines and wineries present). They were spending $85 to try to figure out what was new and what they liked. That seems like an expensive education until you consider how fast you can burn through $85 on failed wine experiments.

People always ask me if interest in Washington wine is a bubble that will someday pop leaving broken wineries in its wake. It is difficult to be sure about bubbles (ask Alan Greenspan about this) and I actually worry that there might be a supply side wine bubble shaping up and a shakeout coming (Paul Thomas, a pioneer Washington winery, closed shop last year). But the demand side looked strong to me as I poured my measured tastes on Sunday. Education is the key to sustainable growth in the wine industry and I met a lot of people who seemed to be committed to broadening and deepening their knowledge of wine. The Washington wine industry can only benefit from this. That makes Taste Washington a more important program than I thought it would be.

What are wine enthusiasts looking for?

April 5, 2008 By Mike Veseth in brands, Constellation Brands, Costco, critics, decanter, Masters of Wine, wine critics, wine magazines, wine markets, wine research 8 Comments

The Search for Wine Drinker DNA

According to the data that WordPress collects about visitors to this website, the three most frequently viewed posts on The Wine Economist are

The World’s Best Wine Magazine?, an analysis of Decanter magazine, part of the ongoing series on wine critics and publications;
Costco and Global Wine , which examines Costco’s wine strategy in the context of the three most important global wine markets, the U.S., Great Britain and Germany, and
Masters of Wine (and Economics), which is about the prestigious Masters of Wine (MW) qualification and the importance of wine economics in its curriculum.

(Other popular posts include my discussions of global climate change, problems in Australia, rising wine prices, and the Hong Kong and Chinese markets.)

What can we learn from the fact that these three posts get the most hits? A closer examination of the WordPress data show that many visitors to this site are looking for information about the “Best” – the best wine, the best wine price, the best wine magazine and so forth. The search for the best and not just the good seems to be very important.

Wine enthusiasts also seem to be searching for credible authorities – people and publications that can guide them and tell them what to buy and drink.

Not unrelated to this is in the interest in Costco (and Trader Joe’s) and other retailers that seem to make the choice concerning good wine or good value wine a little simpler. Costco is now the largest wine retailer in the U.S., as the blog post explains, and it does this in an unexpected way – by giving consumers fewer choices than a typical upscale supermarket (about 120 different wines at typical Costco versus more than 1200 different wines at your supermarket), but also giving them more confidence in the choices that they make.

Project Genome

Visitors to The Wine Economist reflect many qualities that research by Constellations Brands (the largest wine company in the world) has uncovered. The study is called Project Genome, which suggests that it is an attempt to sequence wine drinker DNA. Wines and Vines reports that

The original 2005 study of 3,500 wine drinkers was one of the largest consumer research projects ever conducted by the wine industry. The new study examined the purchases of 10,000 premium-wine consumers–defined as those who purchased wine priced at $5 and higher–over an 18-month period. While the first Project Genome study asked online survey participants to recall their wine purchases during the last 30 days, the Home & Habits study tracked the actual purchases of Nielsen Co.’s Homescan® consumer purchase panel, which employs in-home bar code scanners and surveys to map consumer buying behavior across a demographically balance

Nielsen measured consumer attitudes and purchase behavior within multiple purchase channels, including warehouse clubs, supermarkets, mass merchandisers, drug stores, liquor stores and wine shops. The scan data were supplemented with online interviews to classify consumers by Project Genome consumer segments identified in Constellation’s original study: Enthusiasts, Image Seekers, Savvy Shoppers, Traditionalists, Satisfied Sippers and Overwhelmed.

The largest group of wine consumers are the Overwhelmed (23% of consumers). They are described as

Overwhelmed by sheer volume of choices on store shelves
Like to drink wine, but don’t know what kind to buy and may select by label
Looking for wine information in retail settings that’s easy to understand
Very open to advice, but frustrated when there is no one in the wine section to help
If information is confusing, they won’t buy anything at all.

The second largest group are Image Seekers (20% of consumers). They

View wine as a status symbol
Are just discovering wine and have a basic knowledge of it
Like to be the first to try a new wine, and are open to innovative packaging
Prefer Merlot as their No. 1 most-purchased variety; despite “Sideways,” Pinot Noir is not high on their list
Use the Internet as key information source, including checking restaurant wine lists before they dine out so they can research scores
Millennials and males often fall into this category.

Traditionalists (16% of consumers)

Enjoy wines from established wineries
Think wine makes an occasion more formal, and prefer entertaining friends and family at home to going out
Like to be offered a wide variety of well known national brands
Won’t often try new wine brands
Shop at retail locations that make it easy to find favorite brands.

The Savy Shoppers (16% of consumers)

Enjoy shopping for wine and discovering new varietal s on their own
Have a few favorite wines to supplement new discoveries
Shop in a variety of stores each week to find best deals, and like specials and discounts
Are heavy coupon users, and know what’s on sale before they walk into a store
Typically buy a glass of the house wine when dining out, due to the value.

Satisfied Sippers make up 14% of consumers. They

Don’t know much about wine, just know what they like to drink
Typically buy the same brand–usually domestic–and consider wine an everyday beverage
Don’t enjoy the wine-buying experience, so buy 1.5L bottles to have more wine on hand
Second-largest category of warehouse shoppers, buying 16% of their wine in club stores
Don’t worry about wine and food pairing
Don’t dine out often, but likely to order the house wine when they do.

And, finally, Wine Enthusiasts are the smallest group, accounting for just 12% of all wine buyers. They

Entertain at home with friends, and consider themselves knowledgeable about wine
Live in cosmopolitan centers, affluent suburban spreads or comfortable country settings
Like to browse the wine section, publications, and are influenced by wine ratings and reviews
47% buy wine in 1.5L size as “everyday wine” to supplement their “weekend wine”
98% buy wine over $6 per bottle, which accounts for 56% of what they buy on a volume basis.

The Fortune at the Bottom of the Pyramid

Not surprisingly, Wine Enthusiasts and Image Seekers account for nearly half of all wine sales while Overwhelmed consumers purchase disproportionately little wine. While wine magazines find a ready market at the top of the pyramid, retailers and wine companies probably view the Overwhlemed as the potential “fortune at the bottom of the pyramid.” There is a lot of money that can be made if wine can be simplified (or these consumers educated) so that they move up the wine buying ladder.

Visitors to The Wine Economists seem to fall into three of Constellation’s categories: Enthusiasts, Image Seekers and the Overwhelmed based upon the limited and superficial “most popular post” data reported here. It will be interesting to track further Project Genome results as they are released and to see how Constellation Brands uses this information in its wine market strategies.

The Father of [Wine] Economics?

April 1, 2008 By Mike Veseth in British wine market, wine markets 2 Comments

Adam Smith is generally regarded as the Father of Economics, even though many wrote on economic topics before him. Was he also the Father of Wine Economics?

The case for Smith’s paternity is made in the most obvious (and least likely) of places, The Wealth of Nation (1776), his most famous work. It is the obvious source because Smith wrote about everything in Wealth of Nations: history, theory, policy, even provided practical advice. It is the least likely place to look, however, because it is so little read (really read, if you know what I mean) and because people only remember the book for two thing: the Invisible Hand and the Pin Factory example of the division of labor. But there is a lot more to be found, including an early treatise on wine economics.

Adam Smith wrote a good deal about wine. This was partly because he traveled in France and learned about wine markets first hand. But it was also a fact that Britain was for centuries a wine-drinking country, as John Nye’s fine book explains, just as it is so today, with a practical interest in wine market concerns.

The foundation of Smith’s wine economics is laid out early in Wealth of Nations, Book One, Chapter 11: Of the Rent of Land. Here Smith tries to explain why some kinds of land earn more than other lands. Land suitable for viticulture earns higher rent, Smith said, and has long done so.

That the vineyard, when properly planted and brought to perfection, was the most valuable part of the farm, seems to have been an undoubted maxim in the ancient agriculture as it is in the modern through all the wine countries

But viticultural profits were constantly threatened, Smith argued. Not by nature, although this could cause bad crops, and not by high taxes, although he argued against them. The chief threat (or perceived threat) to viticultural earnings was expansion to new lands. Old vineyards, as he called them, were threatened by New Vineyards — and would seek protection from them or to prevent their development. This section reads very well today if you change Old Vineyards to Old World wine and New Vineyards to New World Wine. Certainly New World Wines (and their vineyard, cellar and marketing practices) are seen by many Old World producers as a threat to their livelihood. Adam Smith understood why Old would seek by any means to prevent development of the New. You don’t have to have a Ph.D. in economics to already know that he did not approve.

Smith wrote about terroir, too. I can’t really say that Adam Smith invented terroir, the idea of a special taste of place that winemakers strive for, but I can say that he understood its economic value. Smith wrote that

The vine is more affected by the difference in soils than any other fruit tree. From some it derives a flavour which no culture or management can equal, it is supposed, upon any other. This flavour, real or imaginary, is sometimes peculiar to the produce of a few vineyards; sometimes it extends through the greater part of a small district and sometimes through a considerable part of a large province.

I note with interest that Smith recognized terroir and doubted the reality of its existence in the same sentence (“real or imagined”). It isn’t terroir that really matters to a wine economist, I suppose, it is only that people think there is terroir. Smith wrote at length about the economics of these special wines and, because of their limited quantities, the premium prices they could command. Any modern winemaker, upon reading this section, would immediately try to create an A.V.A. to cash in on the possibility of terroir by limiting supply.

The whole quantity of such wines that is brought to market falls short of the effectual demand, or the demand of those who would be willing to pay … The whole quantity, therefore, can be disposed of to those who are willing to pay more, which necessarily raises the price above that of common wine.

A small part of this higher price … is sufficient to pay the wages of the extraordinary wages bestowed upon their cultivation, and the profits of the extraordinary stock which puts this labor in motion.

Smith’s treatment of wine is not complete – there is no discussion of cork versus screw-cap, for example, and no treatment of en primeur wine futures, but what he does say shows pretty clearly how well he understood the political economy of wine.

So, to answer the question that started this entry, is Adam Smith the Father of Wine Economics? Probably not, is my answer. His analysis in Wealth of Nations is certainly very good, but I am pretty sure that earlier economists did not ignore the wine market. The reason: because wine was so very important to economy and society from the earliest days.

The Most Profitable Wine in the World?

March 25, 2008 By Mike Veseth in Marlborough Sauvignon Blanc, New Zealand, Supply and Demand, wine markets Leave a comment

Following the Money to New Zealand

What’s the most profitable wine in the world? Not the most expensive single wine (like Chateau Pétrus or Screaming Eagle), but the most profitable type of wine? Guardian wine critic Tim Atkin raised this question is a recent article called “Bottle Banks” and it is interesting to think about what the answer might be.

Profits, of course, are all about the difference between price and cost. So which country gets the highest average price for its wine exports? Most people are surprised to learn that it is New Zealand (see footnote below). New Zealand is unusual among wine producing countries in that its exports are almost entirely premium and super premium wines. The domestic Kiwi market for low cost bulk wines is filled by imports from Australia and Chile, leaving NZ producers free to focus on higher value export markets. This nearly single-minded concentration on upmarket wines results in high average export prices.

New Zealand would therefore be a prime suspect for the most profitable wine-making country – if higher production costs don’t offset the price advantage.

Easy as 1-2-3?

I was not completely surprised, therefore, to read Atkin’s conclusion that the most profitable wine is probably Marlborough Sauvignon Blanc from New Zealand, which is by far that country’s leading wine export. Atkin writes that

I was sitting talking to the owner of a top New Zealand Sauvignon in Australia recently when he proudly took out his mobile phone and showed me pictures of his bespoke Maserati. ‘Kiwi Sauvignon is cheap and easy to make and commands a premium,’ he explained. ‘And by the time I have to pay my growers for their grapes, the wine is already on the market.

That certainly sounds easy enough. Atkin continues

He’s got a point. Marlborough Sauvignon generally produces heavy crops (partly a result of fertile soils, but also of vineyard practices). Once it’s in the winery, all the average producer has to do is crush the grapes, add yeast and ferment it at a cool temperature in stainless steel. A matter of days later the wine is ready for bottling.

Nothing could be simpler really, although I didn’t know you could make wine in just a few days. I wonder why everyone doesn’t just get up and go to Marlborough to make Sauvignon Blanc? Since economists are trained to be suspicious of easy money stories like this, I thought it would be interesting to talk to someone in the New Zealand industry about profitability.

Hidden Complexity

So I wrote to Neal Ibbotson, managing director of Saint Clair Family Estate Wines in Blenheim (Marlborough). I met Neal in 2004 when I was doing research for a book on globalization. Neal was a pioneer winegrower in the Marlborough region — Neal and Judy planted their first vineyard there in 1978 — and someone whose knowledge and opinion I value a lot. The 2003 Saint Clair Wairau Reserve Sauvignon Blanc that I sampled on that visit was the most memorable NZ wine I have ever tasted.

Neal didn’t comment on the Guardian article directly, but what he had to say helped me understand the hidden complexity of the situation.

Marlborough Sauvignon Blanc can in fact be a pretty profitable wine, but that doesn’t mean that everyone is rolling in cash.

Neal writes that

It is very profitable for the best grape growers on the best soils where they can combine relatively high yields and high quality. Say 5% of Marlborough’s growers. These growers deservedly reap the benefit from having out laid the capital and taken some risk and are very fortunate that the grapes they grow are a unique product, in strong demand.

It is less profitable and is in some cases unprofitable, for those growers who are in more marginal areas on less productive soils where yields and often quality are not as good

It can also be quite profitable for the very best wine companies who produce a high quality product and have good access to the markets. Say 10%. There are however both Marlborough Sauvignon Blanc grape growers and wine companies that are unprofitable. {It’s worse in some other parts of NZ.}

There are also a number of cases of new labels that have been produced, by would-be winemakers, that are sitting in the bottling halls, or on retail shelves, gathering dust whilst interest accrues in their bank accounts. In addition there is the huge capital requirement to take a small producer, normally profit marginal, to a medium or large producer where profitability is more likely

This is clearly a more realistic picture of the NZ wine industry. There some firms that are very profitable due to cost advantages or because they are able to leverage unique assets, like reputation or special vineyard characteristics. But there are other firms that, lacking these advantages, scrape by or lose money. Distribution is the big bottleneck in the global wine business, and wineries with access to efficient distribution have a head start towards profit goals. Inevitably in any industry with heterogeneous inputs and outputs, the profit profile is complicated.

Not only are Marlborough profits not uniformly high, according to Neal, they are also not certain. High prices require high quality and the ability to maintain a reputation for exceptional wines (I will talk about what Saint Clair is doing in this regard in a future post). But there are other factors to be considered. Neal writes that …

Most wineries are struggling to some degree with the increasing cost of buying in Sauvignon Blanc grapes, and the high value of the NZ $ which increases the cost of NZ wine in the market place and makes any additional increase in price from the wineries extremely difficult. Because of increasing prices for Marlborough Sauvignon Blanc grapes and the high NZ$ at present most wineries are caught between a rock and a hard place

This reminds me of a discussion I had with Jane Hunter of Hunters Wines in 2004. (Hunters was one of the first NZ Sauvignon Blancs to break into the key British Market and establish the region’s reputation there). What is the biggest threat to your industry, I asked her. The appreciation of the NZ dollar, she replied without hesitation.

Tim Atkin might be right about Marlborough Sauvignon Blanc, but he’s also wrong. I think it must be a very profitable wine for some (I wonder … was he talking to someone from Cloudy Bay?), but making wine and then making money making wine isn’t as easy as he suggests, even in Marlborough.

(Footnote: Here is an interesting fact: Canada actually earns higher per liter revenues from its bottled wine exports than New Zealand, according to my copy of The Global Wine Statistical Compendium, but comparing it to New Zealand is like comparing apples and oranges. Or table wine to ice wine, to be more specific. Canada’s wine exports are tiny compared to New Zealand, but the per-bottle revenues are high because it is mainly expensive ice wine – sweet dessert wines made from grapes left on the vine so that freezing weather can concentrate the juice and flavor.)

Desert (Not Dessert) Wine

March 23, 2008 By Mike Veseth in climate change, emerging wine regions, Oregon wine, sustainability, wine tourism 2 Comments

[Note: My senior Arizona correspondents m&n recently went searching for the Erath vineyards — and they found them and Dick Erath’s Arizona wine, too! Click here to read their report. Update posted 5/15/2011.]

Erath in Arizona

I spent Friday in the Arizona wine country – south-west of Tucson near Sonoita – with my “research assistants” Michael, Nancy and Sue (Michael and Nancy took these photos). I thought that I would learn something from talking with winemakers here, and I did, but it wasn’t exactly what I expected. Here is my report.

I was drawn to explore Arizona wine by the news about Dick Erath’s investment there. Erath is one of the pioneers of the Oregon wine industry; his early wines helped establish the reputation of Pinot Noir in Oregon and he has been instrumental in the growth of the industry over the years. I think you can say that he is a legend in Oregon. Like many north-westerners, Erath likes to go south – to Tucson — during the winter months and he became acquainted with the nascent wine community there in the mid-1990s. He started buying vineyard property near Wilcox east of Tucson a few years ago and has planted vines there. He recently sold his Oregon brand to Ste Michelle Wine Estates (he still owns the vineyards) and is moving forward with the Arizona project.

Erath’s presence lends credibility to the region. People like me figure that Erath wouldn’t put his name, time and money here if he didn’t believe in the potential of Arizona wine.Wines from unfamiliar places always raise questions and Arizona winemakers hope to change the questions from “Arizona? Are you kidding?” to “Is Arizona the next Napa Valley?” Establishing credibility is the critical second step for an emerging wine region (achieving quality is the first) and Erath’s investment is an enormous advantage in this regard.

A Working Hypothesis

My hypothesis going into this research was that the wines themselves would be a bit problematic, as emerging region wines often are, and that the biggest challenge would be in the vineyard not the cellar — growing wine grapes in the high desert.

Our first two winery stops quickly made me change my mind about the quality of Arizona wine. The wines atDos Cabezas WineWorks were intense and flavorful, with a spicy complexity that surprised me. I am not a wine critic, so I will not bore you with amateur tasting notes and doubtful ratings, but we were very impressed with these wines and bought some to give as gifts to Arizona friends who did not know about Arizona wine. Todd Bostock, the winemaker, really knows how to draw flavor from Arizona (and some California) grapes. Todd is working with Dick Erath in addition to his own projects and I think this collaboration bodes well for Erath’s Arizona wines, when they are ready, and for the region’s reputation.

Our second stop was C allaghan Vineyards. Kent Callaghan’s wines were strikingly good. We noted the depth and distinctive character of these wines, particularly the Tempranillo- and Petit Verdot-based blends but also a Mourverdre, Syrah and Petite Sirah blend. These wines were different from Bostock’s and gave us a hint of the potential range of Arizona wine styles. Kent let us taste some library wines and the question, can Arizona wines age well, was answered in the affirmative. We bought wine and had it shipped home, which is I suppose the highest praise a wine consumer can provide.

We visited one other winery, a new one that I won’t name, that made the sort of wines that I originally expected to find – what I would describe as immature wines showing wood in the wrong places. They served to put Bostock’s and Callaghan’s achievements in context. It is possible to make very good wine in Arizona, but it’s probably not easy.

The Globe in Your Glass

Wines have started to appear from many regions not on the list of “usual suspects:” India, Thailand, Peru and Brazil, for example. Brazilian wines actually make a cameo appearance in the film Mondovino, but not in a way that makes them seem in any way part of the classic tradition of wine.

It is possible to grow wine grapes at unexpected latitudes, but special conditions are necessary. In Arizona it is the desert at an altitude of about 4500 feet, where summertime highs are only in the 90s and the temperature at night can drop by 35 degrees. Altitude compensates for latitude. This advantageous diurnal variation along with lots of sunshine and rocky red soil are a good recipe for wine if you can add the right amount of water – not too little or too much.

Climate is not the problem I thought it would be and I think some of the wines we tasted displayed that mystical terroir that is the holy grail of wine critics. But climate change is a problem and that’s the unexpected story here. (I’ve written about climate change and wine in Chateau Al Gore.)

Kent Callaghan told me that the climate seemed to him to have changed significantly in the last 18 years. He reported recent crop yields of just a ton an acre for some varieties due to unfavorable weather. Some of the plantings of the classic varietals that showed promise earlier now seem misplaced so he has started slowly to change over to grape varieties that are able to produce consistent quality in the evolving environment.

This helps explain the use of California grapes for a few wines I tasted (to compensate for low Arizona yields) and the effective use of unexpected varietals (Tempranillo from Spain and Petit Verdot, a Bordeaux blending grape). Having learnt to make good wine in Arizona, winemakers like Callaghan have had to learn the process all over again with new varietals. In this regard I think they are perhaps ahead of the curve – winemakers all over the world will have to adjust to climate change in the decades ahead.

I understand that the Erath Arizona vineyard is being planted with many different varietals. It sounded to me like an experimental vineyard when I heard the list of plantings, but I think there is more than guesswork involved. I expect that Erath, Bostock and Callaghan and other talented winegrowers will figure out what Arizona’s terroir is meant to produce. It will be interesting to track Arizona’s progress and see how its wines fare in a world where the environmental givens are shifting and the market conditions becoming increasingly diverse and competitive.

Wine and Wine Tourism

The wineries I visited are all relatively small with limited distribution, so don’t expect to find these products at your local shop. Production is limited to a couple of thousand cases, even with the use of California grapes to fill in the gap left by low local yield, and sales are mostly cellar door. The winemakers I spoke with are beginning to develop wine clubs and internet sales facilities, but most of the product is sold face-to-face. Restaurant placements, if done well, can help build reputation, but there is not much money in it for a small winery. And output isn’t usually big enough to fill a distributor’s pipeline. All of this may change in the future, of course, but for the present it is a craft industry. The future of Arizona wine, at least in the short run, is local not global.

And that is not necessarily a bad thing because exploiting the local is an important strategy and it seems to me that Arizona has a good potential for wine tourism. The world will probably come to Arizona wine before the wine is produced in sufficient volume to venture out into global markets.

The country around Elgin and Sonoita is strikingly beautiful and closer to Tucson than Napa Valley is to San Francisco. It is already a desirable day-trip destination from Tucson because of its bicycling and horseback riding opportunities. All you need is wine (and food) to complete the deal. The wine is already there, as we learned, and the food, too, but the word hasn’t leaked out. That, I think, is about to change.

Note: Thanks to Michael, Nancy and Sue for their help with this report and to Joyce at Dos Cabezas and Tom Bostock and Kent Callaghan for taking time to talk with us.

The Big Vineyard Squeeze

March 18, 2008 By Mike Veseth in Supply and Demand, wine magazines, wine markets Leave a comment

Globalization and Wine Costs

The March 2008 issue of Wine & Vines reports three stories of how global forces are pushing up the cost of making wine in the United States. They make interesting reading for anyone interested in how the wine industry is changing today.

The first article examines the rising cost of planting new vineyards. Environmental concerns are causing winegrowers to substitute steel posts and stakes for the old treated wood products that have been used for years. Steel makes the vineyard greener, but it is now pushing the vineyard bottom line into the red because the cost of posts and wire has been pushed up by surging demand in for steel in China.

Once the vineyards are planted the vines need to be pruned and the grapes harvested. This is normally a pretty labor-intensive process but machine alternatives exist and the technology has improved considerably over the last 20 years, according to a second article in the magazine. Winemakers are laying out vineyards with wider spacing to accommodate mechanical pruning and harvesting. This is partly because of rising labor costs in the United States and partly because unreliable federal immigration policy makes access to foreign vineyard workers uncertain. High end winemakers may be willing to pay up to $750 per acre for careful hand harvesting, but many others are willing to employ machinery for a cost per acre of $70 to $250 (plus the $150,000 – $250,000 cost of the machine). The cost difference is significant, of course, but my sense is that this trend would be much weaker if federal immigration policy were more stable and industry-friendly.

Bottle Top and Bottom Line

Winemakers are being squeezed everywhere — input costs, labor conditions and even on the cost of the capsules that protect the cork and decorate the bottle top. High end wines often use imported tin capsules for their sleek and beautiful appearance. But their cost is being pushed up in three ways.

First, the price of the raw material – tin – has soared due to high demand in China, where it is used to solder electronic connections. Tin sold for $3600 a ton in 2002 and $6600 in 2005. It costs $16,500 a ton today due to the China effect and speculation associated with it. This huge increase is necessarily reflected in rising capsule prices.

But wait, there’s more. Rising oil prices and demand for shipping container space has helped push up the cost of shipping tin capsules from Europe by 27 percent. The third and final factor is the falling dollar, which makes everything from Europe more expensive. Much more expensive, given the dollar’s recent collapse. Winemakers are having to consider how much a tin capsule adds to their wine’s image, since it is obviously taking from, not adding to, the bottom line.

Global market forces (steel, oil, tin, shipping costs, exchange rates) and the government policies that try to contain them (think immigration) are squeezing winemakers in many ways. It will be interesting to see how much the industry is transformed by these effects.

The Big Squeeze

March 13, 2008 By Mike Veseth in Supply and Demand, wine markets 1 Comment

A Rant about Restaurant Wine

If you want to set me off on a rant, just ask me about wine in restaurants. Not all restaurants, of course, but many of them. All I want is a wine list that is appropriate to the food being served — intelligent selections matched to the cuisine with options at appropriate price points. It doesn’t seem like too much to ask for. It is surprising how often I am frustrated.

I had dinner at a famous Pacific Northwest seafood restaurant earlier this week and I wanted to order a nice wine by the glass (the university was paying so due economy was observed). The choices were affordable enough, but the selection was awful. The only Sauvignon Blanc on offer, for example, was an industrial California wine that was served at room temperature. It added nothing to the meal except alcohol and that’s not what I was looking for. In terms of cost per glass to the restaurant it was probably a few pennies cheaper than a better California or Washington wine or something interesting from Chile, South Africa or New Zealand.

Those wine cost pennies must be pretty important to the restaurant, I guess, for them to make such a severe sacrifice in quality. I would have been happy to pay more for a better wine but was not given the option.

When I dined at a famous Portland restaurant earlier this year the problem was just the opposite. The wine list was interesting enough and included a number of unusual Oregon wines, but it was priced in the stratosphere. An ordinary wine that you could buy in a grocery store was priced at more than twice the cost of a typical entree. Interesting wines bore disproportionate price tags. Another missed opportunity for me to enjoy an interesting wine with my meal and for the restaurant to engage me more completely in the wining/dining experience. I won’t be back.

Who’s Squeezing Whom?

I feel like I am being squeezed as a restaurant wine consumer, but I am starting to realize that the Big Squeeze isn’t on me, it is on the restaurants themselves. A recent article in the Wall Street Journal explains the situation pretty well. As usual it is all about demand and supply.

We have moved into what looks a lot like a recession and this is having a predictable impact on the demand for restaurant meals. Many restaurants in my region are going out of their way to advertise “earlybird” dinner specials in an attempt to entice discretionary customers with discount menus.

At the same time, and this is what the WSJ article emphasizes, the cost of restaurant food is rising as a direct result of rising food costs in global markets. An article in the Economist explained the problem in December 2007. Rising demand as consumers in less developed countries spend their rising incomes on more and better food. Falling market supply as rich countries divert grain from the food chain to the gas pump. Something has to give and it is price. The situation has only gotten worse since the Economist article was published. Restaurants are squeezed pretty badly by falling demand and rising costs. Food costs seem to have replaced labor costs as the critical economic determinant of the bottom line for at least some eateries. The WSJ makes interesting reading when it describes how chefs are reconfiguring even high end recipes and menus in order to shave a bit off the cost of raw materials such as meat, fish and poultry.

False Economy?

A warning: reading the article could affect how much you enjoy your next restaurant meal. I can’t look at my plate now without wondering to what extent the chef’s choices were driven by cost versus flavor. Why were there boiled red potatoes (instead of risotto) on that $30 plate of grilled halibut? Are potatoes cheaper? And are boiled reds more expensive than the smashed potatoes on the $20 prawn special? Or were those smashed potatoes recycled from last night’s leftover boiled spuds?

Cost has always been a factor, of course, but now it seems that every penny counts. Your dinner plate is a waiting economic detective story.

So I guess that I shouldn’t be surprised that restaurants are passing their cost squeeze onto me via the wine list by shaving a few pennies off the cost of inexpensive wines when they can (by moving to down-market labels) and raising the price of premium wine when they dare. If they think that the demand for good wine in restaurants is inelastic, then higher prices are the way to go. It’s a tricky game, however, because the wrong strategy can produce lower sales revenues and fewer wine-enthusiast diners.

Wine in Restaurants: Recent Trends

March 8, 2008 By Mike Veseth in Chateau Ste. Michelle, critics, washington wines, wine critics, wine magazines, wine markets Leave a comment

Each year Wine & Spirits publishes a special issue that reports the results of their annual survey of wine sales in restaurants — information of more use to trade professionals, I imagine, than to wine lifestyle readers. Although the sample is relatively small — 309 Zagat -ranked U.S. restaurants participated in the 2008 survey — and restaurant wine sales are probably unrepresentative of broader market sales, I still find the trends reported here to be of interest, especially since many of them reinforce data I have found elsewhere.

More and More.

Some of the trends are unsurprising to any restaurant wine-drinker. The importance of wine in restaurants continues to grow — over 70% of the restaurants reported that wine was a larger percentage of their total sales in 2007 compared with 2006. More restaurants are paying more attention to wine and wine-drinkers and increasing sales accordingly. A second non-surprise is this: restaurant wine costs more. More than 60 percent of the surveyed restaurants reported that the average price of the wine they sold increased in the last year. Personally I have been staggered at the price of wine in some restaurants recently. There are both demand and supply drivers behind this trend.

Restaurants have an incentive to raise wine prices, of course, but nobody forces diners to buy the stuff. Some of the price increase is demand-side — educated (or status-seeking) wine consumers choosing more prestigious and expensive bottles. Smart restauranteurs and their sommeliers take advantage of the wine boom by offering interesting and hard-to-find wines, which attract wine enthusiast diners and generate higher revenues. So higher prices are the result of education, enthusiasm and strategic behavior. We pay more because we are willing to pay more, up to a point at least.

Even Less is More

The falling dollar is another part of this trend. Cheap dollars mean that restaurants have to pay more for imported wines, which drives up costs and prices. The pass through effect of the exchange rate changes is not yet complete, however, so you can expect even higher prices in the future. Rising wine costs are a supply-side driver of higher wine prices generally. The recent trend to more wines from Argentina and Chile is partly a reflection of the fact that the dollar has not fallen quite so far relative to these currencies, so South American wine is a relative bargain.

The weak dollar also affects the demand side. Many of the surveyed restaurants are located in transnational hub cities where international travelers are a significant factor. Foreign tourists and business travelers take advantage of the weak dollar to treat themselves to otherwise more expensive wines when they dine in the U.S., thus driving up the price averages. This is not an insignificant factor for many of the upscale urban eateries that participate in the Wine & Spirits survey.

Prices continue to rise for even the most inexpensive restaurant wines. About 35 percent of the restaurants reported that they have increased the price of the least expensive wine on their list in the last year. In my experience, however, no one ever orders the least expensive bottle on a wine list. The real indicator would be the price of the second cheapest bottle. I imagine that it costs more now, too.With the price of wine edging up relentlessly it is not surprising to find that restaurants and wine drinkers are paying more attention to by-the-glass sales. More restaurants are offering more wines (and more interesting wines) by the glass as well as the bottle. The average price reported by the survey rose to a new high of $11.05.

The trend toward rising wine prices is not likely to slow very much in the future (see my previous post about The End of Cheap Wine), but this trend is not uniform across the entire wine list. Surveyed restaurants reported steep declines in sales of Merlot and Chardonnay, for example, and flat sales of Cabernet Sauvignon. Average sales prices actually declined for Cab and Merlot. Pinto Noir prices and sales have increased again, as you might expect.

Hot or Not?

No sales trend data were reported for two supposed “hot” wines: Riesling and Syrah. Riesling is the sommelier’s favorite, according the Wine & Spirits (and I don’t disagree), because it is so food-friendly, but it does not seem to be an important factor in restaurants sales. I have my own theories about this, but no facts, so I won’t speculate at this time. I’ll try to find out more at the Riesling Rendezvous that Ste Michelle Wine Estates is organizing this summer.

The case of Syrah is interesting, too. Wine & Spirits says that there was a Syrah/Shiraz boom a few years ago, but that it has faded and Syrah has now settled into a minor niche-role on the restaurant wine list. I suppose that this reflects the changing circumstances of Australian wine (see The Wizards of Oz) more than anything else since so many people identify Australian wine with Shiraz and vice versa.

The fact that Riesling and Syrah don’t figure prominently in restaurant sales suggests to me that restaurant buyers as a group are less adventurous than you might think. Rather than using an unfamiliar wine list as an open invitation to experimentation I think they might on average be looking to avoid making a faux pas, either in terms of the wine they choose or the social signals that they send to the others seated around the table with them. Wine trends in restaurants might, therefore, lag behind wine trends generally rather than leading them. Or it could be that restaurants believe that their patrons are unadventurous and wine lists reflect this, focusing mainly on old standbys rather than hot trends. The result would be the same in either case.

If this is true then Riesling and Syrah will move up on the restaurant wine lists, if they do at all, only after they have become more prominent in other wine venues. Or at least winegrowers in Washington State should hope that this will happen. Because, my goodness, we seem to be making a lot of Riesling and Syrah!

The Martha Stewart Wine System

March 4, 2008 By Mike Veseth in Martha Stewart, wine awards, wine critics, wine magazines, wine ratings Leave a comment

Wine Enthusiast magazine celebrates its 20th anniversary with the March 2008 issue and editor and publisher Adam Strum reflects on the changing market in “The Enthusiast Corner” column. He writes that

“I’d like to think Wine Enthusiast played an important part in helping to bring wine to the attention of the American public at large, and not just the elite, over these 20 years. Wine magazines, books and the rise of food television have all undoubtedly played a role in making America a wine drinking nation. Other factors abound: American cuisine at home and in fine dining restaurants underwent a renaissance, and wine naturally became an important part of that. News of wine’s health benefits enlarged its consumer base. But most responsible for the growth of wine is the incredible leap in terms of overall quality at the same time that wine became more affordable. How often does that happen? Name me one consumer product that can compare.”

I think he is right in all this. Wine’s vigorous growth in the United States is a complex phenomenon. Many factors have contributed to the rise in per capita consumption in the United States and other New World markets at the same time that wine drinking has fallen dramatically in the Old World. The wine media’s role may be an under-appreciated element of this phenomenon.

The Supermarket as Home Depot with Wine

My friend Patrick works the wine aisle at a local upscale supermarket and he constantly delights me with his original insights into consumer behavior. He sees cable TV’s influence everywhere, for example. People watch Trading Spaces or the home remodeling network HGTV, he says, and run out to Home Depot for wallpaper and remodeling supplies. A huge industry has been built around their media-driven passion to renovate and restore. People watch the Food Network, he says, and run to supermarkets for exotic ingredients — and the wine to go with them. Wine is scattered throughout the store, not just in the wine aisle, to make the idea of a sophisticated meal (one that would please the Barefoot Contessa) a convenient choice.

Wine, in other words, is a lifestyle product that is promoted by lifestyle media like cable TV and lifestyle magazines that encourage and enable consumers to develop adventurous, sophisticated, consumption-driven identities. I don’t mean this in a bad way, although I know it sounds pretty bad. It’s just a fact. The magazine racks at Borders are filled with lifestyle magazines. You probably read a couple of them yourself. Even serious newspapers like the Wall Street Journal and Financial Times now have thinly disguised weekend “lifestyle” sections. Don’t pretend you don’t know what I mean!

Wine Enthusiast is a particularly good lifestyle magazine — there is a reason it has lasted 20 years. One factor in its success is that globalization has helped the wine market expand, providing more choice at affordable prices. Mr. Strum writes that

“New regions such as Australia, New Zealand, Chile, South Africa and others new to a global industry muscled their way on to the world stage. Competition drove improved methods in the winery and the vineyard. Competition also drove prices down at the middle and lower tiers.

“The world wine map has been redrawn so dramatically in the past 20 years it’s almost unrecognizable. Back then, it consisted of France, Italy, Spain and, way off in the margins, California. Now you must include Oregon and Washington State, not to mention the other New World countries I mentioned above. Every state in the union now produces wine. Countries like China and India are ramping up production in numbers that boggle the western mind.”

Martha Stewart Wine

Globalization has certainly made wine more interesting and wine drinkers can appreciate the value and variety. It would be a mistake to think that the wine media are passive observers of this phenomenon, however. It is in their interest to promote the industry that they cover and to try to profit from every aspect of it. You aren’t surprised when cable television networks expand outside the box, are you? They sell advertisements on their programs along with videos of the shows, books, lectures and assorted types of lifestyle paraphernalia. Think Martha Stewart! (And yes, there really is a Martha Stewart wine — made by Gallo).

Wine critic publications do the same thing — they have adapted the Martha Stewart System to lifestyle wine. I will focus on Wine Enthusiast here because it is their anniversary, but they are not an unusual example. Wine Spectator, Decanter, Gambero Rosso and most of the others have commercialized the wine experience in the spirit of Martha Stewart.

Mr. Strum describes Wine Enthusiast’s expansion this way

“Wine Enthusiast, as a company, has evolved dramatically over the past 20 years, too. In addition to the success of our catalog and our magazine, we have created an events division that is an astonishing success. We now annually produce four Toast of the Town events to introduce American consumers to wines that are available in their markets. These walk-around tastings, held in spectacular cultural venues, offer a sample of each city’s restaurants, accompanied by tastes of the portfolios of 70 wine companies. These events help educate and expand the palate of the American consumer, and to reinforce wine’s place at the table.”

Wine Enthusiast is more than a magazine, it is a lifestyle system. It sells magazines, of course, plus wine-related products through their catalog and website, produces wine events and so on. It informs, enlightens, educates and enables. A Wine Enthusiast cable network (or YouTube.com channel) would be the next logical step.

Even the magazine is commercialized in perhaps unexpected ways. Everyone knows that wine magazines sell lots of advertisements, of course. The editors always say that they don’t let advertising dollars influence their ratings, and I actually believe them — although market forces obviously do have some influence over the wines that they choose to consider for their reviews. National magazines need to pay attention to wines that are in national distribution. And these are the wines that are featured in the ads.

Wine Enthusiast takes one more step into commercial waters, however. The magazine includes a monthly Buying Guide that provides 100-point ratings and thumbnail reviews of dozens of wines. (I actually find their reviews to be very accurate, by the way.) But just before the long list of ratings there is section where a smaller number of wines are featured, with images of their labels for easy supermarket identification. These are the wines you will remember if you scan through the magazine quickly. I have always assumed that these were featured wines, selected by the editors for their good value or wide availability.

Imagine my surprise, then, when I started reading the fine print about how Wine Enthusiast rates wines and discovered that the labels are in fact “paid promotions.” Wineries can’t write the reviews or designate their products “best buys,” but they can pay to have them highlighted in the illustrated section! I wonder if that is true of other wine magazines? I’m going to be reading the fine print a lot more closely now so that I have a better idea of what is editorial content in the wine press and what is “paid promotion.”

Martha Stewart has only recently entered the wine business (with Paul Newman close behind), but it seems to me that the Martha Stewart system of total lifestyle marketing is already here. Hmmm. I wonder if that’s a good thing?

Hong Kong Wine Taxes: The Papillon Effect

March 1, 2008 By Mike Veseth in China wine, Hong Kong, wine auctions, wine taxes 1 Comment

How Tax Cuts in Hong Kong May Create a Tornado in Bordeaux

Wine prices are dropping in Hong Kong (click on the image to see one merchant’s sale announcement). The reason is that Hong Kong has abolished taxes on beer and wine. The tariff on wine was an incredible 80% until a few years ago, when it fell to a still hefty 40%. So the drop to a zero rate and the price reductions that should follow will be welcome news indeed for wine-drinkers in this prosperous Asian hub.

What prompted the HK government to take such an action, which cost the city over $70 million in lost tax revenue? One factor was a budget surplus, which made tax cuts possible. But why cut wine taxes? Imported wine in Asia is often an expensive luxury sold to well-heeled buyers who may not be very sensitive to price — just the kind of product that makes a logical target for tax policy. If the government can afford to cut taxes, why not target a tax that would provide more general benefit?

The answer, according to published accounts, is that Hong Kong’s policy isn’t about wine, it’s about money. By cutting wine taxes, the Hong Kong authorities hope to bring in more money, not less.

The world auction market for wine is large and growing. London (with annual wine auction sales of $1.2 billion) and New York are at the center of this market, but as much as 40 percent of the expensive auction wine is sold to Hong Kong residents. The high taxes on wine discourage HK buyers from bringing auction purchases home to drink or to re-sell, so the wine is held in foreign warehouses (or sometimes in bonded warehouses in HK).

Much of the world’s supply of great wine and demand for it too resides in Hong Kong, but the wine itself lives elsewhere. By abolishing the wine tax, the Hong Kong government hopes to exploit this fact and turn Hong Kong into Asia’s wine market center. Look for the big auction houses to organize HK wine practices to take advantage of the new market environment. And look for HK government revenues on the resulting auction enterprises to rise, perhaps enough to compensate for the initial tax cut.

The Papillon Effect

The impact of Hong Kong’s auctions are likely to be felt well beyond Asia and well outside the gilded halls of the auction houses. Have you heard of the Butterfly Effect? It is the idea that small changes in complex interconnected systems can sometimes produce large effects. The name, coined by Edward Lorenz in 1961, comes from the idea that a butterfly beating its wings in Brazil, by disturbing air flows in ways that compound and multiply, can theoretically cause a hurricane in Texas. It is a famous concept in the field of non-linear dynamics.

Natural systems are obviously complex and interdependent and sensitive to initial conditions. Tipping points, butterfly effects and the like are both theoretically possible and empirically observable. Economic systems can have these same properties. (I wrote a book a few years ago that examined the turbulent flows and non-linear dynamics of foreign exchange markets, for example.) This is perhaps especially true for complex global markets, like the market for wine.

The shift in the wine market to Hong Kong should have fairly significant effects on wine flows and prices — especially for trophy French and especially Bordeaux wines, the object of much London and soon Hong Kong auction activity. So I’m calling the effect of the HK wine tax cut the Papillon Effect (papillion is French for butterfly — if the HK buyers were focused on Italian wines it would be the Farfalle Effect). I will be interested to see just how much market turbulence the HK tax change creates.

Will the HK butterfly’s wings cause a tornado in Bordeaux? Yes, I think it will, although it might be difficult to tell how large the effect is because of the boom already in progress, both in the auction and en primeur markets, for these wines. Prices are already staggeringly high for the most famous and highly-rated products.

But the really interesting question concerns the side effects in other markets. How will surging Bordeaux prices affect the rest of the wine world? Will the object of speculation remain fairly narrowly focused or will the boom’s domain expand to include investment-grade wines from around the world? How far will the Papillon Effect extend?

And then there is the question of stability. The clear message of the Butterfly Effect is that the compoud effects of small changes may not be sustainable — they can be disruptive and even explosive, like a tornado.

Will the HK tax changes merely shift the wine market centers and expand demand and supply, or will it blow up a bubble, as often happens in financial markets? This is a question that Hong Kong financiers should consider as they raise their bidding paddles at the great wine auctions that seem sure to be coming their way soon!