Has U.S. Wine Industry Consolidation Gone Too Far?

February 8, 2022 By Mike Veseth in Unified Wine & Grape Symposium, wine, wine brands, wine markets 4 Comments

Is the U.S. wine industry becoming too concentrated, with just a few big firms dominating the marketplace? That, more or less, was one of the questions we were asked at the press conference that followed the annual “State of the Industry” session at last month’s Unified Wine & Grape Symposium in Sacramento, California. How would you answer this question?

The query was prompted in part by Mario Zepponi’s excellent presentation about merger and acquisition activity in the wine industry in 2021. Mario is principal at Zepponi & Company, a firm that advises winery and vineyard M&A clients and was very busy indeed last year, when a number of large (for the wine industry) deals were concluded.

How concentrated has the U.S. wine industry become? How competitive is the wine marketplace? The answer you get depends in part on how you look at the data. Wine Business Monthly (which sponsored the State of the Industry session again this year) publishes a report on the U.S. wine industry early in each new year which is required reading. This year’s report appears in the current March 2022 edition, which can be accessed online.

U.S. Wine By the Numbers

Judging by the number of firms competing for retail shelf and restaurant wine list space, the U.S. market is very competitive indeed. For perspective, consider that the WBM report for 2014 found 8,287 U.S. wine producers in total, 3913 in California, 734 in Washington State, 632 in Oregon and the rest distributed across the country. Mississippi was at the bottom of the league table with just two wineries.

Zoom ahead to the just-published WBM report for 2021 and the numbers have jumped. The U.S. winery count rose by 36% in the intervening years, with 11,300 wine producers in total. California again leads the way with 4804 wineries, Oregon comes second with 877, followed by Washington with 875. Mississippi’s winery count increased to six. The Other Washington — Washington DC — is last with two wine producers.

Looking at the data this way, the U.S. wine industry is very competitive, with amazing growth in number of wine producers for such a brief period of time. The increase in winery count in 2021 was slower than in 2020, WBM reports, but that’s not a surprise given the covid and economic conditions we have experienced.

The U.S. market is actually more competitive than these numbers suggest because imports account for about a third of U.S. wine sales, so thousands of international brands are also vying for buyer attention.

Top of the Table Concentration

But number of competitors is not the only factor to consider when assessing industry competition. Market power matters a great deal and the U.S. wine industry features a number of very large players. WBM reported on the top 30 companies in 2014 and the top 50 companies in 2021 along with the lineup from the first report in 2003 and the lists make interesting reading.

The top five producers, ranked by volume of sales, in the very first WBM report in 2003 were as follows: E&J Gallo Winery, Constellation Brands, The Wine Group, Beringer-Blass Wine Estates (now Treasury Wine Estates), and Bronco Wine Company (followed by Mondavi — now part of Constellation — and Trinchero Family Estates).

The 2014 report produced this list: E&J Gallo Winery, The Wine Group, Constellation Brands, Bronco Wine Company, and Trinchero (followed by Treasury and Ste Michelle Wine Estates). The current (2021) line-up is: E&J Gallo, The Wine Group, Trinchero, Delicato Family Wines, and Constellation Brands (followed by Treasury and Bronco).

I think you would have to conclude that the top of the U.S. wine table has been very stable, with a good deal of the movement due to transactions within the industry such as Constellation’s acquisition of Mondavi and more recently its sale of many brands to Gallo and The Wine Group. The steady rise of Trinchero (think Sutter Home, Menage a Trois among other brands) and Delicato (Bota Box, of course, and now also the Francis Ford Coppola Winery) is noteworthy.

The 50 largest wine companies (out of the 11,000 total) account the vast majority of sales volume for domestic wines (not counting the imports) and it is easy to see why because firm size is very large. JUSTIN Vineyards and Winery is #50 in the 2021 table but still produces a very substantial 339,000 cases of wine each year. Gallo is at the top of table with a WBM-estimated 100 million case annual wine output. That’s 1.2 billion bottles. Incredible!

It is interesting to look at how production measured by volume of the top three largest wineries has evolved over the years reported here. In 2014, for example, the big 3 totaled over 187 million cases (not bottles) of wine (Gallo 80 million, The Wine Group 57.5 million, Constellation 50 million). The Big 3 total for 2021 is actually bit less: Gallo 100 million + The Wine Group 51 million + Trinchero 20 million = 171 million total. That is less than in 2014, which could be due to a number of factors including, as I have heard some insider’s comment, a lack of investment in some of the brands involved in the Constellation-Gallo transaction during the long regulatory approval process.

If we assume that the total U.S. wine market was about 450 million cases in 2021, then the Big 3 accounted for about 38% of sales by volume. If imports accounted for a third of total sales, then the Big 3 alone were responsible for 57% of domestic-produced wine sales by volume.

The biggest wine companies are really, really big, but some of the market power has shifted down the line. The 30th largest wine company in 2014 (out of the 30 listed), for example, was Purple Wine Company, which produced 415,000 cases. Number 30 in 2021 is Firstleaf at 700,000 cases. Firstleaf is a direct-to-consumer operation founded in 2016 with more than 75 brands in its portfolio.

What’s Driving Consolidation?

Big is in for U.S. wine and a lot of the bulking-up is taking place in the tiers below the Big 3. What’s driving it? Mario Zepponi presented an interesting perspective in our State of the Industry session. He argued that you have to put wine production in the context of its linkages in the product chain.

A lot of wine is sold in grocery stores, for example, and the top 5 U.S. grocery companies account for about half of total revenues in that sector. Big store chains, with their thousands of assorted SKUs, tend to prefer to work with a small number of distributors in each product segment if possible. So maybe it is no surprise that the top 3 wine distributors account for about 65% of revenues according to Zepponi’s data. Connect the dots here and it is easy to see why distributors might favor large wine companies with broad portfolios.

Big favors big, which favors big. Evolutionary forces point towards increased concentration, even in an industry as fragmented in some ways as wine.

To a certain extent, then, wine consolidation is the result of a process (accelerated by the covid channel shifts) that is affecting retail more generally. Consolidation, in this view, starts at the retail level and works its way backwards.

So has U.S. wine industry consolidation gone too far? It depends upon how you look at it and where you are positioned within the industry — in the Big 3 tier, the broader top 50, or further down the pyramid. And maybe the question should start higher up the food chain with consolidation at the retail and distributor levels. The market sure is competitive even if market power is concentrated at several points.

It is, I am afraid, one of those annoying “on the one hand …” situations that provoked President Harry Truman to ask for someone to send him a one-handed economist.

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Thanks to Cyril Penn and his Wine Business Monthly team for the 2022 edition of their wine industry report. A very valuable resource for anyone interested in U.S. wine market dynamics.

What’s Ahead for the Wine Business? Wine Industry Leadership Conference Next Week

February 1, 2022 By Mike Veseth in economic crisis, wine, wine markets Leave a comment

The Wine Industry Leadership Conference, a free group of webinars produced by the Wine Industry Network, is set for next Wednesday (February 9, 2022) at 9 am Pacific time. Follow this link for more information and to register.

The program is divided into three parts that are relevant to just about everyone in the wine industry.

Session 1: Economic Forecast – What to Expect in 2022 will fill the hour between 9 and 10 with critical analysis of U.S. economic conditions from Sonoma State University Professor Robert Eyler follow by my analysis of some of the implications for the wine industry. I am calling my presentation “Wine and the Big Squeeze,” which may give you some idea of what I see ahead.

The ten o-clock hour is devoted to Session 2: Talent Retention – Keeping A Strong Team Intact featuring commentary by Sandra Hess, Founder / DTC Wine Workshops; Joel A. Miller, Owner & Principal / Chateau HR Consulting; and Karen Alary, Managing Partner / The Personnel Perspective.

Session 3: Successfully Transitioning Your Winery to New Leadership follows from 11 to 12 am and features Greg Brewer, Founder & Winemaker / Brewer-Clifton; Peter Mondavi Jr, Co-Proprietor / Charles Krug Winer; and Mario Zepponi, Principal / Zepponi & Company.

Moderators for the three sessions are George Christie, President & CEO / Wine Industry Network; Stacy Briscoe, Managing Editor / Wine Industry Network; and Kim Badenfort, Director of Marketing Services / Wine Industry Network.

The presentations are being pre-recorded so that the speakers can respond to questions and comments in real time during each session, which promises to make this a more interactive experience than the typical Zoom webinar.

I appreciate the Wine Industry Leadership Conference’s focus on practical business issues facing the industry today and the impressive lineup of speakers. Hope to see you there.

Wine Book Review: Three Faces of Malbec

January 25, 2022 By Mike Veseth in Uncategorized Leave a comment

Laura Catena and Alejandro Vigil, Malbec Mon Amour. Catapulta Editores, 2022.

Laura Catena and Alejandro Vigil have written a fascinating new book about their favorite wine grape, Malbec. If you know that they are from Argentina and associated with the famous Catena Zapata winery, this connection will seem natural, since the roots of Malbec run through this territory and, I guess, through the authors, too.

Three is a number that is full of tension because it defies a casual “either/or” classification, and it is significant that Malbec Mon Amour is built around a number of threes. There are, first of all, the book’s three protagonists: Catena, Vigil, and Malbec itself. They mix and relate in complicated ways over the course of the book’s 200 or so colorful pages.

Then there are the three sides of Malbec as presented here. First is Malbec’s history in France (hence “mon amour), which casts a bright light on the importance of Malbec in Bordeaux’s early development. Then comes the history in Argentina, which is a bit of a roller-coaster ride (and hence typically Argentine, if I can say that). And finally there is Malbec’s history with the Catena family, since family is paramount here.

The story itself is presented in three ways, to continue the theme. First there is the straight text, clear and well written. Illustrations — photos, charts, water-color pictures — illuminate the text and can be read on their own. Finally, super-imposed along the way is a dialogue between Catena and Vigil that puts the situation in a personal context.

The book works at several levels and becomes more detailed and technical as the story unfolds. The final sections, which examine in some depth the particular regions and vineyards in Argentina is real wine-geek stuff. Except that the scientific tension is broken by a Catena-Vigil conversation about art, music, family, and even food.

Malbec Mon Amour has a lot of moving parts, Does it hold together? Sue is the resident expert on design here at The Wine Economist and she gives a positive review. The pieces fit together and make sense — rewarding to study and a pleasure as a casual read.

Malbec Mon Amour is a worthy addition to your wine bookshelf — a shelf that includes two other noteworthy works by Laura Catena: Vino Argentino and Gold in the Vineyards. Wait … does that make three books?

Three cheers (of course!) for Malbec Mon Amour!

Unified Symposium: Wine and the New Now

January 18, 2022 By Mike Veseth in Unified Wine & Grape Symposium, wine, wine markets 4 Comments

These are fast times. I used to think about “getting back to normal” and then I started talking about what the “new normal” would look like. Now I don’t really know what normal is — it’s a “new now” every day.

Crossing the River, Feeling the Stones

Planning for the future in the “new now” era reminds me of the Chinese saying about crossing a river by feeling the stones with your feet. Know where you are going but be sure to take each step one at a time.

I am struck by the degree that the program for the Unified Symposium this year reflects the “new now” of the global economy. The environment has long been a concern, for example, but now there is a timely immediacy that spans the global to the local. The Unified examines the issues starting with Dr. Steven Ostoja’s Tuesday luncheon presentation on “Changing Climate, Extreme Weather and Water Scarcity: What It All Means for the Future of Farming” and extending into sessions on vineyard adaptation, living with climate change, and wild fire smoke issues.

Labor has long been a critical issue in the wine industry, but we often focused on vineyard labor and sometimes, as in Napa, the problem of attracting and retaining cellar staff in a region with sky-high living costs. The labor problem in the “new now,” however, extends throughout the organization, so human resource issues are front and center.

These are just two of the important “new now” issues the Unified will examine this year. Check out the complete program to see what else is on tap. And don’t miss the trade show, which is where new ideas are put into practice.

State of the Industry Now

I will be hosting the State of the Industry session on Wednesday morning and I think you can expect a lot of “new now” thinking from the all-star speaker lineup: Jeff Bitter (Allied Grape Browers), Danny Brager (Brager Beverage Alcohol Consulting), Steve Fredricks (Turrentine Brokerage), and Mario Zepponi (Zepponi & Company). Their collective expertise spans the issues — demand, supply, markets, and investment.

The State of the Industry session looks back at 2021 and ahead to 2022 and beyond but a “new now” problem is understanding exactly where we are at today given the big swings in wine demand, sales channels, and grape harvests that we have seen. It can be hard see through the thicket of short-term events to pick out the real longer-term trends. Prediction is difficult, they say — especially about the future when the present in unclear. But I guarantee that the team will have revealing insights to share.

New Now Sacramento

If you want to get a sense of “new now” maybe the best example of change and adaptation is the Unified itself. It starts with the newly remodeled SAFE Credit Union Convention Center. I haven’t seen it yet but I am told it is state of the art — bigger and better — and safer — than before. I am really looking forward to the new trade show and session spaces.

And then there is the health and safety element of the “new now.” Bringing together thousands of wine industry people during this pandemic and doing so responsibly requires organization, cooperation, and critical analysis.

As Cyril Penn reported recently on WineBusiness.com, the organizers have retained a health data analytics firm to model the Unified from a covid safety standpoint.

Epistemix develops simulations that approximate risk based on venue, audience and anticipated virus levels with proprietary software developed by a team from the University of Pittsburg School of Public Health. The firm partnered with the Exhibitions and Conferences Alliance a year ago and has worked on risk assessments for conferences and conventions in twenty cities. Reiser said Epistemix has been 95 percent accurate in making event projections thus far.

The models take into account the number of attendees and their vaccine and testing status, the prevalence of the covid variants, the mitigation protocols, the varieties of activities that the convention entails, and the various ways that the groups are likely to mix.

The modeling indicates Unified’s masking and vaccination/testing policy at the newly-remodeled Sacramento Convention Center will create a controlled environment with an expected case rate of one in ten-thousand, according to Lindsey Solden Reiser, PhD, Managing Director of Professional Services for Epistemix, Inc. That modeling assumes 12,000 people attend Unified.

If the projections are correct, the convention will have a much lower expected case rate than Sacramento itself, which has a projected rate of eight cases per ten-thousand persons.

Wine and the New Now

The point is that the new now of trade shows and conventions is very different from the old normal, where people like me mainly worried about mundane things like whether the slide-advance “clicker” would work for the PowerPoint presentation. I am sure I never gave a moment’s thought to the idea that data modeling of pandemic spread would be needed or desired. But here we are now.

And I think the wine business is in the same situation. We need to analyze the new now and to try to understand it, but without assuming that it will somehow revert to the old normal or remain fixed in place as the new normal, either.

Better take off your shoes and socks. Time to get your feet wet.

Scratching the Surface of Sicilian Wine

January 11, 2022 By Mike Veseth in cooperatives, Italian wine, wine, wine history, wine markets 2 Comments

I was intrigued when we were asked if we’d like to sample wines from a Sicilian cooperative winery. The history of Sicily’s wine industry — and the role of cooperatives within it — is a roller-coaster tale and such sagas in wine do not always have happy endings. I was thirsty to learn more about the situation today.

I learned about the history of Sicily’s wine sector from The World of Sicilian Wine by Bill Nesto MW and Frances Di Savio (see the Wine Economist review here). Wine in Sicily has been buffeted by a combination of shifts in the external markets and changing domestic incentives. It is no wonder that cooperatives arose to help growers navigate the ups and downs and gain a measure of control over their own destinies. Cooperatives spring up in times of crisis, but it is their ability to adapt when conditions change that is most important.

Incentives Matter

Sometimes the economic incentives the cooperatives and other wine actors faced favored quality, but all too often quantity was the dominant strategy. This was particularly true during the years when EU wine policy unintentionally encouraged over-production of low-quality wines with no obvious market potential. These unsalable wines, the source of the famous EU “wine lake,” were bought up and distilled into industrial alcohol, a process that was not sustainable in economic, political, or environmental terms.

The wine lake days are gone — EU incentives now favor market-driven wine production — and the wines have changed faster than their reputations in many cases. Not all wineries have raised their game, however, and that inconsistency is a headwind.

The wines we sampled were from the Cantine Ermes cooperative, which was founded in 1998 in the Belice Valley in northwest Sicily. The cooperative is very large with 2373 members farming more than 12,000 hectares and operating 11 winemaking facilities. In total Cantine Ermes produces 11.5 million bottles annually, which are sold in 29 countries around the world. Does this surprise you? Cooperatives are important in Italian wine, more important than most people realize.

Beyond Low-Hanging Fruit

One criticism I have heard of many Italian cooperatives is that they cut their own throats by focusing too much on bulk wine and private label products — they take this low-hanging fruit and fail to build the brands that might yield higher margins that would improve their economic sustainability.

Some of the deep dark red wine made in Sicily, for example, is sold off to be blended with lighter Italian reds to give the result more body, color, and alcohol — a practice that has been going on for a long time. Cantine Ermes gives attention to several brands, however, including the Vento di Mare wines that we sampled.

Vento di Mare means sea winds and so it was inevitable that we would ask our friends R and M to sample the wines with us. Their visit to Sicily was punctuated by gale force sea winds that nearly blew them off the island and caused sea foam to pile up on the shoreline like drifts of snow.

The three wines we tasted were screwcap-topped bottles of Grillo DOC, Nerello Mascalese IGT, and Moscato Frizzante that retail for about $12 here in the US — right about the center of the retail wine wall in today’s market. The Grillo had nice varietal flavor and good balance. It seemed very versatile and would pair with many dishes as well as on its own. It was probably our favorite wine.

The red Nerello Mascalese was more intense and called out for a bold food pairing. Nerello Mascalese is the most-planted red winegrape in Sicilty according to my sources, and it was easy to see how it could be the foundation of a number of interesting blends as well as a single-variety wine.

The Moscato was fizzy and slightly sweet. Just 10.5% abv, the wine has a secondary fermentation for two months in an autoclave and then ages another two months on its lees. Aromatic (think orange blossoms) and nicely balanced. Like the Grillo it would work in a number of situations. Very pleasant indeed.

Sicilian Wine Ambassadors

We were impressed with the Vento di Mare wines and a bit surprised at the affordable entry-level price point. Other Cantine Ermes brands probe the higher reaches of the wine wall. I hope the attractive packaging and price point encourage consumers to give these wines a try (and that some restaurants see the potential for wine-by-the-glass sales). These wines are good ambassadors for Sicily and its cooperative wineries.

Since we aren’t able to travel to explore the wine world these days as we did in pre-pandemic times, we find it useful to focus on invitations like the one we received from Cantina Ermes. Clearly we have just scratched the surface of the wines of Sicily and the progress of Sicilian cooperatives, but we are encouraged, nonetheless. These are good wines that chart a path out of Sicily’s quantity-driven past towards a more sustainable future.

A Toast to Ferrari Trento & the Year of Sparkling Wine

January 4, 2022 By Mike Veseth in wine, wine markets Leave a comment

2022 is here and a rear-view mirror look at 2021 reveals a number of interesting wine trends. High on the list of highlights is the surge in sales of sparkling wine.

It is conventional wisdom that wine consumption is occasion-driven. Generally packaged in a multi-serve 750 ml bottle, many consumers need a reason to pull the cork or twist the screwcap. (There are exceptions — I have friends who insist they need no excuse at all …)

Time to Pop a Cork?

Sparkling wine is even more occasion-driven here in the United States, where it is often reserved for special celebrations such as birthdays, weddings, anniversaries, and so forth. This fact was bad news for sparkling wine when we entered the time of covid in 2020 because those festive gatherings disappeared or were in any case much smaller. The spaces we think of for those celebrations such as restaurants were greatly diminished in number and scope. Sparkling wine sales took a big hit.

So one of the pleasant surprises of 2021 is sparkling wine’s rising sales volume in a relatively stagnant overall market. Part of this is due to re-opening of on-premise venues where friends and family can gather over bubbles. But I think there is something more going on.

Consumption may still be occasion-driven, but it seems to me that the occasions have changed in at least two ways. First, given the impact of covid restrictions, it seems like many have opened themselves up to sparkling wine’s ability to brighten any day and not just Hallmark card celebrations. Thanksgiving at the Wine Economist household, for example, featured a different sparkling wine on each evening of the extended weekend. Bubbles work nicely with the rich food and they can sure elevate leftovers!

To Champagne … and Beyond!

A second change is that the sparkling wine spectrum, which starts with Champagne and then fans out in all directions in terms of style, grape variety, and origin, has broadened. Prosecco’s great pre-pandemic success has continued, but there is more to it than that.

An unlikely place to observe this important trend is on the victory podium of a Formula 1 race, where drivers have for some years now celebrated by gulping down and fiercely spraying jeroboams of Champagne.

This season, however, the wine of choice wasn’t from France (although it was made from the same grape varieties using the same traditional method). It came from the mountain vineyards of Trentino in Italy and was made by Ferrari — Ferrari Trento, the Trentodoc wine producer, not the Modena-based maker of the sleek red race cars with the prancing horse badge.

Ferrari Trento is one of the world’s leading sparkling wine producers. Earlier this year it was named Sparkling Wine Producer of the Year at the Champagne & Sparkling Wine World Championship. The brand is known throughout Italy and beyond. Indeed, Wine Intelligence named Ferrari the most recognized wine brand in Italy. That’s wine brand, not just sparkling wine brand.

When wine lovers think of sparkling wine in Italy, Ferrari Trento is on their minds (along with Prosecco maker Bisol 1542, a sister winery in the Lunelli Group). Ferrari Trentto exports 15% of their production to over 70 countries (the US, Germany, and Japan are the top three export markets). Italy’s domestic market accounts for 85% of sales.

Taking Ferrari for a Test Drive

We have been meaning to visit the Ferrari Trento headquarters for several years, but it just never happened and now with covid protocols the trip is postponed again. So Sue and I jumped at an invitation to participate in an online media tasting event with Marcello Lunelli, Ferrari Trento’s chief winemaker. We were sent three wines: – Formula 1 Limited Edition NV blanc de blancs, Ferrari Perlé 2016, and Giulio Ferrari Riserva del Fondatore 2008. All three wines are 100% Chardonnay hand-picked from high-elevation mountain vineyards in the Trentodoc zone. Super wines, but very different.

The NV Formula 1 spent 38 months on yeast but was noteworthy for its freshness. It’s the wine that new F1 Champion Max Verstappen can be seen chugging from the big bottle in the image above. Bone dry and refreshing — that’s my tasting note. It is too good to gulp down like that and I hope McLaren F1 driver Daniel Ricciardo doesn’t insist on a “shoey” — drinking the wine from his own sweaty shoe — the next time he’s on the podium.

The Perlé wine is a step up the ladder in terms of grape selection and winemaking — the wine rests at least 50 months on yeast. What struck us about this wine were its savory notes, which called out for food. It paired nicely with schnitzel and salad. About a million bottles are made each year, a significant quantity given that the entire Trentodoc appellation accounts for about 20 million bottles of sparkling wine each year.

The Giulio Ferrari Riserva del Fondatore is the summit for Ferrari Trento, with grapes from a special vineyard and aged on the yeast for at least 10 years. I admit that I haven’t had the nerve to pop the cork on this wine yet. It may be that everyone is more casual about sparkling wine occasions now, but this wine seems to demand a serious occasion, especially given its aging potential.

The Year of Sparkling Wine

It was fascinating to hear Marcello Lunelli talk about his wines and winemaking in the Trentodoc zone. The mountain environment presents challenges, of course, but also opportunities, he noted. The winegrowers expect climate change to increase growing season temperatures, for example, which can be mitigated to a certain extent by establishing new vineyards at even higher elevations.

Lunelli recognizes that wines like his are luxury products and you can see it in the glass, the bottle, the presentation. Given this, you might be puzzled at the images of Max and Lewis and the other F1 drivers chugging Ferrari Trento wines and spraying each other and the crowd. How does this make sense given the wine’s luxury cachet?

Well, I think it might be one of the many reasons why 2021, Ferrari Trento’s first year with Formula One, is my Year of Sparkling Wine. F1 is a global phenomenon and Ferrari Trento’s place on the podium sends a strong message to F1’s vast global audience about sparkling wine in general and wines from the Italian northeast in particular.

So a toast to 2021, the Year of Sparkling wine, and to Ferrari Trento and all the other producers who have made up appreciate the beauty of bubbles to enrich our lives.

A Keynesian Theory of Investing in Fine Wine

December 21, 2021 By Mike Veseth in wine, wine history, wine investment 2 Comments

Fine wine has been a hot alternative investment category this year, as Blake Gray recently reported in his Wine-Searcher column. Fine wine investment is a very specialized field and anyone who is interested in taking the plunge is advised to get acquainted with research on the topic, especially including the reports from Liv-Ex, a leading fine wine trading platform.

Drinkers, Collectors, Investors

I divide the world of fine wine buyers into three over-lapping groups: drinkers, collectors, and investors. It is important to “know thyself” in this taxonomy. We are drinkers here at the Wine Economist household and, although we have a few special bottles squirreled away to share with friends at the right moment, it isn’t a collection or investment.

I have only a few friends who are really fine wine investors, although many of the collectors I know sometimes speak about their collections in investment terms. The key is what you do when a particular wine has reached its market peak. Do you drink, sell, or hold?

An investor sells, of course, and takes the profit if there is one. A collector holds because now the wine is ever more precious as a collectable. A drinker has no decision to make — the wine is already gone. What do you do?

I was introduced years ago to a wealthy man who generously endowed scholarships at my university. He liked to talk about wine and economics, so we got along very well. “I never pay for my wine,” he once told me. For every case of fine wine he bought to drink he also bought one with the clear intention to sell for profit. The investment gains paid for the wines he drank and, since he sometimes shared bottles with us, I cannot criticize his logic!

Drinkers buy what they want to drink, obviously, which is a matter of personal taste. Collectors buy what they want to hold, which can be influenced by many factors including status and rarity (with a nod to economist Thorsetin Veblen, I have called this “conspicuous non-consumption”). What should investors buy? This got me thinking about John Maynard Keynes, one of the 20th century’s most influential economists.

Keynes and the Beauty Contest Dilemma

Keynes was an investor and a wine lover as well as an economic thinker, but I can’t find evidence that he invested in fine wine. From what I know he was more of a drinker, like me. When asked late in life if he had any regrets, he replied that he regretted that he did not drink more Champagne.

It is possible Keynes’s advice about investment in general can provide some useful insights into fine wine investment. Keynes once compared investment in the stock market to a kind of contest that was popular in the Sunday newspapers of his time. The newspapers printed pictures of a number of women and asked readers to rank them according to their attractiveness — a classic “beauty contest.” Times were clearly different — I cannot imagine such a contest today, can you?

The winner of the reader contest wasn’t the entrant who got the answer right — because there was no right answer. Beauty is in the eye of the beholder or, as an economist would say, de gustibus non est disputandum. No, the winner was the person whose choices came closest to the choices of all who entered. The wisdom of crowds in action!

So, Keynes noted, while a naive person would just choose the photo that seemed the prettiest, a clever person would try to guess what others would do and rank them accordingly regardless of personal preference. And a strategic person would assume that others were clever and so take this into account.

The winner, according to Keynes, is the person who best guesses what other people will think other people will do. And that, my friends, was the foundation of Keynes’s investment strategy, or at least the part that he discussed in one of his books. You don’t buy shares in the company you think will be most successful, you look for the stock that other people (the ones who will buy the shares from you at a profit) will think other people (the ones who they hope will buy the shares from them) will favor.

Other People’s Money

Do you see how this analysis applies to fine wine investment? Wine drinkers buy what they like and so are likely to make wide-ranging purchases since wine offers such great variety.

Wine collectors sometimes buy what will impress their friends and try to guess what they might be and so their purchases are likely to have a much narrower range. Wine investors, however, make purchases based on what they think other people will think other people will do with their money and so are likely to focus on a relatively small number of “blue chip” wines — those that are most likely to meet the “other people – other people” criterion.

Many have noted that the range of investment wines seems to have broadened to include some American and Italian wines in addition to top tier Bordeaux, Burgundy, and Champagne. That is a good thing, since investment markets should be broad and deep if they are to serve real investment needs by providing liquidity and the opportunity for diversification.

Otherwise investing in wine or anything else is a little bit like investing in emerging economy stock markets, which are often dominated by a small number of equities and experience boom-bust price behavior driven by liquidity dynamics. If your 401K account includes investments on the Turkish stock market, you know what I am talking about.

Bottom line: I am not going to advise you whether to invest in fine wine or not or which bottles are most likely to pay off. But this advice I give freely: wine investor, know thyself!

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Sue and I wish all Wine Economist readers a happy holiday season!

Frogs, Tides, and Wine: the Adventure Capitalism Boom

December 14, 2021 By Mike Veseth in economic crisis, Unified Wine & Grape Symposium, wine, wine investment, wine markets 4 Comments

How is the changing investment landscape affecting the wine industry? Some thoughts on adventure capitalism and wine (and frogs and tides at the very end).

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The cover story on the November 27 issue of the Economist newspaper was “Adventure capitalism: startup finance goes global.” It wasn’t, as this illustration might suggest, a story about Bezos and Branson and how their billions were powering rocket adventure tourism in near space. That’s interesting, but it’s another story.

VC become Ad-Venture Capital

The article traces how venture capital (VC) has gone from a niche investment space to something that seems to be much broader and more pervasive. VC is usually thought of as early-stage private investment in privately-held tech and science firms. The old world of VC was mainly focused on the US and just a few sectors — think Silicon Valley start-ups. The idea was to invest early on in what in the best-case scenario might turn out to be a unicorn firm — one that would achieve a billion-dollar valuation while still in private hands and then go public in a big way. Ka-Ching!

High risk is one reason the Economist calls this Adventure (rather than Venture) capitalism. VC is inherently risky. The investments are by their nature illiquid and you need to hit the target with some very successful investments to offset the inevitable disappointments. I suppose it is a little bit like the old joke about the wine business — the best way to make a small fortune is to start with a big one. But of course some investors do very well indeed.

The Economist argues that VC is changing — being disrupted just as it has disrupted in the past. The VC world has broadened beyond the narrow set of sectors of the past and beyond the US. It has also changed as huge amounts of money have poured into VC firms. The fact that there are more investors taking risks doesn’t make the system less risky.

The Problem of Return-Free Risk

There are a number of factors powering the rise of adventure capitalism, but perhaps the most important is the scarcity of positive real returns in some traditional sectors and the consequent logic of assuming higher risk to achieve higher return. Necessity as much as entrepreneurship drives the trend.

It used to be said that US Treasury bonds were “risk-free return,” for example, and so good foundational investments for a variety of individuals and institutions. Now, an investment advisor I know says, Treasuries are “return-free risk.” The interest return is negative in real terms (below the prevailing rate of inflation) and prices are volatile. This fact forces investors to explore all the nooks and crannies of the financial world to meet their needs.

The VC boom isn’t the only example of their trend. You might not have heard of SPACs (special purpose acquisition companies) before this year, but they are now a big enough market niche to be going through their own boom-bust cycles. Some call them “blank check funds,” which suggests something about the times when high net-worth investors decide it is a good idea to hand a financial advisor (sometimes paired with a sports star or celebrity of some sort) a blank check to buy a private company.

There are also NFTs (non-fungible tokens) that sometimes trade for high amounts. I suppose there could be a SPAC that invests in funds that acquire NFTs — what could be better? And I understand there are active markets in virtual assets on metaverse platforms.

This Changes Everything?

If you want to consider how far investors will go to get a return, consider that huge amounts that some recording artists have received for their back catalogues of songs. A steady flow of fees from music streaming services apparently looks really good when the alternative is something like return-free risk.

The list of investors who are plunging into the world of adventure capitalism investing is amazing, including billionaires and speculators, of course, but also what we might usually think of as very conservative institutions such as university endowment funds and public sector pension funds. (I recently reviewed the endowment report of a major mid-west university that had 22% of its assets invested in private equity and venture capital.)

These institutional investors, who once focused on blue-chip investments, now find themselves pulled into higher risk illiquid investments by the gravity created by their need to achieve certain rate of return targets. Most institutions that I monitor aim to increase their private equity and VC profile in the future.

One important question is this: what happens to all of these investments when the economic environment changes, as it looks like it is doing now, with higher inflation pushing interest returns up and the big quantitative easing flows tapering off at least here in the United States?

Wine Investment Booms

So how is this a wine story? The Economist is right that investments in risky and illiquid assets is no longer limited to traditional venture capital firms and Silicon Valley sectors. It is hard to follow the wine business in 2021 without noting all of the investment activity. Acquisitions (Sycamore’s purchase of Ste Michelle Wine Estates, for example), SPACs, and big moves by some institutional investors, too. Lots of money searching for returns in winery and vineyard investments.

Everyone seems to want to get on the NFT bandwagon, for example. Even Penfolds, the iconic Australian brand owned by Treasury Wine Estates is piling in. According to one report,

Australia’s most celebrated wine-maker is going digital with the announcement that Penfolds is teaming up with non-fungible token (NFT) marketplace BlockBar for an innovative new project. The partnership will see a limited edition NFT tied to the impossibly rare Penfolds Magill Cellar 3 barrel made from vintage 2021. According to the iconic Australian brand, only 300 will be made available, for the cool sum of USD$130,000 (AUD$180,00).

And Penfolds isn’t the only producer to exploit interest in NFTs. Barossa winemaker Dave Powell is offering the entire 2021 vintage of his wine through sale of NFTs. Is the wine’s value greater when linked to a NFT? Many apparently think so in the same way that some firms are trying to raise their profile by linking to blockchain (Square, the payments company, is now Block).

Better than Birkin?

Fine wine has done very well as an “alternative” investment in this environment and I have received several emails promoting funds to invest in fine wine assets. According to a recent article in Forbes, fine wines topped the list of alternative investments over the last decade, a list that includes blue chip art and furniture, classic autos, and colored diamonds. Wine’s rise to the top of the pile was noteworthy because it has now outperformed the previous leader … handbags! Gosh those Hermès Birkin bags did really well — I assume you have a bunch of them in your retirement portfolio, yes? Nah — me neither.

I think it is clear that wine is part of the adventure capitalism story — how could it escape such a broad, powerful trend? So the questions I asked above apply to wine, too. What happens when the economic environment changes, as it seems to be doing now? Which of these investment strategies will endure and which will fade away?

Frogs and Tides

Many, including the Economist, seem to be enthusiastic about the adventure capitalism trend and all that goes with it, but it makes me nervous. It seems to me that this is a process that normalizes risk without actually reducing it. Having taught university classes on financial crises and written a couple of books on this topic, I take risk very seriously (and I don’t think I am alone).

The current investment environment in wine and more generally reminds me of the parable of the frog in the pot on the stove. The water heats up slowly, so you kind of get used to it. Once you realize that things have started to boil up it is too late.

I will therefore be watching closely as the monetary life-support system tapers off and interest rates rise. As Warren Buffet is supposed to have said, you never know who is swimming naked until the tide goes out!

Gearing Up for the 2022 Unified Wine & Grape Symposium

December 7, 2021 By Mike Veseth in economic crisis, Economic impact, Unified Wine & Grape Symposium, wine, wine markets Leave a comment

The Unified Wine & Grape Symposium is North America’s largest wine industry gathering — a vast trade show and ambitious collection of seminars and presentations with something new and useful for every wine professional.

The 2020 Unified was the last in-person wine conference that Sue and I attended before the pandemic closures and protocols hit. So we are looking forward with more than the usual amount of excitement to the 2022 Unified, which is scheduled for January 25-27 in Sacramento.

Trade Show by the Numbers

Last year’s Unified was a virtual event and a very good one, but wine is a people business and nothing can fully replace the in-person experience. The two-day trade show will take place in the newly renovated SAFE Credit Union Convention Center on January 26 and 27. Covid protocols will be followed, of course.

You will find 760 booths and 40 large vineyard and winery machinery areas filled with just about everything anyone might need to grow grapes and make and sell wine. If you want to know what’s new, this is the place to find out.

If you haven’t been to the Unified before, you might enjoy reading New York Times wine expert Eric Asimov’s report on his visit to the trade show in 2017. It is interesting to see the event through Asimov’s critical eyes.

Problems and Opportunities

The 2022 conference program features an expanded three full days of meetings January 25-27. The typically ambitious agenda is organized around wine industry problems and opportunities as the Daily Schedule makes clear. There is a strong emphasis on positive take-aways — practical approaches to dealing with wine industry issues and information to help us all make sense of our changing world.

The wine world has changed dramatically in just a short period of time and the themes of this year’s program take this into account, with sessions on environmental shifts, smoke taint problems, new marketing directions, and attracting and retaining essential talent. Two sessions are in Spanish.

State of the Wine Industry

Once again this year I will be fronting the Wednesday morning “State of the Industry” session. I’ll set the stage by analyzing the changing wine market from a global perspective then the all-star line-up takes over: Danny Brager (changing consumer trends), Steve Fredricks (the supply side of the wine market), Mario Zepponi (investment trends, M&A activity), and Jeff Bitter (grower trends and issues).

Danny Brager returns to the podium at the session’s end to recognize wineries that were particularly successful navigating the wine dark seas in 2021. Lots of information and analysis packed into a 2-1/2 hour session.

I don’t have to tell you that 2021 has not been the easiest year for those of us in the wine industry, so look forward to honest, straightforward analysis with a focus on practical strategies as we move ahead into the uncertain future.

The Unified is back. See you there!

What’s New (and Not-So-New) in Port Wine

November 30, 2021 By Mike Veseth in Uncategorized 6 Comments

I was binging on YouTube videos from Kevin Zraly’s 2009 “60 Second Wine Expert” series when I stumbled upon his take on Port wine. Sue and I are fans of Port, so I was a little disappointed to see Zraly reinforce some of the attitudes that hold back the growth of the Port market. Port? Complicated to understand and you should really only think about drinking it when your kids are asleep, it is cold and snowy outside, you have a warm fire in the fireplace, and a loyal dog at your feet. That was the Zraly video’s advice on Port.

This isn’t how I think of Port and it isn’t a picture that is really helpful to Port producers who want to draw consumers into the Port experience. Maybe talking about Port in a beat-the-clock 60 second video doesn’t do it justice. What are Port producers doing to get their message out?

Taylor’s Port Season

There is no particular season for Port at the Wine Economist household — different types and styles of Port lend themselves to different occasions year around. Summertime backyard meals, for example. seem to begin with our favorite White Port spritz, often featuring Taylor’s Chip Dry. Taylor’s and its parent, the Fladgate Partnership, have put all their chips on the Port market — they do not make any other styles of wine, which means they need to expand the perceived Port-drinking windows beyond Zraly’s snowy snowy night.

As you can see from their recent promotional video, Taylor’s has declared “Port season.” Fun, festive, romantic, a glass of Taylor’s LBV Port seems to make any occasion special. The trick, of course, is getting that first glass poured so that people can see what they have been missing.

New Looks and Old

They say that you can’t judge a book by its cover, but everyone does it all the time. You eat (and drink) with your eyes first, the ubiquitous “they” also say, so it isn’t surprising that Port producers are tweaking their packaging in many ways to try to catch consumer eyes.

Graham’s Six Grapes Reserve Port is versatile and delicious — Sue like’s it with dark chocolate “cat’s tongue” treats. Symington Family Estates, which owns the Graham’s brand, has freshened-up the presentation with a redesigned bottle that tweaks the presentation in subtle ways to give a more premium look and feel.

Down the road at Taylor’s you can find both old and new packaging efforts. The new is the Chip Dry Portotonic, a White Port Spritz in a can. Pretty radical for Port! At the same time, Taylor’s has launched a series of special Reserve Port packages that invoke Port’s long history by drawing on bottle designs from the past. The most recent edition is called “The Mallet,” Here is the history behind this unexpected bottle shape.

At the beginning of the 18th century, bottles were hand blown and bulbous in shape. They could not be laid on their sides and were therefore unsuitable for long term ageing. Instead, they were used mainly to convey the wine from the wine merchant’s cask to the consumer’s table. Because bottles were expensive, they were re-used and often displayed the crest or initials of their owner.

As the 18th century progressed, bottles became taller and more cylindrical. The early bulbous ‘onion’ shape gradually evolved into a more elongated, straight-sided bottle with a longer neck. The first stage in this evolution was the appearance of the ‘mallet’ shaped bottle which had become well established in England by around 1730. Like their predecessors, the first ‘mallet’ bottles were squat in shape. Their sides were often tapered towards the shoulder rather than completely parallel. However, by around 1750, the ‘mallet’ bottle had developed a more cylindrical form. This Limited Edition bottle is inspired by the ‘mallet-cylinder’ bottle from that period, the immediate predecessor of today’s cylindrical wine bottle.

Cocktail Hour for Port

Although it is hard to top a glass of Port by itself, there is no denying that it also makes a great base for cocktails (as the White Port spritz example shows). The combination of great flavor and lower alcohol (compared with spirits) is very appealing.

Graham’s Blend No. 12 Ruby Port has been introduced to fill this market niche and it comes in this colorful bottle, which hints at the fruit flavors to be found within. The idea is to appeal to consumers who don’t drink Port but are interested in experimenting with cocktail beverages. As Vicky Symington notes,

It has been great to see people explore the Graham’s range after discovering port through the Blend Nº5 White Port, often in a port & tonic. We are confident that Blend Nº12 will also resonate with people who don’t typically drink port – be it as a delicious and approachable straight serve or mixed in a long serve.

The Classics Endure

I admire that Port can both change and endure. It adapts to satisfy each generation as it emerges, but doesn’t forget who it is. That’s something we can all appreciate.

So I wasn’t completely surprised when Sue announced her choice of a wine to pair with dessert for Thanksgiving: Sandeman 30 years old Tawny Port that we received as a gift on a visit to Porto. The back label advised to pour the wine into large glasses and let it sit a short time to allow the aromas to unfurl themselves.

Your patience will be rewarded, the label advised. And it was! Cheers to Port wine and Port lovers everywhere.