The Bottleneck Bottleneck

May 30, 2010 By Mike Veseth in economic crisis, Fielding Hills, Gallo, Supply and Demand, wine awards, wine distibution, wine law, wine spectator 2 Comments

Bottlenecks are always problematic. It seems like they are always too narrow or not narrow enough.

We ran into an unusual bottleneck last week when were went to Wenatchee to help our friends Mike and Karen Wade bottle the 2008 vintage at the Fielding Hills Winery. FHW is award winning 800-case operation and the bottling is done by a volunteer crew of friends, family and wine club members. I wrote about it in one of my first blog posts, comparing the wine bottle assembly line to Adam Smith’s famous pin factory.

Bottleneck Bottleneck

The division of labor does improve efficiency, just as Smith said, but anyone who’s worked an assembly line knows about bottlenecks – the whole process only moves as fast as the slowest work station. If the corker is slow, for example, nothing else will go very fast. (The corker was no slacker on our shift – John Sosnowy of the Wine Peeps blog.)

Our crew worked very well, but there was still a bottleneck, albeit an invisible one. The capsules that fit over the bottle’s neck hadn’t arrive (a bottleneck bottleneck!) – they were held up somewhere in customs in a container that must contain hundreds of thousands of capsules for many wineries. We bottled the wine, but when the capsules finally arrive it will be necessary to open each of the 800 cases, pull out every bottle, affix the capsule, return and reseal. That’s about 10,000 bottles. What a headache! I hate bottlenecks.

The biggest bottleneck in the American wine business, of course, is distribution. With 51 different sets of state rules and regulations and the three-tier winery/distributor/retailer/consumer system, it sometimes seems like making wine is the easy part – getting it to customers is the bigger problem. Widening the distribution bottleneck seems to me to be a key to expanding the wine market and building a more robust American wine culture.

Tightening the Distribution Bottleneck

The Obama administration seems to want to build up the U.S. wine industry – that’s why he sent Commerce Secretary Gary Locke to Hong Kong to sign an agreement to ease the wine export process and open that bottleneck a bit.

But Congress is moving in the opposite direction. Wine Spectator reports that more than 100 members of Congress have announced support for H.R. 5034, a bill that would further restrict direct wine sales in American. It would make it (even) harder to ship wine across state lines. Wine Spectator reports that wine distributors (who benefit from their key position in the three tier bottleneck) actively support the bill.

The supporters of H.R. 5034 argue that direct shipping undercuts the power of states to regulate alcohol distribution and sales, and I understand this logic. But the winery owners I know actually go to extremes to satisfy state regulations because the penalties for making a mistake are often extremely onerous. (I know one winery that has stopped all interstate sales for now because of compliance concerns.)

Focus on Direct Sales

The slack economy has put direct sales in the spotlight. With wine sales down in many categories and price points still eroding, wineries are trying to boost the yield per bottle and increasing direct sales and reducing the flow that goes through distributors is one way to do that. Isenhower Cellars in Walla Walla has actually reorganized itself (and opened an off-site tasting room) so that it can rely entirely on direct sales. Their website announced that

Isenhower Cellars is no longer selling wine to restaurants, wine shops, or grocery outlets in Washington State. Our wines are now exclusively available from the winery in Walla Walla, Washington, our tasting room in Woodinville, Washington, or here on our web site. We treasure the past relationships with our Washington State distributors and friends in the wine trade. However a complete focus on quality limits production to 2,000 cases of wine and the success of our wine club and second tasting room leaves no extra Isenhower wines available for sale outside of our winery’s embrace.

Even E&J Gallo, which has done quite well thank you during the recession, is trying to increase direct sales. I’m on a couple of email lists for Gallo wine brands that I follow and they frequently offer nice discounts or low cost shipping to try to encourage orders from their online wine shop, The Barrel Room.

It seems inconsistent to send Gary Locke to China to expand wine exports and then discourage the equivalent interstate trade. As an economist, I am naturally biased toward more choice and freer trade. I hope the attempt to tighten the wine shipping bottleneck gets caught in some legislative bottleneck somewhere down the line and never reaches President Obama’s desk.

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Thanks to Karen, Mike and Robin Wade for their hospitality and great wine. Thanks to the members of the 2008 FHW Cabernet Franc bottling crew both a fun and productive afternoon.

Cracking the Chinese Wine Market

May 23, 2010 By Mike Veseth in China wine, emerging wine regions, Portuguese wine, wine exports, wine markets, wine price 5 Comments

Portuguese Wines in Beijing

President Obama wants to double U.S. exports within five years. With this in mind he recently sent Commerce Secretary Gary Locke to Hong Kong to sign a Memorandum of Understanding (MOU) on Cooperation in Wine-Related Businesses. The press release says that

The United States is one of the leading wine-producing countries in the world, and American wines have been growing in stature internationally for decades as people around the world have learned what American wine producers and consumers have known for years: American wines are outstanding,” Locke said. “Working with the Hong Kong government, we want to create opportunities to heighten exposure to American wines in Hong Kong and the region. This MOU will help do just that.

“Hong Kong and the region” … I think that would be code for China. Everyone wants to crack the Chinese market, something that is easier said than done. I’ve written about this problem before (see “Wine and the China Syndrome”). Sean, one of our recent graduates, wrote his senior thesis on the challenges and opportunities of exporting Washington wine to China. Sean identified a number of significant political, economic and cultural barriers that American wine exporters must overcome. He was optimistic regarding the long term, but very cautious about short term success. (Secretary Locke, you might want to give Sean a call.)

Cracking the Chinese Market

Everyone looks hungrily at China with its growing economy and expanding consumer base. But it is hard to break in. Bulk wine imports are substantial (imported wines get blended with local products and labeled “Chinese wine”), but at unsustainably low prices. No future there.

France and Spain have had better luck. The French have been able to leverage their reputation and the prestige of their finest producers to carve out a attractive niche markets for Bordeaux and Champagne as luxury products.

The Spanish achieved success through old fashioned hard work. They have partnered with Chinese wine producers in both production and distribution. If Chinese wines are improving in quality (and I understand they are) then this is at least in part due to technical improvements facilitated by joint ventures.

Miguel Torres has been particularly active in partnerships and ventures of all sorts. You might be interested in their everwines project, which was recently launched in an attempt to develop a western style Chinese wine culture. If you check out the site be sure to click on the Online Shopping link to purchase a variety of international wines in the $20 range and also Opus One for about $550 and a first growth Bordeaux for more than $1200.

Any Port in a Storm

The U.S. is obviously not the only wine producing country with China on its mind and I was pleased to receive an invitation from ViniPortugal to participate in their recent China seminar program and tasting of Portuguese wines. Sixteen winemakers flew from Lisbon to Beijing to present and promote their wines. A good chance to observe this Old World wine country’s China strategy in action.

Beijing is a long way to go for an afternoon tasting, so I was represented by my crack China wine research team, Matt Ferchen (Assistant Professor of International Relations at Tsinghua University) and Steve Burckhalter (who works as a translator for the Chinese public relations firm BlueFocus). Matt and Steve are former students of mine at the University of Puget Sound and keen observers of rapidly changing Chinese markets.

Matt said that he was impressed with the wines he tasted.

The first wines I tasted, and the ones I ended up liking the best, were from a cooperative called Adega Coop. De Borba. A couple of the wineries were family owned and there was a kind of earthiness to the wines that I really enjoyed. I was especially impressed with the Portuguese whites, which were all very crisp and I think would go very well with spicy Chinese food.

I find that most of the wines available in Beijing, both foreign and Chinese, are expensive and mediocre or cheap and bad. Across the board the price to quality ratio was just excellent and I really hope that some of these wineries can find distributors here … [but] …there was only one of the wineries that had any presence in Beijing.

So the product is good and a good value. But that doesn’t necessarily solve the Chinese market puzzle.

Most of the representatives seemed rather disappointed that the turnout at the tasting was quite small and that many of those who were in attendance weren’t in the wine business (i.e. they didn’t see many prospects for finding distributors even if they found possible retail customers). I was asking some of the representatives why Portugal seemed so far behind Spain in terms of entering the Chinese market, especially given what seemed to me the outstanding quality of their product. The answer mostly just seemed to me a question of focus, that somehow the Spanish wine organization was just more aggressive about getting Spanish wines to China and advertising.

Steve also commented on quality and value — and the problem of focus and establishing reputation.

The[seminar] speaker, who I believe was a Chinese man from Macau, noted the long history of wine making in Portugal, the long time presence and popularity in Macau (“We drink this all the time in Macau”), the diversity of wines they are able to grow thanks to the wide range of different climates in Portugal, wines unique to Portugal – such as a “green wine” they grow in the North, which he reasoned would do well in China, being ‘fruity and sweet’ – and finally he also stressed that “Nearly all Portuguese wines are reasonably priced. It’s hard to find any in excess of 2000 RMB.”

He also expounded on why Chinese outside of the Southeast regions don’t care for white wines, which I found interesting. As for the growers and the distributors, there was some diversity to be found in “Brand Portugal”. Interestingly, some were insistent on showing tasters how they straddled both New and Old World wine making (actually, the speaker also touched on this, going on about a vineyard that had invited Australian winemakers to teach them in the ways of new world wine). Others, however, were insistent that they were exclusively Old World – “Portugal is Old World. How can it be New World – that’s not us.”

In response to how they were looking to position their wines, one of the winery reps said that they were looking to focus on promoting, above all, their grapes: the varieties, why they grow so well in Portugal, etc. And their other edge (which I heard from several people) is in pricing, “what you get for X RMB in a Portuguese wine is better than what you get for X RMB in a French wine.” That tended to be the dual answer whenever someone brought up how Chinese people generally went straight for French or Italian wines.

A Wineglass Half Full. Red or White?

Based on Matt and Steve’s reports you can be either an optimist or a pessimist regarding Portuguese wines in China. The upside is that there are many potential advantages, cost being one of them. It is obvious that Portuguese winemakers would like to be seen as a “value” fine wine and avoid the cheap and anonymous bulk wine trap. Good thinking.

But then there is a bit of an identity crisis. Old World or New? Well, both – a harder sell. Focus on regions or grapes (or both)? That requires a substantial sustained education program.

Even the most basic question is problematic: red or white? Westerners know that crisp whites like Vinho Verde taste great with Asian foods – great to westerners, anyway. But, as has often been said, the first duty of wine in Asia is to be red.

I’m cautiously optimistic about Portuguese wines in China, especially if they can settle on the right focus and sustain the education/marketing efforts. But they have a long way to go. Steve reports that “I noticed at a store (targeting Western tastes) last night the only Portuguese wines (out of hundreds and hundreds) were four Ports. Haven’t been to Carrefour in a while, but I bet it’s the same deal.”

Good luck to Portugal – and to American winemakers, too, of course. China is a key market for the future. But scaling the Great Wall is a real challenge and many will fail in the attempt.

Money, Music, War and Wine

May 16, 2010 By Mike Veseth in globalization, history, Supply and Demand, wine education, wine science 5 Comments

I’ve just finished reading final papers from The Idea of Wine class I teach at the University of Puget Sound. These essays remind me that wine really is a liberal art and a natural element of an enlightened education.

Jean-Robert Pitte is right (and the French government is wrong) — wine has a place in the college curriculum.

The Greeks realized this centuries ago. They defined a symposium as a discussion over wine! What could be better? Herewith thumbnail sketches of three student papers that suggest the many ways that wine and liberal arts education intersect.

Wine and the Hard Life

Since this is The Wine Economist I’ll start with a paper by an economics student. “The Postwar Decline of the Old World Consumer” addresses the question of why per capita wine consumption in “Old World” countries has fallen so rapidly over the last 50 years. This falling demand is a key factor in the continuing global wine glut and especially the EU’s notorious wine lake. David, the author, turned the question around: why, he wondered, was consumption so high in the first place?

The most intensive wine consumption in France, Spain and Italy in the early postwar years was among laborers and rural workers who expended great energy in their jobs and required high caloric intake. Rough local wine (of the sort that is in excess supply today) was a cheap source of this energy. As European economies modernized and living standards rose the demographics of wine consumption changed. Fewer people engaged in grueling hard physical labor. Life was easier, living standards higher and better nutritional options presented themselves.

Not surprisingly, as the need for wine’s cheap calories declined so did its consumption. Other factors were at work, too, but rising living standards explain an unexpectedly large proportion of the wine consumption decline.

Romantically, we Americans associate wine with the good life and wonder why Europeans would turn away from it. But for some Europeans, at least, wine was part of the hard life and they may be happy to have moved away from it. The wine world will just have to adjust.

Beethoven and Bordeaux?

Megan, a science major, wrote on “The Melody of Taste.” Her paper surveyed the literature on how your perception of wine may be affected by the music you listen to while tasting. I found this paper very interesting in the way that it embraced both science and philoisophy. There is reason to think that wine and music might have some connection, she wrote, because “wine is an aesthetic object and drinking wine is an aesthetic experience.” Wine and music evoke similar aesthetic responses and it is plausible that they would interact on that basis. So far so good.

Science suggests that the link between wine and music might go deeper than this, according to Megan. Brain scan data indicate that sensory experiences from taste, odor and music “target the same areas of the brain, initiating cross-modal processing.” One author argues that because different types of music affect the taste of wine in particular ways, a science (or art?) of music-wine matching (like pairing wine and cheese) might be a serious possibility.

If you want to experiment with wine and music yourself, Megan writes, try this. Buy a $5 bottle of Glenn Ellen Chardonnay. Taste it on its own and then while listening to the Beach Boys singing “California Girls.” I’ve provided the music here — you have to supply the wine. The Beach Boys tune apparently stimulates the right part of your brain to make this value-priced wine taste a lot better.

Megan also reports a study showing that polka-style music makes Sutter Home White Zin taste better, too. Well … of course. Anything would probably help and a polka seems just right to me.

Winemaker Clark Smith has developed a line of wines to be paired with specific musical pieces. Read more about this project at GrapeCraft Wines. I haven’t tried wine-music pairing, but I would be interested in comments from anyone who has.

Wine and War

Let me finish with politics student Hally’s paper on “The Real Story of Unknown Lebanese Wine: A Reason to Survive,” which was provoked by a puzzle. Lebanon has a very long winemaking history and some of its wines (Chateau Musar, for example) have attracted worldwide attention. Why aren’t these excellent wines better known and more popular, Hally wanted to know?

Yes, yes, Lebanon is a long way away and not well known, but that doesn’t seem to stop other wines from unlikely places (think about New Zealand!) from reaching local markets. The answer, Hally learned, is that sometimes wine is affected by war and peace even more than by soil and weather.

Making wine in war-torn Lebanon in recent years has presented far more than the unusual number of challenges. “For Lebanese wine makers, picking grapes and making wine is more an act of defiance against years of repressive wars and religious hatred than it is a business necessity,” Hally writes. “Wine is key to the survival of their spirit through seemingly endless years of conflict.”

Bitter Memories?

After finishing her paper, Hally reports, she was able to track down a bottle of Chateau Musar from a war-torn recent vintage when practically no wine was made or released due to the constraints of conflict. I’m sure Hally wanted it to have a glorious taste — the triumph of wine over war, but she says it was awful. Corked, I think, from her description. Not what she wanted at all.

What makes a wine memorable? People always imagine that the great flavors and aromas are what make wines special to us, but I have my doubts. Wine is too complicated to be just about its direct sensory effects. Hard times, upbeat music and the determination to struggle through conflict — wine can reinforce these associations, too, and burn them into our memories.

Wine stimulates all our physical senses (taste, smell, touch, sight — even sound if we touch glasses in a toast). But its real power comes from the fact that it also stimulates our minds, triggering memories and inspiring thoughts. Hmmm. I should organize a symposium on that theme!

Wagnerians vs. Martians

May 10, 2010 By Mike Veseth in book reviews, brands, Two Buck Chuck, wine brands, wine distibution, wine history, wine law, wine research 4 Comments

I’ve spent the last couple of days reading Thomas Pinney’s masterful A History of Wine in America (Vol. 2: From Prohibition to the Present, University of California Press, 2005). If you want to understand how wine in America got the way it is, this is the best general reference I have found.

Pinney devotes the last section of the book to what he sees is a fundamental battle for the idea of wine in American. It is a conflict between Wagnerians and Martians, he says.

Song of the Wine Maidens

The Wagnerians are inspired by the ideas of Philip Wagner, a Maryland journalist, viticulturist and winemaker who was especially active in the years that bracket the Second World War. Wagner believed that wine should be an affordable part of ordinary life and a constant companion at mealtime. Pinney writes that

Wagnerians are always delighted to have a bottle of superlative wine, but their happiness does not depend on it, nor are they so foolish as to think that only the superlative is fit to drink. Their happiness does depend upon wine each day … good sound wine will not only suffice. It is a necessary part of the daily regimen.

Wagnerians sing an appealing but fundamentally radical song in the American context, where wine is just one of many beverages and not always the cheapest or most convenient to purchase. Regulations that treat wine as a controlled substance are very anti-Wagnerian.

Wagner founded Boordy Vineyads and was well-regarded by wine people from coast to coast. He is an important figure in the history of American wine, according to Pinney, and one whose idea of wine lives on in many forms. I guess you could say that Two Buck Chuck is a Wagnerian wine, for example, although I think there’s a lot more to Wagner’s idea of wine than just low price.

Wagner promulgated his populist vision by promoting the so-called French Hybrid grape varieties on the East Coast and elsewhere. I think he wanted America to be Vineland (the name given it by the Viking explorers), a country covered with grapevines and abundant with honest, respectable wine. This is easier said than done, however, as Pinney’s history makes clear.

My Favorite Martian

Martians are inspired by Martin Ray’s idea of wine. Whereas Wagner was disappointed that America lacked a mainstream wine culture, Martin Ray was upset that the standard was so low in the years following the repeal of prohibition. He persuaded Paul Masson to sell him his once great winery in 1935 and proceeded to try to restore its quality with a personal drive that Pinney terms fanatical.

He did it, too, making wines of true distinction — wines that earned the highest prices in California at the time. His achievement was short lived, however. A winery fire slowed Ray’s momentum and he finally sold out to Seagrams, which used a loophole in wartime price control regulations to make a fortune from the Paul Masson brand and its premium price points, starting a trend of destructive corporate exploitation that forms a central theme in Pinney’s book.

The Martian view, according to Pinney, is that “…anything less that superlative was unworthy, that no price could be too high, and that the enjoyment of wine required rigorous preparation.”

Ray’s history is therefore especially tragic since his attempt to take California wine to the heights through Paul Masson ended so badly. Paul Masson today is an undistinguished mass market wine brand — as un-Martian as you can get.

When wine enthusiasts of my generation think of Paul Masson (now part of the Constellation Brands portfolio), it is often because of Orson Welles’ classic television ads, like this one from 1980 promoting California “Chablis.” Roll over, Martin Ray!

Two Ideas of Wine

Martians and Wagnerians have two very different ideas of wine and it is a shame that one needs to choose between them. It seems to me that wine could and should be both a daily pleasure and an opportunity for exceptional expression. The good isn’t always the enemy of the great. But many people see it that way, including Pinney, who reveals himself to be a Wagnerian and expresses concern that the Martians have won the bottle for wine in America.

The people who write about wine in the popular press largely appear to be Martians, who take for granted that anything under $20 a bottle is a “bargain” wine and who routinely review for their middle-class readership wines costing $30, $40, $50 and up. Even in affluent America such wines can hardly be part of a daily supper. They enforce the idea that wine must be something special — a matter of display, or of costly indulgence. That idea is strongly reinforced by the price of wine in restaurants, where a not particularly distinguished bottle routinely costs two or three times the price of the most expensive entrée on the menu.

“No wonder, Pinney concludes,” that the ordinary American, unable to understand how a natural fruit product (as wine undoubtedly is) can be sold for $50 or more a bottle, sensibly decides to have nothing to do with the mystery.”

Monolithic Thinking?

I guess I am a Wagnerian, too, if I have to choose, but I’m not as pessimistic as Pinney. I’m about to throw myself into full-time book-writing mode: I need to finish my current project this summer so that it can be in bookstores in early 2011. The more I work on this project the happier I am with its upbeat title.

Grape Expectations started out as a simple pun on the famous Dickens novel, but it has evolved into something more. I have developed genuinely optimistic (if not “great”) expectations for the future of wine and I see the three forces I study in the book — globalization, Two Buck Chuck and the “revenge of the Terroirists” — as possibly bridging the Martian-Wagnerian divide.

Can wine be both common and great? Why not? Wine isn’t one thing, it is many things to many people. No purpose is served in my view, by monolithic thinking. That’s my hope … and my Grape Expectations!

Stags Leap Through the Looking Glass

May 3, 2010 By Mike Veseth in Economic impact, globalization, wine markets, wine research, wine tourism Leave a comment

This week I’m reporting on my research expedition to Napa Valley, where I attended the Stags Leap District Winegrowers Association Vineyard to Vintner’s (V2V) event and ventured “through the looking glass” to consider the past, present and future of wine.

My last post ended with a question: Stags Leap was still an emerging region when I visited in 1980, but it was already attracting a great deal of attention and international investment. Would the influx of big money into the Stags Leap District destroy its great wines or would the terroirists managed to save them? Here’s what I found out.

Follow the Money

The big money certainly arrived and you can see it today in the wonderful facilities that the wineries have created.

Stag’s Leap Wine Cellars was a tiny one-building operation when I visited there 30 years ago. Now that original structure with its oak doors is Building 1 on an expanded campus of facilities that includes a vast arched barrel room and a network of tunnels for barrel storage (I’ve heard these called wunnels — wine tunnels). Everything is sleek and custom made for entertaining clients and visitors as well as making wine.

The barrel room at Stag’s Leap Wine Cellars is gently curved like a barrel stave. The barrels are stacked five deep.

Warren Winiarski is responsible for these changes, but he doesn’t own Stag’s Leap any more. He sold out in 2007 to Italy’s Antinori family. I’ve read that he figured he could trust the Antinori to uphold his vision of wine.

The Antinori partnered with Ste Michelle Wine Estates (SMWE) of Washington State, who they trusted because of their successful joint venture on Red Mountain, Col Solare. (SMWE is owned by Altria, a corporation that also owns Phillip Morris and U.S. Smokeless Tobacco.)

Changing Hands

Stag’s Leap is not the only winery in the district to be acquired big business. Chimney Rock is now owned by The Terlato Wine Group, a company that owns several notable U.S. wineries and is a major force in wine distribution (they represent Gaja and Santa Margherita wines from Italy, for example).

Pine Ridge Winery, which produced its first vintage in 1978, was acquired by the Leucadia National Corporation in 1991, which also owns Archery Summit in Oregon but is is best understood as a diversified holding company investing in manufacturing, telecommunications, oil and gas drilling gaming, entertainment and real estate activities.

So the big money did in fact come to Stags Leap and the many of the wineries they created are rather grand – as far from the simple cellar that I visited 30 years ago as can be imagined.

The Economic Factor

Dinner at Stag’s Leap Wine Cellars

Economics dictated the large scale and luxurious feel of many of today’s Stags Leap District wineries. Winemaking is capital intensive, so it is important to produce in volume. Stags Leap AVA Cabernet Sauvignon (necessarily limited in supply by the AVA’s tiny size) is often therefore produced alongside higher volume “Napa Valley” wines, for example, and Chardonnays from Carneros grapes in order to get volumes up to an economic level. Nothing wrong with that.

The plush feel of the wineries themselves, with plenty of space for entertaining, events and on-site culinary staff, is a product of the practicalities of distribution. Direct sales – to cellar visitors and wine club members – yield more revenue than restaurant and retail sales that must make their way through the tortuous and costly three-tier distribution system. So it is important to build and establish direct-sale personal relationships and to provide appropriate winery facilities.

One winery’s wine club manager told me that nearly 70% of sales came through this direct channel. Wow! That’s a lot of revenue and worth a substantial investment. So it is important to both make good wine and to create a memorable winery experience. Understandable.

But what happens to the wine in the process? Is there so much focus on image and marketing that the wines themselves are an afterthought?

The Mondovino hypothesis

My answer, based on an intense weekend in Stags Leap, is that it ain’t necessarily so. Sure, we tasted a couple of wines (I won’t name the makers) that seemed like they were made to catch the attention of critics more than to capture a sense of place, but for the most part the wines we sampled seemed to be authentic variations on a Stags Leap theme. And the winemakers we talked to spoke with conviction of wine made in the vineyard, not the advertising agency.

Can big multinational money coexist with an authentic idea of wine? Yes, at least in Stags Leap. (Robert Parker goes further — he seems to think that the Antinori/Ste Michelle money and technical attention might actually restore the faded — according to him — glory of Stag’s Leap Wine Cellars.)

So the way I framed my question — money, business and globalization versus terroir — was plain wrong. Money, marketing and multinationals doesn’t guarantee great wine, but it doesn’t make it impossible, either. Wine is too complicated for that.

The pessimistic Mondovino hypothesis that the wine business inevitably destroys wine itself doesn’t always hold. I’m not saying this is true everywhere, but I am quite sure that the somewhereness of Stags Leap has survived these 30 years.

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Thanks to the Stags Leap District Growers Association for inviting us to attend the Vineyard to Vintner program. Thanks as well to Russell Weiss (Silverado), Mark Smith and Jim Duane (Stag’s Leap Wine Cellars), Elizabeth Vianna (Chimney Rock), Tim Dolven (Steltzner), Jeff Virnig (Robert Sinskey) and Michael Beaulac (Pine Ridge) conversations and help in various ways.

Wine Economist in Wonderland

April 27, 2010 By Mike Veseth in globalization, wine brands, wine history, wine markets, wine tourism Leave a comment

Alice entered Wonderland by jumping down a rabbit hole. I got there by walking through this doorway.

It happened 30 years ago and inside the door I met a famous winemaker who was as interested in economics was I was in wine. The result of our chance conversation was my fascination with wine economics and, ultimately, this blog.

Through the Oak Door

This is not an ordinary door. It is made from the planks of a huge oak cask. I rediscovered it a few days ago when I visited Napa Valley to attend the annual Stags Leap District Winegrowers Vineyard to Vintner (V2V) seminar, tasting and celebration.

The Stags Leap AVA can understandably be viewed as Wonderland by wine lovers. It is famous for its distinctive Cabernet Sauvignon wines, including some of the ones that did so well in the famous 1976 Judgment of Paris commemorated in George Taber’s excellent book of that name and the more recent somewhat dubious but nearly always entertaining film, Bottle Shock.

I was in Stags Leap at the invitation of the growers association to attend the events and to consider how wine has changed in 30 years, using the terroir of this region as my test bed.

One Side Makes You Grow Larger …

It was hard to know how Stags Leap and its wines would develop when I first opened the door thirty years ago. There were a lot of indications that the area might turn into what some critics say the whole of Napa Valley has become — the over-commercialized Disneyland of wine.

Although it was only really “discovered” as a winegrowing area in the early 1970s, a lot of money was already focused on Stags Leap when I made my first visit. Clos du Val (first vintage in 1972) was the result of a collaboration between American businessman and wine industry investor John Goelet and Bordeaux winemaker Bernard Porter. It was just the sort of thing that gives Mondovino fans screaming nightmares.

Chimney Rock Winery (1980) looks like a South African Cape Dutch estate because its founder Sheldon “Hack” Wilson made his money selling Pepsi Cola in South Africa. He was the largest volume Pepsi bottler in the world at one point, according to my copy of James Halliday’s Wine Atlas of California.

Silverado Vineyards (1981) — a beautiful winery with a beautiful view — unintentionally reinforces the Disneyland theme because the family of Walt Disney built it, starting with a vineyard purchase in 1976 and continuing today.

It was easy to imagine in 1980 that this trend would continue — and the wines would suffer — as more money flooded into the tiny Stags Leap area.

… And the Other Makes You Grow Smaller

But capital is not always blind (to paraphrase Walter Bagehot). Some of the early Stags Leap investors were the sort of people I have labeled terroirists who value wine for its somewhereness.

I suppose that Dick Steltzner would fit into this group. An experienced viticulturalist, he planted what might have been the first vineyard at the base of the Stags Leap palisade in 1965, finally making his own wine at Steltzner Vineyards in 1977.

Warren Winiarski, the guy who won the red wine competition in the 1976 Paris tasting with his Stag’s Leap Wine Cellars Cabernet Sauvignon, strikes me as a terroirist, too, although perhaps he was just a stubborn, philosophical wine perfectionist. So all the pieces were in place for a battle for the soul of Stags Leap wine.

And Now Which is Which?

Looking back to 1980, it seems like it could have gone either way. Globalization money and media creating Coca Cola wine … or the revenge of the terroirists, preserving the distinctive quality of Stags Leap.

How did the story turn out? Check back in a few days to find out what I think I learned from my fieldwork.

Malbec Boom … and Bust?

April 18, 2010 By Mike Veseth in Argentina, Supply and Demand, wine markets 6 Comments

Malbec is hot and Argentinian producers are harvesting the benefits of a boom market. The Nielsen Scantrack multi-vector retail sales data reported in the April issue of Wine Business Monthly tell the story.

Total U.S. table market sales up 3.0 percent in dollar value over the last 12 months and up 3.5 percent in the quarter.

Argentinian wine sales (mainly but not entirely Malbec) are up 41.4 percent for the year and 36.6 percent in the last quarter. That’s a rate of growth unmatched in the current wine league table — much higher than other New World producers like Chile (5.2 percent growth for the year), South Africa and Australia (falling dollar volume sales).

Only New Zealand is remotely in the same sales growth ballpark with an 18 percent increase in the last quarter.

That’s Why They Call It the Dismal Science

Only an economist would look at this picture and wonder if Argentina’s Malbec boom might foreshadow a coming Malbec bust. Sorry to be so gloomly … can’t help it. That’s why they call it the dismal science. When economists see silver linings they start looking around for the dark clouds that come with them.

Personally, I hope the boom continues for a while at least. It has to come to an end some day, of course, since 30+ annual percent growth quickly compounds its way to All The Wine in the World. Only someone named Ponzi could sell that vision of Argentina’s future.

The idea that bust follows boom isn’t just my dismal side talking, it is a persistent feature of agricultural markets. High prices are great, but when everyone expands production the result is a collapse. Low prices convince producers to invest elsewhere, so supply fails to keep up with demand the prices rise again. Rinse and repeat.

World Wine Wheel

I learned about this cycle back in Econ 101 in the form of the cobweb model of market dynamics. The Turrentine Wine Business Wheel of Fortune (click here for the pdf version) applies this idea to the U.S. wine market in particular.

The 2007 version of the wheel shown above predicted that the U.S. wine industry would be deep into the Emerging Shortage zone in 2010. This obviously didn’t take into account the Great Recession, which has created substantial surpluses of wine today, but I think the general logic still holds.

Data suggests that vineyard plantings are down (at least one major grape vine nursery has shut its doors). My sense is that wine producers have scaled back supply to the level of current demand and that the persistent overall market surplus is mainly the overhang from previous years. Once that is dealt with (easier said than done!) and demand begins to come back, that “emerging shortage” situation could come to pass.

Having a Good Crisis

Meanwhile, Argentina is having a good crisis, at least in terms of wine, as their good value Malbecs have benefited from consumer trends to trade down and trade over. WineSur (a great source for Argentinian wine news) reports new vineyard plantings and winery expansions, calling it “a risky supply and demand game.” Risky and high stakes.

The Catena Family group exported 12 million liters of wine in 2009, according to the article, but has expanded its capacity so that it can produce 19 million liters this year to sell in 2012. “We are running a risk and investing according to our estimates,” chief winemakers Alejandro Vigil reports, “We also continuing buying vineyards … This year we’re planning to implant around 200 hectares … 75% of which will be implanted with Malbec.”

You’ve got to think five or six years ahead in Argentina’s dynamic Malbec market. New vineyards today, more grapes in three years or so when the vines have matured, market-ready wine a couple of years after that. I wonder what the wine market will look like then? No wonder they say that the only person crazier than a winery owner is his banker! Easy to get caught leaning the wrong way under these circumstances.

Will Argentina’s Malbec boom lead to bust? Possibly, but there is reason to think it might not. Nicolás Catena, head of one of the largest firms, is a recovering economics professor (he taught at UC/Berkeley at one point). He came back to wine and Argentina at his family’s request. If, as I think, skepticism is hardwired into the economist’s brain, then perhaps Catena’s big investment in the future is more cautious than it seems and will pay off handsomely.

Conventional Wisdom versus Mark Twain

The decision to expand output and exports forces a second risky choice: focus (on Malbec) or diversify? It is conventional wisdom not to put all your eggs in one basket. But Mark Twain once advised the opposite: Put all your eggs in one basket and watch that basket!

A new article on WineSur addresses this question and the majority viewpoint seems to be with Mr. Twain but this is perhaps understandable since it is Malbec that has put Argentina on the world wine map. Malbec has established Argentina’s identity and reputation and winemakers are understandably reluctant to bet against their own success.

But it must be said that rapid export expansion focused on a single varietal does magnify the risks. I would advise Argentinian wine industry leaders to watch that basket very carefully — invest in their markets so that Malbec becomes a durable phenomenon with good length and not a short sharp boom/bust fad.

Myth of the Level (Vineyard) Playing Field

April 11, 2010 By Mike Veseth in Economic impact, EU wine market reforms, speculation, Supply and Demand, trade policy, wine investment, wine markets 4 Comments

Terrain matters, both in wine and in markets. Many of the world’s best vineyards cling to hillsides or follow natural contours (like the famous Pewsey Vale vineyard shown here).

While wine people seem to appreciate the challenges and opportunities that complicated terrain presents, economists are drawn (at least metaphorically) to tabletops. We think of the world in competitive terms and seek out “level playing fields” where our favorite theories are most applicable.

The Difference Between Vineyards and Soccer Fields

As a wine economist, I can appreciate the flat and the steep of the wine world and I have come to upon a particular irony. Wine market reforms in the European Union are intended to create a level playing field and to encourage, induce and sometimes force winegrowers to compete. The days of big subsidies and routine “emergency” distillation are gone, or will be soon, we are told.

But wine markets are as complicated as the vineyard shown above and establishing a flat competitive arena is not a simple matter. Wine markets are more like vineyards than we like to think. Tariffs, quotas, subsidies and selling regulations can be brought into line, of course, but that is just the beginning. The uneven contours of the market run very deep.

Whither/Wither the Vines?

I was reminded of this by a recent post on the Tablas Creek Vineyard Blog titled “Whither inexpensive, artisanal California wine?” (Tablas Creek is a well regarded maker of Rhone-inspired wines in California’s Paso Robles area.)

The question that the article posed was whether it made economic sense for the winery to develop a new vineyard property to produce high quality reasonably priced wine (the $20 price point plus or minus a few bucks). The answer? Probably not, but with a rather thorough cost analysis provided so you can see how the various factors (land cost, debt service, planting cost, operating cost, even opportunity cost) factor in.

It’s a really good article for anyone who thinks that the decision to start of vineyard or a winery is an easy one. (The sommelier in the video above would do well to read it!)

At the end of the day, the single most important factor was the cost of the land. Even in a depressed market, land costs create a hurdle too high to overcome in Paso Robles.

(Note: I was also struck by planting and operative cost differences associated with dry farming the vines. Much lower cost, somewhat lower yields — worth serious consideration where feasible given the growing water shortage.)

Why are vineyard land prices so high that they make the vineyards themselves uneconomic? Well, the land has many uses aside from the obvious one of growing wine grapes. Speculators might want to buy it to hold and resell, not operate for the long run. Lifestyle investors push up the price because they consider the amenity value of a vineyard home more than the economic value of its grape crop. These alternative demands can push the price above the level growers can afford.

Tilting the Playing Field

This distorts the playing field on which international wine markets operate. Land costs are a big factor for many expanding New World wineries because those costs are so recent that it is difficult to ignore them.

Land costs are often ignored for Old World producers, I am told — especially the thousands of small winegrowers who have owned their land for several generations. Ignoring the cost of capital allows them to sell for less, depressing prices (and therefore, ironically, the value of their land, too). Poor economic choices in the Languedoc tilt the playing field against Paso Robles.

But the loudest cries I have heard in this regard are from Australia, not California, where vineyards that produce grapes for bulk wine find themselves more directly in competition with those economically untutored Languedoc vignerons. The low prices that result when French winegrowers ignore the cost of vineyard capital are not the only or even the biggest source of Australia’s current crisis, but they are certainly a contributing factor.

Stag’s {Stags’} (Stags) Leap

April 4, 2010 By Mike Veseth in Wine Competitions, wine festivals, wine history, wine law, wine research, wine tourism Leave a comment

The Stags Leap District Winegrowers Association has invited us to their V2V (Vineyard to Vintner) program later this month and we are looking forward to the event.

I have a particular interest in the Stags Leap District. My study of wine economics can be directly traced to a conversation with one of this area’s leading winemakers in his cellar many years ago. I’m looking forward to this focused opportunity to learn more about the Stags Leap District today and see what has changed since my last visit.

Money, Wine and Lawyers

The first stage of my research to prepare for the Stags Leap trip took an unexpected turn that reminded me of Warren Zevon’s song “Lawyers, Guns and Money.” Most stories of famous wine regions are about places, faces and wine. They start with places (the terroir), then move to faces (of the famous winemakers who helped establish the region’s reputation) and end with the wines themselves.

Stags Leap AVA certainly has the terroir. The district, about six miles north of Napa on the Silverado Road, is marked by a 1200 foot vertical basalt palisade that is both landmark and a source of the particular soil and microclimate that helps define the district. The growing season is longer in Stags Leap than in other parts of Napa Valley, with bud break coming two weeks earlier. The grapes ripen more slowly during their longer time on the vine, which seems to have a positive effect.

Stags Leap has it famous wine faces, too. The most notable is Warren Winiasrski of Stag’s Leap Wine Cellars. A former lecturer in Greek at the University of Chicago School of Social Thought, he was one of the early movers in Stags Leap. His second vintage, a 1973 Cabernet Sauvignon, was declared the red wine winner at the famous 1976 “Judgment of Paris” wine tasting that Steven Spurrier organized to test California wines against the French originals. (You know about this event if you’ve read George B. Taber’s excellent book on the subject or seen the fictionalized film version, Bottle Shock.)

(Incredibly, the winning wine was made with grapes from three year old vines — infants! Unfortunately, according to my sources here, the vineyard was not in the Stags Leap District but rather farther north in Napa Valley. It established the winery’s and the region’s reputations at once.)

There is even a hallmark Stags Leap style — “perfumey fruit” according to Bruce Cass, although not every wine is made in a way that highlights this.

Lawyers, Wine and Grammar

So where do the lawyers come in? Well, the first thing I did when I started this project was to grab my copy of James Halliday’s classic Wine Atlas of California. Halliday devotes seven pages to Stags Leap places and faces and its distinctive Cabernet Sauvignon wines. But he begins his report with the most controversial part of the AVA’s history: its name and the legal battle over the the valuable intellectual property rights (IPRs) associated with it.

The area takes its name from the legend of a prodigious jump that a stag (or maybe several stags) took on the palisade while fleeing hunters. Warren Winiarski naturally included this colorful reference in the name of his winery, Stag’s Leap Wine Cellars, when he founded the operation in 1972.

But so did Carl Dounami, who started founded Stags’ Leap Winery just up the road, also in 1972. Two wineries, two strong personalities — they battled for years over the right to the Stag’s / Stags’ Leap name. More than an apostrophe separated them, of course, although any grammarian can tell you that where the apostrophe is placed makes all the difference.

The right to label your wine with some variation of Stag’s/Stags’ Leap had obvious economic advantages and both winemakers wanted clear title to the designation. The IPR battle reemerged and intensified when the AVA was formed and its geographic lines drawn.

Clashing economic interests made the process of choosing a name and drawing AVA lines particularly contentious, according to Halliday. The compromise name — Stags Leap (no apostrophe anywhere, purely plural, nowhere possessive) settled the legal squabble, leaving the real task clear: making great wine.

Challenges Old & New

The old wine economics story of Stags Leap was about intellectual property. The new one — the one I want to explore when I visit later this month — is how the winegrowers are dealing with the current economic challenge and will respond to the future ones.

The current challenge, of course, is the continuing economic crisis, which has hit some upscale producers especially hard.

The future challenges? The future is hard to predict, but I’d suggest globalization (with its many threats and opportunities) and climate change, which would seem to be an especially scary prospect for a micro-region like Stags Leap. But maybe I’m missing an even bigger story? I guess I’ll have to go there and find out!

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Here’s Warren Zevon performing “Lawyers, Guns and Money.” Feel free to sing along, adding wine and grammar references as necessary. Enjoy!

Where Does Wine Come From?

March 30, 2010 By Mike Veseth in Fielding Hills, Washington wine 2 Comments

Where does milk come from? Most people will tell you that milk comes from a cow, but it is easy to imagine that a child might be confused and tell you that milk comes from the supermarket or from the milk company because these are the most obvious choices for someone who has never visited a farm.

The links between products and their natural origins are easy to miss or misinterpret in today’s complicated world, with its long and sometimes global supply chains. Christopher Chase-Dunn used to ask his students “where did your breakfast come from?” and the question when taken seriously sometimes really stumped them.

How Wine is Different from Milk

I like to think that wine is different from milk because we have a lot more information about its origins. We know that it comes from grapes, of course, but there is often a lot of specific information available (on the label and on the web) about the origins and production processes. Most wine labels tell us the vintage year, for example, and the production region. Data on harvest dates, brix levels, vineyards sourced, fermentation and aging techniques and so forth are frequently available, too.

We typically know or can conveniently discover a whole lot more about where wine comes from (and when and how it was made) than we typically know about milk. It gives wine a certain “somewhereness” that I have written about before. So it’s easy to get sorta cocky about wine and to think that wine enthusiasts actually drink in all this information and are very well informed about wine terroir. But it would be a mistake to think that everyone is a geeky as I am in this regard.

Taste the Vineyard

If you ask winemakers where wine comes from many will tell you that it is made in the vineyard (vineyards are to wine as cows are to milk, I guess). But consumers don’t always think of it that way, as I learned on Sunday when Sue and I poured wines by several makers using grapes from the Riverbend Vineyard in the Wahluke Slope AVA during the Taste Washington event in Seattle.

Most of the action at Taste Washington was out on the main floor, where about 200 wineries offered tastes of their wines. Our table was in a area designated for vineyards, not wineries. You could visit the Boushey Vineyard table, for example, and taste its terroir as expressed by several different wineries that source their fruit from this famous grower. It was a different way of thinking about wine: vineyards, not varietals or winemakers or AVAs.

It’s an idea of wine much closer to the concept of terroir that wine geeks talk about with such urgency.

Riverbend is the estate vineyard of the highly regarded Fielding Hills Winery, so the people who stopped by to chat and taste with us were able to sample the Fielding Hills 2006 Cabernet Sauvignon and Syrah as well as and a half dozen other wines made from Riverbend grapes by others (including wines by Nefarious Cellars, Soos Creek, Tildio Winery, Hard Row to Hoe, and Chateau Faire Le Pont).

The wines, all excellent, were sometimes very different (the influence of the winemakers) but there were some interesting common threads (the terroir) that could be teased out with a little time and concentration (difficult, I know, in the context of a big tasting event). It was an unusual and interesting opportunity to taste wines in this way and decide for yourself where wine comes from — the vineyard, the cellar or maybe both.

Where Does Wine Come From?

We had a great time and met a lot of great people, but we soon came to realize that the idea of tasting wines from the same place but made by different people was quite foreign to most of the attendees. They knew about the idea of terroir, but that’s not the way they identified wine in practice.

Where does wine come from? From wineries — those tables out on the main floor of Taste Washington — and the winemakers who work in them. The idea of the vineyard’s critical role was something we had to explain. To their credit, a lot of people embraced it and took their time tasting through the wines. I hope they found the time they spent worthwhile (they paid a high opportunity cost for their education in terroir given limited time in a room full of great wines).

I’m always on the lookout for teachable moments and so I liked the challenge of staffing the Riverbend Vineyard table. It turns out that wine is more like milk than I thought — it’s easy to think that it comes from the store or the winery and to forget its natural origins. But you can find terroir if you know where to look and you take the time and trouble to seek it out.

Events like Taste Washington create teachable moments and proponents of terroir-based wines have lots of educating work to do to make the difference between milk and wine even clearer in consumer minds.

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Update 3/31/2010: By coincidence Jancis Robinson has posted an article on her Purple Pages website about the incredible terroir of Washington’s best vineyards. She attended a London tasting of Washington wines and was drawn to the the Cabs made from Champoux Vineyard fruit. Here’s a quick taste of the article.

The highlight of the Pacific North West tasting in London earlier this year was a clutch of very fine Cabernet Sauvignons from Champoux vineyard in Washington state. They reinforced my impression from the rest of the tasting that Cabernet can be a real star among the state’s reds, particularly when the vines are more mature, the site just right and the vineyard manager a perfectionist.

You can find the entire article (including tasting notes) here. It reinforces what I wrote above about the benefits of thinking of wine as a vineyard product.

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Thanks to Mike and Karen Wade of Fielding Hills for inviting us to work the Riverbend Vineyard table. Thanks as well to Robin Wade for all her help. Thanks to all the nice people we met. Great wine, great people, great event.