Wine Economist 10 Under $10 Challenge: Nominations Open

April 14, 2020 By Mike Veseth in Costco, recession, wine, wine price 29 Comments

redblend Last week New York Times wine columnist Eric Asimov published a list of “15 Wines under $15: Inexpensive Bottles for Stay-at-Home Drinking.” It’s always fun and interesting to go through Asimov’s price-constrained wine lists (he often features 20 under $20 wines) and this one got me thinking about wine and coronavirus recession drinking.

Fifteen dollars is a good limit to consider — some wine critics have suggested that $15-$20 is the current “sweet spot” for everyday wines. But, in the spirit of hard times, why not step down just a little more in price and see what we can find?

Good Wines at Good Prices

And so I am soliciting nominations (use the comments section below) for a list of 10 wines under $10. Do you have a favorite wine in this price range? If so, tell us what it is, how much it costs, where you bought it, and why you like it. Sue and I will use some of our shelter-in-place time to vet the list to be published in an upcoming column. Nominations (one per reader) close at the end of April, so you have a couple of weeks to work on this. Drink up!

There are only two rules. First, the wine must be generally available here in the US market, which means basically we are looking at supermarket wines or their equivalent. And, second, the regular price needs to be $9.99 or less. Close-out prices are sweet, but that’s a different story. Unfortunately, I think this rules out Grocery Outlet purchases from the final list, although I don’t object to hearing from you if you have a close-out favorite you’d like to share.

A Tuesday Night Wine

Just to get the ball rolling, I will nominate Red Blend Portugal by Casa Santos Lima, which we bought at Costco for $5.99 a bottle. It is a juicy red blend that’s dry with just enough tannin. We drank up a case of it lightly chilled with barbecue over the summer last year and we recently had it again during lock down with hearty ham and bean soup from the freezer. It is a simple wine meant to drink, not something to philosophize over or lay down for the future — an example of what Sue calls a Tuesday night wine.

data

There’s another reason to think seriously about less expensive wines right now. As recent Wine Economist columns have explained, the global economy has slipped into a recession that is likely to be more severe than the global financial crisis of a dozen years ago. Short term growth forecasts (see table) released last week by the Economist Intelligence Unit paint a dismal picture of global economic conditions through the middle of 2020.

Income and wealth have already fallen dramatically in many parts of the world and unemployment has surged. More than 17 million ex-workers have applied for unemployment benefits in the U.S. in the last three weeks alone. Trading down to good wine at a lower price is not a ridiculous thing to consider in these circumstances.

We will be interested to see your nominations and perhaps to compare them with Asimov’s slightly more upmarket list. There’s a big difference between $10 and $15 in today’s wine market. Sales of wines in the $12 – $15 price range have been growing strong over the last couple of years (and not just during the recent stock-up surge) while sales of bottled wines in every segment below $10 have been falling.

The Big Squeeze

Why are cheaper wines in a slump? There are lots of explanations, but some of my industry friends privately tell me they think that quality is a factor. Production costs keep increasing, they say, but consumers resist attempts to raise price. Something has to give in the cost-price squeeze and, in some cases corners are cut to preserve margins.

I don’t know how generally this is true, but the 10 under $10 challenge is an opportunity to see how much quality there is at this price point. And it will be kinda fun to see what wines people suggest.

Thanks in advance for nominating wines for the Wine Economist 10 under $10 challenge. Stay well. Be safe.

Decanter’s Power List 2013: Globalization and China’s Continuing Rise

July 16, 2013 By Mike Veseth in China wine, Costco, critics, decanter, Economic impact, globalization, Grace Vineyards, wine markets 1 Comment

He’s still #1

The July issue of Decanter (the self-proclaimed “world’s best wine magazine”) is out and with it comes the Decanter Power List 2013 – a list of the 50 most powerful people in wine this year as determined by the magazine’s editors.

The Power List, which appears every other year, is great fun, both in the way that it spurs debate (my soccer-fan friends spend hours and hours debating similar lists for their sport) and because of the glimpse it offers into the way the world wine map is changing … or not.

Small World After All

What does the 2013 list reveal? Well, the #1 most powerful man (only 15% of those on the list are women) is once again Pierre Pringuet, CEO of drinks multinational Pernod Ricard. There are bigger wine companies – Gallo (Gina Gallo is #17 on the list) and Constellation Brands (#5 Robert Sands) but it is Pernod Ricard’s global reach and decidedly global strategy that sets it apart and makes Pringuet #1. Or so I believe, because one of the messages of this Power List and the last one is that globalization is now the way of wine.

The new #2

Asia is the key to the global kingdom, or so the list seems to say. Ten of the 50 listed luminaries have a strong Asian connection, including the new #2 (up from #8 last year) Wu Fei, head of the wine and spirits division of COFCO, China’s state-owned Cereals, Oils and Foodstuffs Corporation.

COFCO makes wine (Great Wall brand), invests in wine properties (Chateau Viaud in Bordeaux with more foreign acquisitions to come) and is a key potential partner for anyone in the world who wants to sell bulk wine into the Chinese market. It will soon start bottling Australian and Chilean wines to sell under the Great Wall label, with more international expansion planned.

COFCO’s (and China’s) influence is so strong that its association with Bordeaux flying winemaker Michel Rolland seems to account for his surge in the ratings from #18 last year to #7 in 2013. The China connection also might explain Aubert de Villaine’s meteoric rise from #30 to #8.

De Villaine is co-owner of Domaine de la Romanée Conti and that alone might justify a place on the list. But 2013 has been widely seen as the year that many Chinese investors and collectors lost interest in Bordeaux and turned their attention to Burgundy. So no surprise that DRC, perhaps the most sought-after Burgundy wine, would surge in the ranking.

New Names and Faces

There is always a good deal of churn in the Power List and this year is no different. I counted 14 new names, starting with #48 Judy Leissner (CEO of Grace Vineyards, China) and ending with #11 (John D Watkins, ASC Fine Wine, China) and #12 (Yang Wenhua, C&D Wines, China).

Not every new face has a Hong Kong or China link, but many do including # 44 Li Demei (Chinese consulting winemaker), #42 Paolo Pong (Hong Kong retailer and restaurateur), #27 David Pedrol (Chinese online wine retailer) and #23 David Dearie (CEO of Treasury Wine Estates, which is noteworthy for opening a vast 6000 square meter wine gallery in Shanghai).

Other new names on the Power List are Magdalena Gerber (#33 – she is CEO of Sweden’s wine monopoly, Systembolaget) and Bob Peter (#32, head of the provincial monopoly Liquor Control Board of Ontario). Systembolaget and the LCBO are two of the world’s largest wine purchasers and retailers (along with Costco, the U.S. leader, represented by Annette Alvarez Peters at #4 and Tesco’s Dan Jago at #14). Globalization can create a huge wine pipeline and this gives power to those who can fill it (like Pernod Ricard) and those who can empty it profitable (Costco, Tesco, Systembolaget and the LCBO).

More questions than answers

The U.S. is the world’s largest wine market today and it seems a bit under-represented on the Power List with only eight names, but they are heavily concentrated in the top tier: #9 critic Robert Parker, #6 Constellation’s Robert Sands, #5 distributor Southern Wine & Spirits’ Mel Dick and Costco’s Annette Alvarez Peters at #4.

It’s interesting to ponder the Power List because it raises more questions than it answers. Who do you think really is the most powerful wine person in the world?

Why aren’t there more women on the list, especially from Europe where Jancis Robinson and Magdalena Gerber are the only female representatives? This is a question for the industry (and not just Decanter’s editors) to ponder. Will this year’s new faces still be around in two years when the next list is released? Where will the next group of new names come from?

And, of course, when will Decanter finally include a wine economist in the power list? I guess we’ll just have to wait and see.

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Click on the links to read my analysis of previous Power List selections for 2011 and 2009.

The Wine Economist 200

October 17, 2010 By Mike Veseth in Australian wine, brands, China wine, Costco, economic crisis, extreme wine, Fielding Hills, restaurant wine, Shameless Self-Promotion 1 Comment

This is The Wine Economist’s 200th post since it began a little more than three years ago under the name “Grape Expectations” — a good opportunity to reflect briefly on readership trends, just as I did when we passed milepost 100.

: Not that kind of list!

Milepost 200

The Wine Economist has an unusually broad readership given its focus (wine economics), content (no wine reviews, no ratings) and style (most posts are way longer than is typical for weblogs).

I never expected to get millions of visitors like Dr. Vino or Gary V. and other popular wine critic sites, so I’m surprised by how many people have found this page and come back to read and re-read.

About 200,000 visitors have clicked on these links, sometimes with surprising intensity. The Wine Economist has been ranked as high as #6 in the big “Food” category where wine blogs are filed in Technorati‘s daily ratings and as high as the top 30 in the even broader “Living” group.

Reader Favorites

The most-read articles of the last few days are always listed in the right-hand column on this page, so it is easy to see track reader behavior. I thought you might be interested in readership trends since the blog began. Here are the top ten Wine Economist articles of all time.

Costco and Global Wine — about America’s #1 wine retailer, Costco.
Wine’s Future: It’s in the Bag (in the Bag in the Box) — why “box wine” should be taken seriously.
The World’s Best Wine Magazine? Is it Decanter?
[Yellow Tail] Tales or how business professors explain Yellow Tail’s success.
Olive Garden and the Future of American Wine or how Olive Garden came to be #1 in American restaurant wine sales.
Australia at the Tipping Point — one of many posts about the continuing crisis in Oz.
No Wine Before Its Time explains the difference between fine wine and a flat-pack antique finish Ikea Aspelund bedside table.
How will the Economic Crisis affect Wine — one of many posts on wine and the recession. Can you believe that some people said that wine sales would rise?
Wine Distribution Bottleneck — damned three tier system!
Curse of the Blue Nun or the rise and fall and rise again of German wine.

As you can see, it is a pretty eclectic mix of topics reflecting, I think, both the quite diverse interests of wine enthusiasts and wine’s inherently complex nature.

My Back Pages

What are my favorite posts? Unsurprisingly, they are columns that connected most directly to people. Wine is a relationship business; building and honoring relationships is what it is all about.

KW’s report on the wine scene in Kabul, Afghanistan has to be near the top of my personal list, for example. I am looking forward to following this friend’s exploits in and out of wine for many years to come. (Afghan authorities found KW’s report so threatening that they blocked access to The Wine Economist in that country!)

Matt Ferchen and Steve Burkhalter (both former students of mine now based in China) reported on Portugal’s efforts to break into the wine market there. The commentaries by Matt, Steve and KW received a lot of attention inside the wine trade, but their thoughtful, fresh approaches also drew links, re-posts and readers from the far corners of the web world.

Looking back, I think my favorite post was probably the very first one, a report on my experiences working with the all-volunteer bottling crew at Fielding Hills winery. I learned a lot that day about the real world of wine and I continue to benefit from my association with Mike and Karen Wade (and their daughter, Robin, another former student) who have taught me a lot about wine, wine making and wine markets.

Look for another report like this when The Wine Economist turns 300. Cheers!

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Thanks to everyone who’s helped me in various ways with these first 200 posts. I couldn’t have done it without you! (Special thanks to Sue, my #1 research assistant!)

	Views
Home page	67,337
Costco and Global Wine	6,627
Wine’s Future: It’s in the Bag (in the B	6,191
The World’s Best Wine Magazine?	5,429
[Yellow Tail] Tales	3,921
Olive Garden and the Future of American	2,852
Australia at the Tipping Point	2,581
No Wine Before Its Time	2,483
How will the Economic Crisis affect Wine	2,357
Wine Distribution Bottleneck	2,185
Curse of the Blue Nun

Economic Effects of Washington Liquor Initiatives

October 12, 2010 By Mike Veseth in alcohol, Costco, Economic impact, Family Wineries, washington wines, wine distibution, wine law 10 Comments

This is the third in a series on initiatives to liberalize Washington’s alcoholic beverage laws (click here to read the first and second segments). How would Washington Initiatives I-1100 and I-1105 affect wine makers and wine consumers? Let’s look at wine makers first.

Wine producers in Washington are not united either in support of or opposition to the initiatives. One industry group, The Washington Wine Institute, publicly opposes both initiatives, for example, while the Family Wineries of Washington State supports I-1100 but opposes I-1105.

Winners & Losers

Both initiatives would create more avenues of competition for wineries by removing state restrictions that prevented discounted prices, negotiated payment schedules and so forth. Based on my conversations it seems that some wineries would welcome the opportunity to compete using a fuller range of business strategies. They would like to be able to go after the business they want and to reward retailers and restaurants that carry the full range of their products or who make long term commitments.

Other wine makers are concerned that they may be disadvantaged in this new environment because they lack the resources or expertise to compete effectively. Interestingly, it is not just small wineries who want to avoid competition and not just large ones who embrace it. Obviously it is a complicated matter.

One wine maker candidly told me that it is hard to know if the gains will outweigh the losses. This person saw obvious areas for new business expansion but realized there would be negative effects on margins and the need for more capital to accommodate extended payments. I sensed a very pragmatic attitude: wine is a business and business people have to cope with whatever is thrown at them whether it is Mother Nature (a late harvest) or a change in state liquor laws.

My conversations reminded me of Olivier Torres’ discussion of the difference between French and American business strategy in his book The Wine Wars. American entrepreneurs, Torres says, look for new opportunities, taking risks, while the French business strategy is more about fending off threats. This is an oversimplified stereotype, of course, but it does seem to capture a bit of the wine war raging today in Washington state, where those with “French” attitudes are not necessarily from France.

Will Small Wineries Get Squeezed?

Television ads like the one I have inserted above suggest that small wineries would be especially hard hit by the new laws. A local news analysis of this ad raises some doubts about this claim (see this King5 report). Will small local wineries get crowded off the shelf? Here’s my brief analysis.

I do think that large wine companies will have an advantage if the law is changed, but they have obvious economic advantages now, so this is nothing new. I would not be surprised to see big companies (Constellation Brands, Gallo, etc) increase their relative share of retail shelf space since they have the resources to offer discounts and incentives.

It is also possible that spirits companies and distributors will bring associated wine brands with them as they rush to fill their newly opened retail market niche if the initiatives pass, adding to the “crowding out” effect. Retailers are trying to streamline their operations and reduced the number of suppliers they deal with, giving “drinks” companies that can supply wine, beer and spirits an advantage.

This effect will differ by type of retail account, of course, and be different for fine dining versus casual dining restaurant sales. In the supermarket segment, for example, you can already see differences in the relative incidence of the big producer portfolios in Fred Meyer (Kroger) and Safeway stores compared with regional chains like Metropolitan Market.

Although small wineries might get somewhat less shelf space, they certainly will not disappear from wine shelves and restaurant lists. Wine enthusiasts value diversity and smart sellers fill their shelves accordingly. That’s why a typical upscale supermarket offers 1500-2500 wine choices, at least ten times the number of options in any other product category. Retail wine margins are high and sellers profit by catering to their customers’ desire for a wide range of choices.

I think the competition among smaller winemakers will be more of a factor than between the big corporations and the small family wineries. There are hundreds of small wineries in Washington state all seeking a place at the retail table. Right now it is pretty difficult for the maker of a $40 Walla Walla Syrah to get shelf space (or distributor representation) and many producers are sensibly reconfiguring their business plans to focus more on direct sales. This will remain a good strategy if the initiatives pass, but makers who want to compete for shelf space will have more tools at their disposal.

And That’s A Good Thing?

Bottom line: small wineries will get squeezed by the big boys, but other small wineries are the real competition (hence the lack of a consensus among wine makers) and the initiatives will make this competition much more intense.

Is this a good thing? Well, it will probably be good for many consumers who will benefit from lower wine prices. They will likely have more (but different) wines to choose from too. Whether the new choices will be better is bound to be a matter of taste. If, as some have suggested, big box drinks retailers Bevmo and Total Wine open outlets in Washington it will change in significant ways the market terrain.

At the Ballot Box

How am I going to vote? The issue is complicated enough that I honestly haven’t decided yet. I am unlikely to vote for I-1105, however, since it seems like a stumbling half-step towards market liberalization.

I find the wine market aspects of I-1100 appealing and, as an economist, I am programmed to believe in the benefits of competition, but I am still concerned about the liquor law changes. I don’t know how making spirits cheaper and more readily available will help solve the public health and safety problems associated with liquor consumption. Many will disagree with this view and I respect their opinions.

I guess I’m going to have to weigh the pros and cons before I cast my ballot just like everyone else.

Anatomy of the Costco Initiative

October 6, 2010 By Mike Veseth in alcohol, Costco, Washington wine, wine distibution, wine law 3 Comments

Second in a series on initiatives to liberalize Washington’s alcoholic beverage laws (click here to read the first segment).

A recent article on the Wine Spectator website does an excellent job of detailing the specific elements of Initiative 1100 (which I call The Costco Initiative) and I-1105 (a.k.a. The Distributor Initiative) as they pertain to wine. It is required reading for anyone interested in this issue.

For my part, let me approach the question in a different way: how would the initiatives affect Costco (and other wine retailers), wine distributors, wine consumers and wine makers in Washington state? This post looks at retailers and distributors. I’ll address consumers and winemakers next time.

Costco’s [Big] Dog in the Fight

Let’s start with Costco, which is appropriate since it is a major backer of I-1100. How would I-1100 affect Costco? Well, the most important factor is that it would allow Costco and other retailers to sell hard liquor, which is currently a state monopoly in Washington. Other changes are important, but that’s the big one in terms of economic impact in my view.

What about wine? Not surprisingly, Initiative 1100 would allow Costco to be a much more efficient wine retailer.

First, Costco would be able to purchase wine directly from producers and could take advantage of more efficient central warehousing of alcoholic beverages. Costco would be able to negotiate volume discounts from producers and could benefit from other promotions (wholesalers must maintain uniform prices under the current law and are forbidden from providing retailer incentives). Costco could also negotiate payment schedules — current law requires that retailers pay for wine and beer at the time of purchase.

These changes would make the process of selling wine pretty much the same as other products by removing current restrictions. Costco would also be permitted to sell space on its wine shelves to producers (much as supermarkets routinely sell shelf space for grocery items), although it is unlikely this would actually happen. Costco does not sell space now in states where this is legal. Rather, like Wal-Mart I think, it simply asks for a lower wholesale price.

Taken together these market reforms would lower the cost that Costco pays for wine, savings that would be passed on to consumers. Costco’s normal mark-up on wine is 15% (17% for own-brand Kirkland Signature bottlings), so Costco’s existing absolute price advantage for the wines it carries would likely grow.

Don’t expect Costco to use these advantages to monopolize state wine sales, however. Costco has great wine prices, but it carries a surprisingly small number of wines at any time — about 100-150 different wine SKUs compared to the 1500-2500 that you can find at an upscale supermarket.

So while Costco wine sales will rise, there will be lots of room for other retailers, too. In fact, there is speculation that the market reforms will draw big box wine/beer/liquor retailers Bevmo and Total Wine into the Washington state market.

It is easy to see why retailers are backing I-1100. Their costs will fall and they should be able to sell more wine, which is a high margin item compared to most other supermarket categories.

The three-tier distribution system for beer (and wine).

The Impact on Distributors

It is also easy to see why distributors oppose I-1100 and why they back I-1105. Initiative 1100 privatizes liquor sales, liberalizes the alcoholic beverages market and allows retailers to cut out middlemen and purchase directly from wine, beer and spirits manufacturers. I-1105 is similar to I-1100 in most respects, but requires that the distribution step in the three-tier process be retained.

Distributors recognize that the ability of large retailers to bypass them and buy directly from producers and to demand discounts and other incentives is a threat to their business and it is understandable that they would oppose this.

Don’t expect distributors to disappear if I-1100 passes, however. Distributors play a vital role in connecting producers and retailers and, although they might lose some “rents” from their previous legal status, I can see where their role will change and might even expand in some specific areas as the overall wine market grows.

Larger distributors, who already have some economic advantages, might get an added edge if they are better able to offer retailers payment terms. Competition in general will increase, so there may be a shake out in this sector if I-1100 passes.

Fundamentally, I-1100 shifts market from distributors to retailers and will redistribute profits within each group, too. What about the people who make wine and those who drink it? Check back in a couple of days for analysis.

This Changes Everything? The Washington Costco Initiative

October 1, 2010 By Mike Veseth in Costco, Washington wine, wine distibution, wine law 9 Comments

Everyone knows that the wine business is highly regulated. In France, for example, very restrictive appellation regulations govern how wine can be made and even more restrictive laws limit how it can be advertised and promoted.

French winemakers sometimes must feel they are fighting a battle with one arm tied behind their backs.

America’s Long Hangover

But they have an advantage over many American producers, who could be excused for thinking that both their arms are immobilized. The American appellation system is not as restrictive as Europe’s, but the complicated web of federal, state and local regulations makes selling wine, especially across state borders, costly and cumbersome. (HR 5034, which would impose additional barriers to interstate wine shipments, would make this problem even worse.)

In my forthcoming book I call this mess the American Hangover. The U.S. wine market has a hangover, but it isn’t from too much wine. It is still recovering from Prohibition. Most of today’s regulations can be traced back to the repeal of Prohibition, when the federal government retained some regulatory powers, but turned others over the states (and in some cases, to local jurisdictions, too) thus creating a mess that is difficult to untangle.

The Swedish Solution

Here in Washington state, the end of Prohibition coincided with two important initiatives. First, the state government seized control of liquor sales under a modified version of the Swedish system.

Sweden instituted a state liquor monopoly in the 19^th century (which lives on today in the form of Systembologet) based on the logic that people want alcoholic beverages (and will find a way to get them if they are banned outright), so Prohibition isn’t really feasible. But if liquor sale is in private hands it will be actively promoted because of the money it spins off, leading to increased alcoholism and public health and safety concerns.

A state alcohol monopoly can provide wine, beer and spirits as a sort of public utility – people get the product at a high price and at some inconvenient to simultaneously discourage but facilitate consumption. No profit incentive encourages marketing and promotion of alcohol. The state has a monopoly on off-premises spirit sales in Washington; beer and wine are sold both in state stores and by private retailers.

At the same time the Washington state spirits monopoly was put in place, so were laws meant to protect state wine producers from out-of-state (read “California”) competition. Incredibly, the number of wineries in the protected market actually fell as the industry collapsed. Without outside competition to discipline local producers, Washington wine became a least-common denominator product. The typical wine was sweet and fortified (Thunderbird-class wine, if you know what I mean) and early attempts to produce quality wines were hampered by the lack of an active fine wine culture.

This Changes Everything

The bad old days of Washington wine.

Much changed in 1969 with the passage of House Bill 100, otherwise known as the California Wine Bill. This law allowed out-of-state wines more or less equal access to the local market. Cheaper California wines flooded in and people naturally bought them. Unable to compete in the low end wine market because of their higher production costs, Washington wine makers were forced to turn up market.

The California Wine Bill didn’t destroy Washington’s wine industry, as many expected it would. It redefined it. The result (to skip a few steps) is the industry you see today, where even large scale wine producers (think Columbia Crest) make wines to a high standard and the best wines compete successfully with the finest wines in the world.

The California Wine Bill changed everything … or nearly everything. This market liberalization remade the competitive landscape in Washington and set up the growth we have seen in recent years.

Now Washington voters are being asked to consider another set of potential market changes in the form of two initiatives on the November ballot. You might call them The Costco Initiative (I-1100) and The Distributor Initiative (I-1105). Costco is the largest backer of I- 1100 ($1 million according to a Seattle Times article). Liquor distributors Young’s Market and Odom Southern Holdings are reported to have contributed $2.2 million to back I-1105 (and oppose I-1100).

Pros and Cons

Are these proposed laws a step in the right direction in terms of the wine industry in Washington state? Will they “change everything” like the California Wine Bill and in a positive way? Since so many people have asked me this question I thought I would devote some space here to considering the issues.

Both proposals would eliminate the state monopoly on spirit sales. State liquor stores would close and private retailers would be permitted to sell spirits along with beer and wine. Costco has an obvious interest in this as do Safeway (which has contributed $325,000 to support the initiative campaign) and even Wal-Mart (a $40,000 contribution).

The move from public liquor utility to private market is a big change, since it substitutes American capitalism for Swedish socialism. Many people will understandably decide how to vote based on this factor alone. There really are public health and safety concerns associated with potential increased consumption of spirits and it is a fair question to ask if more active promotion of these products and more convenient access to them is in the public interest.

Even wine enthusiasts like me who consume alcoholic beverages every day may oppose these reforms, since we often claim somewhat self-righteously that wine is a temperance beverage – different from hard liquor. I’ll admit it: if this was just about letting Safeway and Costco sell vodka and tequila, I would vote against both the initiatives.

But there is more to the proposals than privatizing liquor sales. How would they change the wine (as opposed to spirits) market? Who would win and lose? Look for answers to these questions in the next Wine Economist post.

Bottoms Up: Extreme Value Wine Demand

November 7, 2009 By Mike Veseth in 7-Eleven, Costco, economic crisis, Supply and Demand, The Wine Group, Trader Joe's, Two Buck Chuck, wine bargains, wine brands, wine price Leave a comment

“Life is too short to drink cheap wine,” but either life is getting longer or the definition of cheap is changing, because cheap wine (or extreme value wine, as I called it in my last blog post) is a booming market category.

The US off-premises wine market grew by 3.7 percent dollar value in the last year, according to Nielsen Scantrak results reported in Wine Business Monthly, but sales of wine under $3 per bottle equivalent rose by more than 5 percent and sales of $3-$5 increased by 9.4 percent. This gives the old toast “bottoms up” a new meaning. The bottom of the wine wall is currently leading the way.

Bottoms Up!

Since I’m an economist I tend to approach market problems from the perspective of supply and demand. It is easy to understand where the supply of extreme value wine is coming from. The global wine surplus combined with structural falling demand in the Old World and recession-induced slow growth in the New World means that there is a lot of wine out there searching for a home. Some of it ends up being deeply discounted or dumped in stores like the Grocery Outlet chain.

A lot of it goes into own-brand wines at mainstream stores. Safeway has introduced its Quail Oak brand and 7-Eleven just announced a line of $3.99 wines called Yosemite Road. Both wines (and many other own-brands) are made by The Wine Group, the giant privately held California winemaker that, like Fred Franzia’s Bronco Wines, seems to specialize in making wines to hit particular price points.

Demand Side Puzzle

Although it just seems wrong, let me assure you that supplying wine to sell at $5, $4, $3 or even two bucks per bottle is not that difficult once you set out to do it. Cheap surplus grapes, cheap surplus wines, low-cost winemaking processes and economies of scale all contribute to extreme value supply. Nope, supply is easy. The challenge, until recently at least, has been selling the stuff.

Studies have repeatedly shown that wine drinkers are influenced by price – but not in the way you learned in Econ 101. A lower price does not always produce more sales because insecure buyers infer quality from price. They assume that higher price means better wine. In a blind tasting of two identical wines, buyers will often rate one above the other if they are told it costs more.

So why are many wine drinkers now stooping down and buying cheaper (sometimes very cheap) wines – and shopping at stores like Grocery Outlet — when in the past they have been programmed to consider these products inferior? I think there are three forces at work.

Two Buck Chuck Effect

The first factor is what you might call the Two Buck Chuck effect. Trader Joe’s stores have led the way in introducing American wine drinkers to inexpensive own-brand wines. Because shopping at Trader Joe’s is cool, trying Trader Joe’s discount wines is cool, too (or at least not as un-cool as buying Carlo Rossi at Kroger would be).

You might ask “How good can a $3 wine be?” elsewhere, but at Trade Joe’s it’s “How bad can it be?” TJ’s lends its reputation to the wine, which is the key to all own-brands. It is clear that Safeway, 7-Eleven, Target, Wal-Mart and many other chains that have introduced own-brand wines believe that they can do the same.

Costco Effect

Costco, the big box store chain, is the largest retailer of wine in the United States. Although their selection of wines is surprisingly limited (fewer than 150 different wines in each store compared with 1000-2000 or more at a typical upscale supermarket), it draws people in with low prices, made possible in part by the fact that buyers pay annual membership fees for the right to shop. The maximum markup on Costco wines is 15 percent above wholesale, which is hard to beat if you want to buy what they want to sell.

Costco has trained its upscale clientele to look for low price, but that’s not the Costco Effect I’m talking about here. Costco doesn’t sell extreme value wines – it leaves the bottom-feeding market to others.

The Costco Effect refers to the fact that shopping for wine at Costco is a lot like a treasure hunt. The wine selection changes all the time and so you need to come back often. Costco makes a point of stocking limited production wines, which run out. So if you see something you like, you better buy it now. I have friends who have scored one or two spectacularly good buys on impossible to find iconic wines at Costco and who are now completely addicted – they stop by as often as they can just to see what might be in the bin today.

Costco’s success with its treasure hunt strategy has generated a group of upscale customers (including perhaps my friend Jerry who was featured in the last blog post) who find the hunt almost as pleasant as the wine they buy. It’s a big a step but not an impossible one to go from Costco to Grocery Outlet since both position themselves as happy hunting grounds.

Trading Down Effect

The final piece of the demand puzzle is the recession, which made most of us stop and think about what we are paying and what we are getting. The data indicate that trading down (lower price), trading over (adopting a more casual and lower cost wine lifestyle) and drinking up (drinking from the cellar rather than buying expensive wines) are significant effects. Paying less for wine doesn’t carry the social stigma it might have in the boom-boom days and it doesn’t dent your personal wine identity as deeply either.

When you combine these three effects you get a market where extreme value wines can enter the mainstream. The demand for these wines is increasing, with different wine buyers responding to different motivations. It will be interesting to see if the market shift is permanent or if wine buyers will go back to their old habits.

Good, Bad or Ugly?

It is easy to conclude that the extreme value trend is a bad thing for the wine industry. People are paying less for wine, buying more generic wine and less of the quality product. I don’t see this as a completely negative trend, however. At least they are buying wine and not switching to other beverages. That would be ugly. This is part of the story of the collapse of wine demand in Europe. Wine became just another beverage and faded away as a quotidian pleasure. That hasn’t happened here, at least not yet.

I am actually hopeful that the extreme value trend will ultimately benefit the wine world, although I admit that my viewpoint is backed up by anecdotes more than hard data. I spoke with a young couple at the local Grocery Outlet who seem to me to be an optimistic future of wine in America. They had parked their shopping cart (with two small kids) in the wine corner and were busy picking out three or four bottles of wine from the huge selection of inexpensive bottles.

Do you buy wine here often? Yes, every week. We try different wines, which is fun. Some of them are disappointing, but it doesn’t cost very much to try them and we can also buy something different the next time. It’s been a long time since we found something that made us want to come back and buy a case, but that’s OK – it’s still fun.

Serious Business

What I like about this couple is that they use the extreme value store as an opportunity to experiment and they have the confidence to trust their own taste rather than some wine critics ratings. If they keep this up I think they will work their way out of the bargain bin. But I hope they never lose their sense of fun and willingness to take a chance on something different.

Wine is a serious business, but it is a mistake to take it too seriously. Wine can be intimidating, that’s for sure, especially the high-stakes wine game. It might be a healthier business in the long run if more people learn to love its treasure hunt side. If mainstreaming extreme value wine helps accomplish that, I think it is a positive development.

Olive Garden and the Future of American Wine

September 13, 2009 By Mike Veseth in brands, Costco, economic crisis, Italian wine, Olive Garden, popular culture, Trader Joe's, wine distibution, wine markets, wine price 5 Comments

How an investigation into trends in restaurant wine sales leads to an unexpected discovery.

Reading Down the Wine List

Everyone knows that restaurant wine sales are down as the recession has reduced both the number of diners and their willingness to spend a lot of money on wine. One of the best sources of news on restaurant wine sales is the Wine & Spirits magazine annual restaurant issue, which surveys selected wine-friendly restaurants and reports sales trends.

The W&S data give only part of the picture, however, since they tend to survey restaurants with more sophisticated wine-enthusiast customers. What’s happen to wine sales a bit further down the food chain?

Two studies by Ronn Wiegand (publisher and Master of Wine) in the current issue of Restaurant Wine report that US restaurant wine sales were off by 5.5 percent by volume in 2008 while sales of the Top 100 wines fell by just 3.5 percent. This suggests some consolidation in this sector, which will make sense once I tell you what the best selling wines are.

The drop in restaurant wine sales overall is less than the numbers I’ve seen for upscale restaurants. One reason for this discrepancy as I understand it is that Wiegand’s figures come from distributors, who report sales to all restaurants and on-premises establishments, not just purchases by select restaurants. So this gives us a picture of the broader market.

America’s Best Selling Restaurant Wines

Upscale restaurants of the sort that receive Wine Spectator awards get the most attention in the press, but casual dining restaurants are where the volume of wine sales is greatest. The top ten individual wines (by volume not value of sales) in 2008 were (drum roll) …

Kendall-Jackson Vintner’s Reserve Chardonnay
Cavit Pinot Grigio
Beringer White Zinfandel
Sutter Home White Zin
Inglenook Chablis
Ecco Domani Pinot Grigio
Mezzacorona Pinot Grigio
Copper Ridge Chardonnay
Yellow Tail Chardonnay
Franzia White Zin

None of these is an expensive wine and the #1 K-J is probably the costliest of the lot. The best selling restaurant (“on-premises”) wines are high-volume, widely-distributed inexpensive wines – just the sort that recession-ravaged consumers who want to trade down (in terms of price) and switch over (to a more relaxed view of wine) might find appealing.

Using the rule of thumb that a glass of restaurant wine sells for about the wholesale price of the bottle, these wines would sell from about $5 (for the Sutter Home) to maybe $8 (for the K-J Chard) per glass — and I suspect that a lot of this wine is sold by the glass. An affordable luxury, as they say.

Who Sells the Most Restaurant Wine (and How)?

If you are someone who dines mainly at three star restaurants where the wine list is really a leather-bound book that is handled with biblical reverence (and White Zinfandel must be a typographical error), the facts I’ve just stated about what America drinks when it dines out are probably pretty discouraging. But don’t give up hope just yet.

If you want to see the state of the art in American restaurant wine programs, follow your nose in the direction of the local shopping mall and get in line for a table at Olive Garden. Olive Garden’s 691 restaurants sell more wine than any other restaurant chain in the United States and its sales and education programs are a positive part of the transformation of American wine culture. Olive Garden is the optimistic future of American restaurant wine.

How does Olive Garden, a chain best known for its bottomless salad bowl and endless supply of tasty bread-sticks, sell so much wine (half a million cases in 2006, according to one source, probably much more than that today)? The short answer is education. Americans like wine and enjoy having it with food, but they are intimidated by everything about wine and need education before they are comfortable embracing wine. You’ve gotta learn ’em before you can turn ’em (into mainstream wine consumers).

The educational process at Olive Garden starts with staff, the people who are best placed to influence customer choice. Early on, Olive Garden established a relationship with the family that owns Rocca delle Macie winery in Tuscany. Specially selected staff travel to Italy each year to live, shop, eat, drink, cook and in general soak up knowledge and experience that can be used and shared back home — a nice employee incentive that pays off in higher wine sales.

Back home, in partnership with several California wineries, Olive Garden has established a similar institute in Napa Valley. Many restaurants expect that their wait-staff will pick up wine knowledge – Olive Garden really works at it by providing literally hundreds of thousands of hours of training. Of course, it has the chain-wide scale to make this investment pay off.

Selling Wine By Giving It Away

So Olive Garden staff are likely to know their wine list (37 wines from Italy, California, Washington and Australia, 35 of which are available by the glass) and which wines match well with different dishes, but how to you get patrons to try them – and especially to move out of their comfort zone and try something new?

The answer is … wait for it … to give away free samples! Patrons at many Olive Garden restaurants (this is America — local regulations vary) are offered small samples of different wines along with advice on menu pairing. The Italian house wines are the Pincipato brand made by Cavit that sells for $5.35 a glass and $32 for a 1.5 liter bottle meant to be shared family-style. Bottle prices of other wines range from $21 for the Sutter Home White Zin on up to $110 for Bertani Amarone. Most choices are in the $24-$34 range.

Olive Garden takes the free sample idea seriously, giving away 30,000 cases of wine in 2006 and presumably more today. That’s about 3-4 million tastes, according to my back-of-the envelope calculation. And it’s worth it, both in terms of wine sales and customer satisfaction. Customers like the wine, once they’d had a chance to try it, Olive Garden says, and it helps them enjoy the whole family dining experience more. No argument here — I can see how having one of those 1.5 liter bottles on the table would help a family relax and enjoy their meals.

The Olive Garden website continues the education process for customers who develop an interest, with basic Wine 101 information along with an interactive guide to pairing specific wines with particular menu items.

Confidence Game: Olive Garden, Costco and Trader Joe’s

The Olive Garden system sells wine, obviously, and it sells the idea of wine in a very healthy way. Olive Garden customers are more likely to try new wines and have fun with wine, I think, because they trust the Olive Garden brand.

Olive Garden has obviously invested a lot in its wine program and in research about what will appeal to its customers. There is less perceived risk in trying something new at Olive Garden. This is perhaps especially important in selling some of the Italian wines, where both the producer (Mandra Rossa, for example, or Arancio) and wine name (Fiano or Nero d”Avola) would be unfamiliar to most diners.

In a way, Olive Garden has the same advantage when it comes to selling wine as Trader Joe’s and Costco. The seller’s trusted brand gives buyers confidence in making an otherwise uncertain purchase.

Olive Garden is big enough and smart enough to make the investment required to pursue this wine strategy. It’s a good thing in terms of the development of a healthy American wine culture, but it does contribute to the consolidation of the industry noted at the start of this post. Olive Garden needs large, reliable supplies of each wines to make its system work (minimum quantity 7500 cases, I think), which rules out smaller producers.

But Olive Garden doesn’t have to be everything to everyone and there is plenty of room in the marketplace for other types of restaurants and wine programs. If Olive Garden helps introduce middle America to a healthy idea of wine, it will have done a great service. And I think that’s exactly what’s happening.

Chateau Cash Flow: The Rise of House Brand Wine

August 18, 2009 By Mike Veseth in Aldi, brands, British wine market, Charles Shaw, Costco, globalization, Supply and Demand, Trader Joe's, Two Buck Chuck, wine bargains, wine brands, wine markets 1 Comment

Decanter.com reports that house brand wine sales are rising in Great Britain even as the overall market slumps.

Retailers are reporting impressive growth of own-label wines as cash-strapped customers look to rein in their spending.

A Datamonitor survey reports 41% of all grocery sales in the UK are now own-label, up from 38.2% in 2008, and wine sales are following the upward trend.

Supermarket retailer Sainsbury’s told decanter.com its own-label wines had grown at double the rate of its wine range this year. A spokeswoman said: ‘Last year we revamped our own-label packaging and we have put a lot of effort behind the range in store and in the media.’

House brands aren’t so important in the U.S. wine market [yet] but they may well be in the future. The best known U.S. house brand wines are Charles Shaw (a.k.a. Two Buck Chuck) at Trader Joe’s and Kirkland Signature at Costco. Big Box retailers Target and Wal-Mart have launched their own house brands in recent months and other retailer’s have commissioned discount brands (not yet closely associated with their names) in an attempt to get a grip on the trading-down market. Look for this trend to continue, especially if the economic downturn persists.

Chateau Cash Flow

House brands are a solution to several problems, which is why they are likely to increase in importance. On the consumer side, they provide buyers with reputational assurances. You might wonder if a $3 wine can be any good, but you are more likely to try it if Trader Joe’s or Wal-Mart stands behind it. As I have written before, a $3 unknown wine at Safeway makes you think “how can it be any good?” while a $3 wine with the Trader Joe’s imprimatur makes you think “how bad can it be?” You might buy the latter but not the former.

The British have years of experience with house brands — it is why they are [for now] the world’s most important wine market and why Britain’s supermarkets are arguably the most sophisticated wine distribution machines on earth. The U.S. is catching up, but Britain still leads.

Reputation is especially important when consumers are trading down, moving into unfamiliar territory on the lower shelves. Decanter reports that while some British consumers are trading down to house brands, building that market, existing customers are trading up within the house brand portfolio! If this trend continues it will be hard to resist the house brand strategy.

Supply Side Wine

House brands have big advantages on the supply-side, too. Producers with surplus wine are often happy to sell it off through house brand bopttlings because it generates cash flow without directly undercutting their own brands and market. In my international economics class we call this “dumping.” You sell off unintended surpluses (of which there are plenty just now) through retailers in a different market segment, allowing you to maintain reputation and price points in the home market. If you start discounting wine to sell it, we have learned, it is sometimes difficult to regain the ground you have lost.

Some British retailers have moved aggressively into the supply chain, buying up grapes and surplus wines and acting as full-fledged negociants, but it isn’t really necessary to make such a large commitment to get into the house brand wine business. There are plenty of regional and national firms who can quickly respond to demand. No large investment is required, cost is low.

House brands can also have a somewhat fluid identity (not tied tightly to a particular region or style), which allows them to benefit from global opportunities, sourcing Sauvignon Blanc from Chile, for example, and Pinot Noir from Northern Italy or the South of France.

The main problem is to be sure that quality is good enough. Otherwise you have put your own brand in jeopardy.

Three Way Battle

The world’s wine markets are a battleground for three models of wine sales. The German model is based upon low cost (one euro per liter) and hard discount sellers like Aldi. The American model is all about corporate brands like Gallo and Constellation Brands. The British model is built upon upscale supermarkets and the house brands they sell.

Recent news suggests that the British model is gaining ground, both in the UK and here in America, where it is the model that drives Costco sales (Trader Joe, on the other hand, uses a version of the German system). It will be interesting to see if this trend persists once the recession eases up.

Decanter’s Wine Power List

July 14, 2009 By Mike Veseth in British wine market, Constellation Brands, cork vs screwcap, Costco, critics, decanter, Economic impact, EU wine reforms, globalization, Tesco, wine brands, wine critics, wine distibution, wine magazines, wine markets, wine ratings Leave a comment

Decanter, the self-proclaimed “World’s Best Wine Magazine,” takes its rankings very seriously. Wine rankings, of course, and, in the July 2009 issue, Power rankings. Who are the most powerful people in the world of wine and what does the power list tell us? Let’s see if we can find the message in this bottle.

The Power List

The names on the power list are very interesting but the story that they tell about wine today is perhaps more important. Here are the first ten (top ten) people on the list.

Richard Sands, USA, Chairman, Constellation Brands
Robert Parker, USA, wine critic
Mariann Fischer Boel, Denmark, EU Commissioner for Agriculture
Mel Dick, USA, Southern Wine & Spirits (wine distributor)
Annette Alvarez-Peters, USA, Costco wine director
Dan Jago, UK, Tesco wine director
Jean-Christophe Deslarzes, Canada, President of Alcan Packaging
Jancis Robinson, UK, wine critic, author and journalist
Nicolas Sarkozy, France, President of France
Pierre Pringuet, France, Pernod Ricard

Since Decanter is a British magazine with very small US distribution you might be surprised that three of the top ten positions (and both of the top spots) are held my Americans, but don’t be. Constellation Brands is the largest wine company in the world and accounts for one out of eight bottles of wine sold in the UK. And Robert Parker is best known for his ratings of French wine, not Napa bottlings, which is important to British buyers and merchants. The presence of Sands and Parker at the top of the list does not reflect any sort of US-centrism, just the realities of the global marketplace. It really is a global list. Or at least, like those famous New Yorker cover illustrations, the globe as seen from London.

I won’t list the second ten names (out of 50 in total), but the I think they illustrate the global reach of the wine market today: America, China, Chile, Australia, Spain and so on. Even India, an emerging wine market, makes the top 50 ranking.

The list is complete and up-to-date (Gary Vaynerchuck, the US internet wine guru, shows up at number #40), but there are some interesting gaps. Fred Franzia, the godfather of Two Buck Chuck, is nowhere to be found, for example, despite his obvious influence on the US market, while Judy Leissner of Grace Vineyard in China, who perhaps represents the future of Chinese fine wine, makes the “Ones to Watch” list.

No wine economists make the list, alas. Greg Jones, the respected Southern Oregon University wine climatologist, is the only professor (#33). Maybe next year …

The Story

It is fun to see who makes the list and who doesn’t (why Jancis and not Oz?), but the ranking is more interesting if you strip out the personalities and consider what market forces they represent. Herewith my version of this story.

The world of wine is very unsettled. Although wine is one of the most fragmented global industries (much less concentrated than beer or spirits, for example), size matters more and more as consolidation continues. [Hence the power of Constellation Brands, Pernod Ricard and Southern Wine & Spirits.] Reputation matters, of course [Parker and Robinson], but the world is changing and everything is up for grabs from how and where wine is sold [Costco and Tesco] to how the bottle is sealed [Alcan].

Although change is generally associated with New World wine, this is no longer the case. The biggest threats to “business as usual” for Old World wine come from inside the European Union itself. On one hand, the new EU wine regime [Mariann Fischer Boel] will pressure Old World wine to compete with the New World head-on and without continuing EU support. On the other hand we have an unexpected prohibitionist movement [symbolized by Sarkozy] that seeks to regulate wine like the Americans do (even as some parts of America are changing) — as a dangerous controlled substance. It is thus imperative for Old World wine to master the tricks of the New World industry — tricks that Constellation and Southern and Costco symbolize.

These changes take place, of course within the context of the expanding global market, global climate change and a continuing global economic crisis (that’s where a wine economist would have been a useful inclusion).

I won’t pretend that the Decanter Power List is a scientific ranking (Decanter doesn’t claim this in any case), but it is an interesting peek into how wine insiders view their industry. I’ll be curious to see how the names and the story lines change when the next Power List appears.