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

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

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

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

Cautious Optimism?

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

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

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

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

Brexit’s Many Potential Impacts20160702_cuk400

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

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

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

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

Short Run: Exchange Rate Effects

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

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


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

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

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

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

Long Run: The Vultures Circle

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

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

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

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

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

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


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

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

Not Just Up and Down

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

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

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

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

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

All Taco Bell Now

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

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

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

All MoVin Now

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

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

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

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

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

All Kiwi White Now

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

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

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

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

You Want Grapes with that Wine?

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

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

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


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

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


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


Alentejo Wine in Transition: History and Changing Times in Portugal’s “Lodi”

seloSue and I recently returned from historic Évora, Portugal where I am spoke at the 10th Alentejo Vine and Wine Symposium. We spent about a week in the Alentejo wine region and learned a lot. This is the first of a short series of columns loosely organized around the theme of the disruptive intersection of old and new which I have found in many corners of the wine world, but none more clearly than Alentejo.

Portugal’s Lodi

The map gives you an idea of Alentejo’s location. Évora is about an hour east of Lisbon and give hours south of the Douro Valley. Portuguese leaders once thought that this region would be Europe’s grainery (more Kansas than Lodi, I suppose), but the landscape we saw was more pastures dotted with cork trees and vineyards, some of which are quite large by Portuguese standards.lisboa-alentejo

I think of Alentejo as the Portugal’s Lodi for several reasons. The first is the summer heat, which reaches up to 40 or 45 degrees Centigrade (100 to 110 Fahrenheit) or even higher in July. Difficult to grow high quality wine grapes in such baking heat. But, as markets shift, both regions feel the need to increase quality and so producers are pushing hard. And both regions are implementing important sustainability initiatives that are part of their new identities.

They both produce quite a lot of wine, too. Alentejo accounts for more than 40 percent of the wine consumed in Portugal. But the market is changing and the region must adjust and evolve. The domestic market has not fully recovered from the global financial crisis and price pressure is extreme, especially in the lower price tiers. At the same time, the traditional export markets — especially former Portuguese colonies Angola (#1 on the export list) and Brazil — are struggling.

Drawing Strength from the Old and the New

Alentejo is drawing strength from its past in this transition and from new ideas and initiatives, too. The sense of history is never far below the surface here. Évora is a Unesco World Heritage site, for example, with Roman ruins around every corner. The Romans made wine in this region and the big clay pots they employed are inspiring today’s winemakers (watch for a future column on this).

Portugal was once part of the Arab world (“Portugal,” we were told, means “orange” in Arabic and this was not hard to believe with orange trees everywhere). The name Alentejo itself reflects this history. Alentejo comes from Al Entejo (just as mathematic’s algebra was originally al gebra).

Old practices and a wealth of indigenous grape varieties are more than living history — they form building blocks, but bold initiative is needed for glue. The next three columns will explore this dynamic.

First I will introduce you to Adega de Borba, a big cooperative winery that is moving decisively into the future. Then I will take you into the world of cork by visiting Amorim cork’s processing plant in Alentejo and its high tech labs and production facilities in the north. Finally, we will go back in time to the wines made in big clay pots when we meet with winemaker Domingos Soares Franco at José Maria da Fonseca‘s José de Sousa winery.


One of the highlights of the conference was a dinner that featured a group of men who sang the famous Cante Alentejano that is unique to this region. It was a moving experience to hear the singing that turned to pure joy when we learned that the singers were winegrowers — members of the Vidigueira  cooperative. And to top it off, we were drinking their excellent wines. What an experience!

Will Argentina Wine Export Growth Return in 2016?

Last week’s column analyzed the reasons Argentina’s wine boom fizzled out. Wine exports to the U.S market have more or less plateaued since 2010 after a decade of rapid growth. Part of the problem, I wrote, is increased competition in the wine market, particularly from the so-called Red Blends that seem to have taken some of the momentum from Argentinian Malbec.

But the biggest factor has been Argentina’s domestic economic policies, which made it very difficult to do business and squeezed the margins of export industries, including wine. The squeeze has been particularly severe in the value wine categories, where the margins are so tight (or even negative) that Argentinian producers have been squeezed out.

Yes / No / Maybe?

Will Argentina wine growth in the U.S market return in 2016? Maybe is the answer, although 2017 looks like a better bet than 2016. The main reason for optimism is the change in government that took place in December 2015 when Mauricio Macri became President of Argentina, promising an end to the policies that crippled the economy, especially export industries like wine, and pushed inflation skyward.

The Economist magazine reports that Macri is “off to a fast start,” removing export taxes and allowing the peso to fall from its artificially high level. These actions will benefit exporters, but also send a shock to the domestic economy through higher interest rates and a short-term boost in the inflation rate due to rising import costs.

Argentina’s wine industry it likely to be twisted in 2016, with falling domestic economic activity offset by the exchange rate’s boost for exports. Growth in both domestic and export markets will have to wait until 2017 and beyond.  Good news under the circumstances even if it is far short of an instant cure for the ailing industry.

Like a Normal Country

But some of my friends in Argentina tell me that they are not expecting a miracle. They just want Argentina to be “like a normal country,” as they put it, in terms of its politics and economics and perhaps that’s what they will get.

If “normalization” works, will Argentina’s wine boom return to the U.S market? Perhaps, but things have changed and adjusting the macroeconomic levers won’t turn back the clock entirely. Argentina will come back, that’s for sure, although it will take a while for the foreign exchange and other factors to be fully felt  But don’t expect a return of the boom.

The best that Argentina should hope for — and it is actually a good thing — is to be like a “normal country” when it comes to the U.S. wine market. By this I mean that its exports are driven by the normal factors and not subject to booms or crises. Being a normal country in this context suggests a focus on the $10 and above price points, because that is where market grown and margin opportunities are.

A recent Rabobank report on Argentina’s wine sector notes that the reforms will allow more competitive pricing for Argentine wine exporters, but cautions against a rush into the value wine segment where Argentina used to be strong. “There are now opportunities to be more flexible with pricing,” Rabobank’s Stephen Rannekleiv notes, “but these need to be managed carefully in order to avoid undermining the long-term premium positioning of the brand and the overall category. … Excessive pricing moves may allow for windfall profits today, but could create headaches in the long run.”

And being a normaql country also means resisting the temptation to define Argentina as Malbec-ville. I know the temptation to adopt a particular grape as a region’s “signature variety” is strong, but I don’t see it as the best path for the industry.

Three-Dimensional Argentina

Argentina has Malbec, and that’s a good thing. But before the growth slowed smart Argentinean producers were already trying to add dimensions to their market space. Terroir is an obvious dimension that is even more important in signalling quality and  authenticity than it was a few years ago. I think many consumers now look for region — Uco Valley? Salta? — and especially elevation (Malbec develops differently in Argentina depending on the vineyards’ altitude) as quality indicators.

Another way to add dimensions is to exploit grape varieties beyond Malbec. There are so many wines that do well in Argentina besides Malbec and Torrontes, the two “designated” signature grapes. I love Mendel’s old vine Semillion, for example, And we recently surprised a Syrah-loving friend at a local Argentinean restaurant by ordering a higher elevation Syrah from the Uco Valley. He loved it, but would never have thought of  ordering an Argentine Syrah. Time to get that thinking started.

The options are nearly endless, as we learned a few years ago when we visited Buenos Aires and had lunch with sommelier Andrés Rosberg (you can read about the lunch here).  Andrés knew that we would taste many Malbecs during our visit and he wanted to be sure that we understand that Malbec was only the most visible part of the story — not the whole story and maybe not even the best story.

No Sure Things

So he served us a line-up of wines that featured everything except Malbec and it was great. Lesson learned and it was reinforced as we met with winemakers and tasted distinctive Chardonnay, Cabernet Sauvignon, Cabernet Franc and even Bonarda. Malbec? Yes and that’s a good thing. But a lot more, too.

This is an age of discovery for wine and Argentina has much to discover, both within the Malbec terroirs and beyond Malbec. That’s the sort of strategy that “normal countries” are embracing in the U.S. wine market today.

Argentina has little experience as a normal country, making its way without crisis or drama. The success of Macri’s economic policies is not a sure thing since they depend on short-term sacrifice for long-term gains in an uncertain and even unstable global economic environment. It won’t be easy to become normal, but it is an important step.

Sometimes, as Argentina’s national soccer team has demonstrated, great players and great ideas can come to a disappointing end. I am optimistic, however, and hopeful that the wine sector gain will regain momentum while avoiding the boom-bust cycles of the past.

Whatever Happened to Argentina’s Wine Boom?

Whatever happened to Argentina’s wine boom (and can that country’s wine industry recover the momentum it has lost)?

Argentina is an important player in world wine. Recent OIV statistics (click here to download the pdf) tell us that Argentina is the fifth largest wine producer in the world (behind the USA and ahead of Australia) and the eighth largest consumer country. Just a few years ago it seemed like Argentina was poised to become the next New Zealand in terms of its export growth, especially here in the U.S.

Anatomy of the Malbec Boom

New Zealand somehow manages  to sell more Sauvignon Blanc each year and it seemed like Argentina might find a way to do the same with its signature Malbec wines. In fact, the boom was so strong that it made some people nervous, as the award-winning 2011 documentary Boom Varietal revealed. Maybe it was too good to be true? Maybe the world would suddenly get tired of Malbec and move on to something else? What then? Bust?

The boom had many causes. Perhaps the most important was the Argentine Peso Crisis of the early 2000s. The collapse of the peso and the opening of the economy to foreign investment was a painful transition for the people of Argentina, but it restored international competitiveness and encouraged foreign investment, both critical to the industry’s rise.

Shift to US Exports

Like many European countries, wine consumption in Argentina is in long-term decline and the economic crisis made things worse for the domestic market, where inexpensive jug wines dominate. As explained in Laura Catena’s book Vino Argentino and Ian Mount’s The Vineyard at the End of the World, Argentine producers found themselves with no choice but to focus on export markets for growth and that meant major investments to improve quality. The U.S. market was the prime target, a different strategy than Chile, which developed more diversified export opportunities.

The US-led export push was effective for several reasons. First the wines presented good value and rapidly improving quality. The U.S. wine market was growing and consumers were turning away from Merlot and later Syrah/Shiraz, opening the door for easy to drink and understand Malbec.

Some of the most important brands established effective distribution partnerships, which enabled them to lead Argentina into the market and firmly establish the category. Catena partnered with Gallo, for example, to make Alamos the market leader No wonder Argentina’s wine exports boomed year after year.

The only questions, it seemed at the time, were would demand continue to rise and, if it did, could Argentina produce enough Malbec to satisfy thirsty buyers?


The End of the Boom

And then? Well, the boom didn’t turn to bust as many feared, but Argentina’s export growth has skidded to a stop. As Kim Marcus reports in his recent Wine Spectator article, exports to the U.S. have plateaued at about 13.2 million cases overall. Recent Nielsen data for off-premises sale as reported in Wine Business Monthly paint only a slightly more optimistic picture, with a meager 0.3% growth rate over the previous 52 week and a 2.5% fall in sales revenues over the most recent four weeks.

The Wine By Numbers figures for January through September 2015 shown above (click on the table to enlarge it) tell the story in detail. Export volume is up overall, but revenues are down because of falling unit price. Good success in bottled wine sales in some markets (UK, Germany and China, for example), is offset by declines elsewhere, including Sweden and Denmark. Note the huge rise in UK bulk sales. But the US market is still #1 for Argentina and it remains flat.

An article by Angel Antin in the current issue of Market Watch adds more detail about the U.S. market situation. Impact Databank statistics show that Argentina wine shipments to the US market peaked in 2010-11 in terms of volume after a decade of rapid growth. 2014 volume was modestly down from that peak, but lower than any year since 2009. The boom seems to have faded.

The situation for individual brands depends very much on price point and margin. Constellation’s Marcus James was the market leader in 2009 with 425 thousand  cases in the U.S. market compared with Alamos with 75 thousand cases. But the situation has changed. Alamos, which sells at a premium price point, has plateaued at 900 thousand cases in 2014. Marcus James, selling at a much lower price point, has slumped to just 180 thousand cases.

The Red {Blend} Menace

What accounts for this situation? The U.S. market has indeed shifted. “Red Blends” are now the fastest growing red wine category, rising to #2  after Cabernet Sauvignon and ahead of Merlot and Pinot Noir. I suspect that some of the Red Blend growth is coming at the expense of Malbec sales.

The Red Blend category is very diverse, encompassing all sorts of blends (even some that include Malbec). I like to joke that the key to Red Blend success is that many of the products are blends of two wines that consumers say they hate but secretly love: Merlot and Shiraz. Whether this is really true or not, Red Blend is a convenient category for producers with stocks of red wines and an inconvenient truth for Argentina producers.

But Red Blends are far from the most important problem. It seems to me that the most severe constraint on Argentina exports in recent years has been supply not demand. Not so much difficulty growing grapes and making wine as navigating the harsh economics of the situation.

Economic Policy Squeeze

The economic policies of the government of President Cristina Fernández de Kirchner pushed up inflation rates, which pushed up wage rates, which increased the cost of producing wine. At the same time, the exchange rate was frozen at an artificially high rate, which squeezed margins. Capital controls added to the problem by making it difficult for Argentina to import technology and winemaking supplies from abroad.

The inflation/exchange rate squeeze was particularly hard on the value wine exports that were the initial key to Argentina’s success. It is nearly impossible to profit from exports of Argentinian Malbec with a retail price below about $10, so many of these wines have simply disappeared from the market (a few brave firms are absorbing short-term losses to maintain their market positions for the future).

The good news is that the $10+ part of the U.S. market is growing, and so the Argentinian wines that remain are in a good place. The bad news is that this market segment has become intensely competitive, so it will not be easy to survive and thrive. And of course the Red Blend trend continues.

I’ll end on a positive note. Economic policies are changing in Argentina, which gives hope for the wine industry there for 2016 or perhaps 2017. I’ll analyze the changing market environment in next week’s column.


Here’s a good soundtrack for any discussion of a boom. Enjoy.

Butterfly Effect: How China’s Crisis Threatens the U.S. Wine Industry

china1“The Butterfly Effect” is a term coined by Edward Lorenz that describes the nature of a highly interconnected system such as the global environment or the global economy. A butterfly beats its wings in Brazil, the story goes, setting off a chain reaction that indirectly results in a tornado thousands of miles away in Texas.

The Butterfly Effect was on my mind last month when I spoke at the annual meeting of the California Association of Winegrape Growers in Napa, California. Part of my presentation outlined several indirect global threats to the California and U.S. wine industries. Two of these are in the news this week.

China Market Meltdown and Contagion

The financial crisis in China was one of the threats that I highlighted. “I know what you are thinking,” I told the group, “Mike, we don’t have a lot of money in the Chinese stock market and we don’t really sell too much wine in China, so I don’t see how falling Chinese stock prices are a threat to our business.” Well, they aren’t much of a direct threat, it’s that Butterfly Effect that you need to worry about.

Economists have a name for the Butterfly Effect of a financial crisis — we call it contagion and it takes several forms. Exchange rates are one way that economic effects are transmitted from country to country.  The Chinese crisis drives down raw material prices on global markets and this has pushed down the foreign currency values of many natural resource producing countries including Australia, New Zealand and Chile.

These three countries are important wine exporters to the U.S. and lower exchange rates for their currencies means increased competition for U.S. producers. When you find that a Chilean producer has undercut your price for bulk Cabernet Sauvignon, for example, there might be a Butterfly Effect at the root of the problem.

Oil is another potential contagion vector. As China slumps, oil prices do, too. This has a disproportionate impact on certain countries such as Russia, which relies on oil exports to China more than in the past due to the current international  sanction regime. When Russia also slumps due to falling oil sales wine producers in Spain, for example, find themselves stuck with excess stocks earmarked for the Russian market. If they try to sell them off here in the U.S. at a bargain price that’s another Butterfly Effect to consider.committee

The Contagion-Busters

Contagion occurs in other ways and I highlighted the group that I think of as  “The Committee to Save the World” (shown above) in my Napa talk (you might prefer to call them the Contagion-Busters). The “Committee’s” job is to stop contagion or at least minimize its effects and it is a difficult task. They have been focused on Greece in recent months, but now it is impossible for them to ignore China.

Hopefully they can prevent the Chinese crisis from having real impacts on other large economies. It is already clear that there have been substantial financial effects (the U.S. stock market “correction,” for example) but the real economy of jobs and output is slower to react and sometimes is less affected. Fingers crossed.

Certainly the Chinese crisis adds risk to the whole world economic system and puts constraints on policy. If the Federal Reserve now goes forward with its widely anticipated plan to raise interest rates in September, for example, the result is likely to be a big spike in the value of the U.S. dollar on foreign exchange markets, putting U.S. wine producers at a further competitive disadvantage. Another beat of the butterfly’s wings?

Keep an eye on China. The impacts could be both bigger and different than you otherwise expect.

Premiumization: Is This the Wine Market’s New “New Normal?”

Is the current U.S. wine market the new “new normal” — can the recent upmarket shift in wine sales be sustained into the future? Two recent Wine Economist columns have detailed the surprising bifurcation of the U.S. wine market and tried to understand what forces are behind it. Wine sales below about $9 are stagnant or falling while upmarket sales revenues are increasing, with the largest percentage rise in the $20+ segment.

This is a surprising state of things, I argued two weeks ago, because the conventional wisdom once held that the Great Recession had created a “new normal” that centered on trading down behavior and discounting strategies. Not many people argued that we’d be “trading up” in the post-recession world.

And, as I noted in last week’s column, it is not clear that it is a simple return to previous behavior. I analyzed several theories for the change and concluded that none of them told the entire story, but together they explain the situation fairly well. So now we have to ask if those trends will continue — if the new market structure is the new “new normal” — or if the upmarket movement is unsustainable.

My answer — typical of an economist — is that it depends. It is really too soon to tell what will happen in the long run because there are so many unpredictable factors to consider. But since I asked this question I feel I ought to give more of an answer, so here’s my attempt at crystal ball gazing.

It’s too soon to tell about the U.S. market in the long run, but the current pattern is likely to be sustained for the medium term, although not necessarily due to the same factors that created it in the first place. Here’s my reasoning.

Decline and Fall of Down-market Wine

Inexpensive wines are not going away, but it seems unlikely that they will soon return to solid growth. This might be because of the alleged “bad wine” effect that I talked about last week, but it is more likely due to supply-side effects.

With water issues rising to the surface almost everywhere and higher irrigation costs in many places, the economic sustainability of low-cost wine grapes is in serious doubt at current prices. Jeff Bitter’s presentation at this year’s Unified Symposium in Sacramento included photos of acres of healthy Central Valley grapes left to rot on the vine because they were not worth the cost of harvest this year and probably not worth irrigation costs next year.

What is the future of these vines? Thousands of acres of vines have been grubbed up in California in recent years to make way for other crops with higher potential value — almonds and pistachios are the most frequently cited crop alternatives, but I’m sure there are others.  Imported bulk wines can easily fill in the gap left by falling California production in the short run, but sustainability issues (both economic and environmental) are a global phenomenon.

Low-cost wine grapes (and the wines they produce) are not going away, but there is limited incentive to invest here and so the focus is upmarket, where margins are better and business sustainability is more feasible.

Up the Down Staircase?

The upmarket movement in wine sales is likely to be sustained at least for some time because it is driven by factors affecting both demand and supply that are not specific to the U.S. but part of strong global trends. The supply-side element is easy to understand. Intense competition has cut margins on basic wines to the bone (and even deeper than that in some markets). Follow the money, Deep Throat said, and wine producers are listening to that advice now more than ever.

Once again, that doesn’t mean that basic wines and the bulk wine trade that has evolved around them are going away. It is simply that this is not the market segment that will get investment in future. Producers are likely to focus even more on the premium, super-premium and ultra-premium segments in the future. Every wine producer I have talked with around the world is focusing on moving up the up staircase and plotting effective distribution and marketing strategies.

On the demand  side I would point to the increasing importance of retailers like Trader Joe’s and Whole Foods and their many upscale local market competitors that attract customers by providing them with a sense of authenticity and affordable luxury in the quotidian consumption experience.

Products of origin and artisan creations with sustainability credentials — these are the hallmarks of the new retail environment and upscale supermarkets and a growing number of their customers seek out wines that fit that profile. Even hard-discount Aldi is playing along on the wine aisle, providing unexpectedly premium wines in their U.K. stores.

Bronco Busting

Don’t believe that the shift is important? Well, it wouldn’t be the first time that I’ve been wrong, but I think you will find evidence all around you if you look for it. Let me give you just one data point to get you thinking.

Consider the Bronco Wine Company, the famous maker of Two Buck Chuck and many other inexpensive wines. Bronco chief Fred Franzia once said that no wine should cost more than $10 and he built the 4th largest wine company in the U.S. by making those wines both for his own labels and, under contract, for other firms.

Where is Bronco headed today? Well, Two Buck Chuck is still in the picture and I think it is probably still selling about 5 million cases a year as it was the last time I wrote about it. But Bronco is busting out of that market segment via a variety of new products that, while they don’t aim for Screaming Eagle or DRC cult status still fit the profiles I’ve outline here. Several of Bronco’s wines illustrate the upmarket trends that I see for the future, including Garnet and Green Truck.

Garnet Vineyards are maybe not what you’d expect from the maker of Two Buck Chuck. They are all about cool climate Chardonnay and Pinot Noir from Monterey and more cool climate Pinot Noir from the Sonoma Coast. The highly-regarded Alison Crowe (author of the popular blog The Girl and the Grape)  makes the wines . The Garnet Rogers Creek Vineyard Sonoma Coast Pinot Noir ticks the boxes key to buyers seeking authenticity and sells for $29.99 on Amazon.com, about ten times the price of a bottle of Two Buck Chuck.

(Editor’s note: Bronco is the sales agent for Garnet but does not make this wine — see Alison Crowe’s comment below, which clarifies the relationship. Thanks to Alison for her correction.)

The long list of wines that Bronco produces and/or distributes includes six different organic wine brands plus a number that are vegan-friendly. Green Truck wine from Mendocino County is a good example. The wines are made from organic grapes and when I searched to see the nearest retailer to me there was Whole Foods near the top of the list.

Buckle Up!

Wine is looking up! The new normal will focus on wines that tell as good a story as other contemporary market products, such as craft beers and spirits and locally-sourced food products. It’s a great opportunity for wine producers, but the market is very competitive and will only get more so.

Buckle up!  It’s going to be a wild ride.


I thought you might enjoy this 2007  video of  wine critic Oz Clarke and “Top Gear” presenter James May meeting Bronco’s Fred Franzia. Their reaction to Two Buck Chuck may surprise you. Cheers!