The program is divided into three parts that are relevant to just about everyone in the wine industry.
Session 1: Economic Forecast – What to Expect in 2022 will fill the hour between 9 and 10 with critical analysis of U.S. economic conditions from Sonoma State University Professor Robert Eyler follow by my analysis of some of the implications for the wine industry. I am calling my presentation “Wine and the Big Squeeze,” which may give you some idea of what I see ahead.
The ten o-clock hour is devoted to Session 2: Talent Retention – Keeping A Strong Team Intact featuring commentary by Sandra Hess, Founder / DTC Wine Workshops; Joel A. Miller, Owner & Principal / Chateau HR Consulting; and Karen Alary, Managing Partner / The Personnel Perspective.
Session 3: Successfully Transitioning Your Winery to New Leadership follows from 11 to 12 am and features Greg Brewer, Founder & Winemaker / Brewer-Clifton; Peter Mondavi Jr, Co-Proprietor / Charles Krug Winer; and Mario Zepponi, Principal / Zepponi & Company.
Moderators for the three sessions are George Christie, President & CEO / Wine Industry Network; Stacy Briscoe, Managing Editor / Wine Industry Network; and Kim Badenfort, Director of Marketing Services / Wine Industry Network.
The presentations are being pre-recorded so that the speakers can respond to questions and comments in real time during each session, which promises to make this a more interactive experience than the typical Zoom webinar.
I appreciate the Wine Industry Leadership Conference’s focus on practical business issues facing the industry today and the impressive lineup of speakers. Hope to see you there.
How is the changing investment landscape affecting the wine industry? Some thoughts on adventure capitalism and wine (and frogs and tides at the very end).
The cover story on the November 27 issue of the Economist newspaper was “Adventure capitalism: startup finance goes global.” It wasn’t, as this illustration might suggest, a story about Bezos and Branson and how their billions were powering rocket adventure tourism in near space. That’s interesting, but it’s another story.
VC become Ad-Venture Capital
The article traces how venture capital (VC) has gone from a niche investment space to something that seems to be much broader and more pervasive. VC is usually thought of as early-stage private investment in privately-held tech and science firms. The old world of VC was mainly focused on the US and just a few sectors — think Silicon Valley start-ups. The idea was to invest early on in what in the best-case scenario might turn out to be a unicorn firm — one that would achieve a billion-dollar valuation while still in private hands and then go public in a big way. Ka-Ching!
High risk is one reason the Economist calls this Adventure (rather than Venture) capitalism. VC is inherently risky. The investments are by their nature illiquid and you need to hit the target with some very successful investments to offset the inevitable disappointments. I suppose it is a little bit like the old joke about the wine business — the best way to make a small fortune is to start with a big one. But of course some investors do very well indeed.
The Economist argues that VC is changing — being disrupted just as it has disrupted in the past. The VC world has broadened beyond the narrow set of sectors of the past and beyond the US. It has also changed as huge amounts of money have poured into VC firms. The fact that there are more investors taking risks doesn’t make the system less risky.
The Problem of Return-Free Risk
There are a number of factors powering the rise of adventure capitalism, but perhaps the most important is the scarcity of positive real returns in some traditional sectors and the consequent logic of assuming higher risk to achieve higher return. Necessity as much as entrepreneurship drives the trend.
It used to be said that US Treasury bonds were “risk-free return,” for example, and so good foundational investments for a variety of individuals and institutions. Now, an investment advisor I know says, Treasuries are “return-free risk.” The interest return is negative in real terms (below the prevailing rate of inflation) and prices are volatile. This fact forces investors to explore all the nooks and crannies of the financial world to meet their needs.
The VC boom isn’t the only example of their trend. You might not have heard of SPACs (special purpose acquisition companies) before this year, but they are now a big enough market niche to be going through their own boom-bust cycles. Some call them “blank check funds,” which suggests something about the times when high net-worth investors decide it is a good idea to hand a financial advisor (sometimes paired with a sports star or celebrity of some sort) a blank check to buy a private company.
There are also NFTs (non-fungible tokens) that sometimes trade for high amounts. I suppose there could be a SPAC that invests in funds that acquire NFTs — what could be better? And I understand there are active markets in virtual assets on metaverse platforms.
This Changes Everything?
If you want to consider how far investors will go to get a return, consider that huge amounts that some recording artists have received for their back catalogues of songs. A steady flow of fees from music streaming services apparently looks really good when the alternative is something like return-free risk.
The list of investors who are plunging into the world of adventure capitalism investing is amazing, including billionaires and speculators, of course, but also what we might usually think of as very conservative institutions such as university endowment funds and public sector pension funds. (I recently reviewed the endowment report of a major mid-west university that had 22% of its assets invested in private equity and venture capital.)
These institutional investors, who once focused on blue-chip investments, now find themselves pulled into higher risk illiquid investments by the gravity created by their need to achieve certain rate of return targets. Most institutions that I monitor aim to increase their private equity and VC profile in the future.
One important question is this: what happens to all of these investments when the economic environment changes, as it looks like it is doing now, with higher inflation pushing interest returns up and the big quantitative easing flows tapering off at least here in the United States?
Wine Investment Booms
So how is this a wine story? The Economist is right that investments in risky and illiquid assets is no longer limited to traditional venture capital firms and Silicon Valley sectors. It is hard to follow the wine business in 2021 without noting all of the investment activity. Acquisitions (Sycamore’s purchase of Ste Michelle Wine Estates, for example), SPACs, and big moves by some institutional investors, too. Lots of money searching for returns in winery and vineyard investments.
Everyone seems to want to get on the NFT bandwagon, for example. Even Penfolds, the iconic Australian brand owned by Treasury Wine Estates is piling in. According to one report,
Australia’s most celebrated wine-maker is going digital with the announcement that Penfolds is teaming up with non-fungible token (NFT) marketplace BlockBar for an innovative new project. The partnership will see a limited edition NFT tied to the impossibly rare Penfolds Magill Cellar 3 barrel made from vintage 2021. According to the iconic Australian brand, only 300 will be made available, for the cool sum of USD$130,000 (AUD$180,00).
And Penfolds isn’t the only producer to exploit interest in NFTs. Barossa winemaker Dave Powell is offering the entire 2021 vintage of his wine through sale of NFTs. Is the wine’s value greater when linked to a NFT? Many apparently think so in the same way that some firms are trying to raise their profile by linking to blockchain (Square, the payments company, is now Block).
Better than Birkin?
Fine wine has done very well as an “alternative” investment in this environment and I have received several emails promoting funds to invest in fine wine assets. According to a recent article in Forbes, fine wines topped the list of alternative investments over the last decade, a list that includes blue chip art and furniture, classic autos, and colored diamonds. Wine’s rise to the top of the pile was noteworthy because it has now outperformed the previous leader … handbags! Gosh those Hermès Birkin bags did really well — I assume you have a bunch of them in your retirement portfolio, yes? Nah — me neither.
I think it is clear that wine is part of the adventure capitalism story — how could it escape such a broad, powerful trend? So the questions I asked above apply to wine, too. What happens when the economic environment changes, as it seems to be doing now? Which of these investment strategies will endure and which will fade away?
Frogs and Tides
Many, including the Economist, seem to be enthusiastic about the adventure capitalism trend and all that goes with it, but it makes me nervous. It seems to me that this is a process that normalizes risk without actually reducing it. Having taught university classes on financial crises and written a couple of books on this topic, I take risk very seriously (and I don’t think I am alone).
The current investment environment in wine and more generally reminds me of the parable of the frog in the pot on the stove. The water heats up slowly, so you kind of get used to it. Once you realize that things have started to boil up it is too late.
I will therefore be watching closely as the monetary life-support system tapers off and interest rates rise. As Warren Buffet is supposed to have said, you never know who is swimming naked until the tide goes out!
The Unified Wine & Grape Symposium is North America’s largest wine industry gathering — a vast trade show and ambitious collection of seminars and presentations with something new and useful for every wine professional.
The 2020 Unified was the last in-person wine conference that Sue and I attended before the pandemic closures and protocols hit. So we are looking forward with more than the usual amount of excitement to the 2022 Unified, which is scheduled for January 25-27 in Sacramento.
Trade Show by the Numbers
Last year’s Unified was a virtual event and a very good one, but wine is a people business and nothing can fully replace the in-person experience. The two-day trade show will take place in the newly renovated SAFE Credit Union Convention Center on January 26 and 27. Covid protocols will be followed, of course.
You will find 760 booths and 40 large vineyard and winery machinery areas filled with just about everything anyone might need to grow grapes and make and sell wine. If you want to know what’s new, this is the place to find out.
The 2022 conference program features an expanded three full days of meetings January 25-27. The typically ambitious agenda is organized around wine industry problems and opportunities as the Daily Schedule makes clear. There is a strong emphasis on positive take-aways — practical approaches to dealing with wine industry issues and information to help us all make sense of our changing world.
The wine world has changed dramatically in just a short period of time and the themes of this year’s program take this into account, with sessions on environmental shifts, smoke taint problems, new marketing directions, and attracting and retaining essential talent. Two sessions are in Spanish.
State of the Wine Industry
Once again this year I will be fronting the Wednesday morning “State of the Industry” session. I’ll set the stage by analyzing the changing wine market from a global perspective then the all-star line-up takes over: Danny Brager (changing consumer trends), Steve Fredricks (the supply side of the wine market), Mario Zepponi (investment trends, M&A activity), and Jeff Bitter (grower trends and issues).
Danny Brager returns to the podium at the session’s end to recognize wineries that were particularly successful navigating the wine dark seas in 2021. Lots of information and analysis packed into a 2-1/2 hour session.
I don’t have to tell you that 2021 has not been the easiest year for those of us in the wine industry, so look forward to honest, straightforward analysis with a focus on practical strategies as we move ahead into the uncertain future.
Growth is the big question mark for the global economy and for the US wine market. The International Monetary Fund released their report on global growth last week, for example, and it was one of those situations where you wonder if your glass is half empty or half full.
The forecast for global growth was in the range of earlier estimates — about 6% economic growth for 2021 — but this solid expected performance was a combination of higher growth for the U.S. (7% growth) and some other developed countries with downgraded growth forecasts for less developed countries (LDCs), many of which continue to struggle with the covid pandemic.
The Global South is experiencing unexpected headwinds. Although many LDCs are projected to grow faster than the richer countries, as the table at the bottom of this column shows, the LDC growth rates shown here are lower than previous projections.
A two-speed global economy, where rich regions accelerate and poorer countries slow down, inevitably exposes fault lines that no one wants to see break open.
Planet Wine Concerns
Here on Planet Wine we are concerned about growth, too. 2020 was a good, bad, and ugly year for wine. Some brands did very well pivoting to new sales channels, others struggled to hold their own, and some really suffered. Many analysts believed that as the economy opened up from pandemic restrictions in 2021 we’d see a surge of wine spending, a rising tide of wine sales to raise all boats and solve a lot of problems.
That does not seem to have happened yet and so there is much concern. Why hasn’t broad wine market growth returned along with rising economic activity in general? Has the wine market changed in some fundamental way while we were pre-occupied with other things? Did the pandemic accelerate a market decline that was already under way?
The Bicycle Theory of Growth
As a recovering economics professor, I can’t think about questions of growth without picturing bicycles and locomotives because, unlikely as it may seem, these are useful ideas when analyzing growth.
The Bicycle Theory of Growth was originally invented to describe the dynamics of the European Union. The idea was that the EU is like a bicycle. It is safe and stable so long as it keeps moving ahead. But, like a bicycle, it becomes unstable once it stops and can easily tip over. The Bicycle Theory has many applications — I think the situation in China is a good example. Every important institution contains a variety of tensions and conflict, and pushing ahead — growth — is a way to deal with them. Once growth comes to a halt, inherent instability takes over.
The wine market is much the same. The wine business has many structural problems, but strong growth can patch up some of the weaknesses. Every week my email inbox is filled with press releases that stress growth. New AVAs. new wine brands, new wine products. Everyone is trying to grow their patch of the wine business and that can work OK if the whole market is growing, too. But that growth was already slowing down before the pandemic and now things look even worse.
Houston, do we have a bicycle problem?
The Locomotive Theory of Growth
How do you keep your bicycle moving ahead? In global economics we also talk about the Locomotive Theory of Growth. All the countries are like freight cars. They may have different ultimate destinations, but right now they are linked together in a train and heading in the same direction. It would be great if several cars helped push the train forward — and sometimes that actually happens — but all that’s really necessary is that one or two big countries or regions have enough growth to pull the rest along. Like a locomotive, get it?
The U.S. is the global locomotive in 2021 according to the IMF analysis, with fast growth powered by huge fiscal deficits and $120 billion per month of Federal Reserve quantitative easing asset purchases. Even with these massive injections, however, the U.S. economy only recovered to its pre-pandemic level in the 2nd quarter of 2021, so there were about 15 months of lost potential growth — a bit less aggregate impact than earlier forecasts projected, but still a substantial hit.
The global economy overall has also recovered to 2019 output levels, but this is mainly because of growth in the US and China. You might think that China’s amazingly quick recovery would pull the world ahead, but the Chinese economy has taken an inward turn that limits its international impact.
So all eyes are on whether the U.S. economy can keep up the head of steam it has developed and sustain it through the end of some of the stimulus payments and the Federal Reserve’s quickly-approaching asset-purchase “tapering.” It’s a big deal because if the U.S. locomotive slows, what country or region take its place? There is also the problem of how tightly the train is liked together, which why the IMF is so concerned about the two speed growth finding.
How does the Locomotive Theory apply to wine? Well, maybe it doesn’t! But even before the pandemic the US was losing steam as the global wine market locomotive. Many hoped that Chinese wine buyers would pick up the growing slack, but the most recent OIV statistics suggest that hasn’t happened.
Why has US wine consumption lost momentum? Maybe the US problem is this: not so long ago the wine market was dominated large mid-market segments that sort of pulled the whole industry along with them. I don’t want to push this too far, but it was sometimes almost possible to talk about the wine market as a whole and it would mean something because the segments were linked together to a certain extent.
Now — and I do think the pandemic has magnified this — the market segments are not so well connected. The locomotive in 2020 was wine in the segments that NielsenIQ calls Luxury and Super Luxury. It is hard to see how this strong growth helped pull the rest of the market along.
So I have the same concerns about the wine economy that the IMF seems to have about the global economy. Can the locomotive effect endure? And what happens if the train it is pulling falls apart?
Here is a summary table from the IMF report with the most recent growth projections updates. See the full report for details.
We are celebrating the tenth anniversary of the publication on my book Wine Wars here at Wine Economist world headquarters and I want to use this opportunity to reflect on how the wine world has changed since 2011. As I explained in last week’s column, Wine Wars is organized around a trio of strong forces that together (along with other factors, of course) shape the wine sector and many other industries, t00. In very simple terms …
Globalization drives change. Commodification is a commercial response to these disruptive forces. Together globalization and commodification provoke grass-roots reactions that I call “the revenge of the terroirists.” I think the framework still applies. But things have indeed changed. Here are some notes.
Wine and Globalization
Globalization continues to be a driving force in the world wine sector. Indeed, I think it is safe to say that more different wines from more different places are now available to more different consumers than at any point in history. World wine is truly an embarrassment of riches! Wherever we have travelled in the world of wine we’ve met producers anxiously seeking new opportunities.
But while the globalization pulse remains strong, there have been important qualitative and quantitative shifts. The first is that the fundamental nature of the market has changed from positive-sum to something much closer to zero-sum. As I was writing Wine Wars the world wine market had just come to the end of an era of expanding global wine consumption. I am not sure any of us where really aware of this sea change at the time. It was easy to blame the down-tick in consumption on the global financial crisis. But the recovery up-tick didn’t follow.
As this OIV graph shows, in place of rising year-on-year global wine consumption, we entered what I have called global wine’s lost decade. (The most recent OIV data, which will be released later today, show dramatic further consumption decline in 2019 and 2020.) Global wine consumption reached a high plateau and flat-lined. Demand bumped up and down a bit from year to year, but that rising trend line that was so powerful before had vanished.
This doesn’t mean that wine demand was flat everywhere, of course. Among the major markets, structural demand declines in the old world — Spain, France, and Italy — was offset by rising demand in some new world markets, especially China (from a low base) and the United States (slow growth, but still growth). I profiled what were then the three most important wine markets in Wine Wars: the UK, Germany, and the United States. Today you would need to add China to that list. In Wine Wars I speculated about what the rise of China might mean and some readers wondered why I even asked the question. There are still plenty of questions about China and wine, especially since recently sharp declines in both production and consumption in China ,but no one seriously doubts its importance any more.
Caught in the Crossfire
Global wine has changed in another important respect. Globalization in pre-Wine Wars was all about expanding international trade. Free trade agreements were the order of the day and the more of them that a country could negotiate the better. Chile was a big winner in this competition and its wine industry benefited enormously from easy access to the most important markets.
Now wine is caught in the crossfire of tariffs and trade barriers. The U.S. has imposed tariffs on some European wines, for example, and China has raised trade restrictions on wine from both the U.S. and Australia. U.S. wine sales in China were relatively small, so the economic loss was limited, but China was Australia’s #1 export market and the pain is hard to over-state. In the meantime, the British withdrawal from the European Union — a.k.a. “Brexit is Brexit” — has thrown sand in the wheels of what was once a very efficient set of trading arrangements.
What is interesting about the new political economy of wine tariffs and trade is that it isn’t really about wine at all. Wine is simply caught in the cross-fire in other disputes. Why pick on poor innocent wine? Probably because wine has a clear identity and national association. Sanctions on wine from a particular place send a clear message. And of course with so many wines available from other places, the harm to consumers who are willing to accept substitute products is pretty limited.
Globalization is built on many complex structures including especially global communications networks, so it is easy to forget about supply chains and logistics until they break down — and that’s the most recent challenge that wine and other global goods confront. Global supply chains have recently shown themselves to be less reliable and most costly than many supposed when plans were made just a few years ago. The benefits of global reach must always be weighed against the security of local linkages. How much this trade-off has changed and to what extent it will impact the global wine sector is still to be determined.
Wine and Commodification
Commodity wine is only one side of the industry, but it has been an area of growth in the decade since Wine Wars first appeared. One way to appreciate this is to look at wine branding trends. There are many different types of brands, of course. Champagne is a brand, for example, and the producers are diligent in protecting their brand’s intellectual property. More broadly, there are collective brands (appellations, AVAs, etc.) and private brands (Mouton Cadet, Barefoot, etc.). Brands are successful when they encourage demand by providing an indicator of consistent value and quality.
As the market has become more congested, brands have become more important and evolved in interesting ways. One of the most important trends, which Wine Wars anticipated, is the rise of private label wines (which some call “exclusive label” wines in a nice bit of marketing). The maker’s brand is generally replaced or supplanted by the seller’s brand. British supermarkets like Tesco made private label wine an important category and now it is everywhere. Here in the U.S. Costco, Walmart, and Target have their own wine brands, for example. But the phenomenon isn’t limited to large-multiple sellers. The upscale supermarket down the street (which appeared prominently in Chapter 3 of Wine Wars) is part of a small local chain (nothing like Kroger’s vast network), but it has its own private label Champagne.
As the wine market has stagnated over all in many regions, the demand for private label wine has grown. Buyers look for value, retailers see higher margins. Growers and producers get the business they need even if they don’t control branding. Some of these wines are very high quality. Others, of course, are drawn from lots of generic bulk wine from sources that vary from year to year and lot to lot depending upon price among other factors.
Take It To the Limit
What happens if the trend towards generic wines is taken to its logical extreme? In Wine Wars I joked (sort of) that we’d be left with Bud Red and Bud White — a threat that is more potent today with wine-in-cans gaining popularity. But I could never have imagined that we’d be staring at the specter of hard seltzer!
Wine today competes for a share of the stagnant overall beverage alcohol market. That means the growth in total wine sales need to come from other alcohol categories. And the toughest competitor in this space — the one that has been eating market share for lunch — is hard seltzer, a.k.a. flavored alcoholic fizzy water. I may be wrong, but this seems to me to be the real least common denominator threat to the idea of wine that most readers of this page likely share. Yes, I know that we’ve always had products like wine coolers, which may have served as a first step on the wine ladder. But if hard seltzer is the first step, I’m not sure what the second step might be!
Ultimately Wine Wars counted on what I called “the revenge of the terroirists” to keep wine from jumping the branded goods shark. How has that worked out? Come back next week for my thoughts.
WineFuture 2021, an ambitious virtual wine conference, is just two weeks away and I am excited to be part of the program. The wine industry has embraced the necessary pivot from in-person events to on-line programs, so there are lots of virtual conferences these days. What makes WineFuture 2021 different?
One distinguishing factor is the expansive vision of the organizers. This program thinks big, with global reach and broad societal focus. The gist of the program is this: the world is facing not one, not two, but at least four crises and the future — of wine, but not just wine — depends on what we do to address these challenges. The four crises are these.
Coronavirus Pandemic Crisis. The global health crisis comes first if only because it is an inescapable fact of daily life today that is likely to cast a long shadow into the future.
Global Economic Crisis. The pandemic and policies to address it have pushed the global economy into crisis, which some regions suffer more than others. China seems to be recovering pretty well, for example, while Europe looks likely to slip into another recession in 2021.
Inequality and Social Justice Crisis. The health and economy crises have accentuated many serious underlying issues. Inequality and social justice problems are not new, but they, along with the political reactions and social responses to them, have captured our attention.
Climate Change Crisis. Climate change is an existential threat and no serious attempt to address other problems can afford to ignore it.
Each of these crises demands our attention. And although there is a natural desire to prioritize the crises and tackle them one at a time, it is important to consider that they are interdependent and can’t really be unstirred, to use a phrase from Tom Stoppard’s “Arcadia.” It is a dauntingly complicated situation. But that’s not a reason to ignore complications and uncertainties. It is a reason to try to unravel the threads to increase understanding so that effective action is possible. That’s what WineFuture 2021 is about.
Beyond Davos Man
Looking through the many sessions and keynote talks it occurs to me that this is the sort of ambitious agenda that I normally associate with the World Economic Forum, that insanely expensive gathering of the global elite that takes place every winter in Davos, Switzerland (except this year, of course, because of the pandemic). What’s different about WineFuture 2021 is that it focuses on the wine industry, of course, and is open to a much broader audience and pressing practical concerns. “Davos Man” has become a derogatory synonym for a certain insulated attitude toward the world and its problems. I don’t see much evidence of Davos Man at WineFuture 2021 … and that’s a good thing.
So what is it about wine that provokes ambitious projects like this? I pondered this question a couple of years ago at the equally ambitious Porto Climate Change Leadership Conference. Maybe it is because wine is an agriculture product, and so rooted in nature in a way that finance capital and some manufactured goods are not? Maybe it is because so many of the largest and most important wine firms are family businesses, which bring a generational perspective to their thinking. Maybe it is wine’s special ability to bring people together — especially thoughtful people like Adrian Bridge, who was instrumental to the Porto project, and Pancho Campo and David Furer, who are the organizing forces for WineFuture 2021.
And then there’s this. WineFuture 2021 will benefit three non-profit initiatives, with funds from the program plus an auction of items donated by speakers going to the charitable causes. The non-profits are SOS Cape Town, which works to address water issues in South Africa, The Porto Protocol, which promotes sustainability in wine, and North Bay Jobs with Justice, which supports initiatives to improve worker conditions in California.
Unfolding Wine’s Future
The four day conference begins with analysis of the challenges, then dives deep into particular areas of concern, focusing on workable solutions, before gazing ahead to the future. Here is how the first day unfolds.
Francis Ford Coppola opens the show — and with his experience in film I know he will do this in dramatic fashion. Coppola is famous for his cinema work, of course, but also for his important efforts in wine and for the values that guide his many and varied efforts. The first formal panel, moderated by the wine industry’s most famous MD — Laura Catena — will address the inescapable topic of the health crisis.
The second panel examines at the economic crisis. I’m speaker and moderator and am delighted to have Rabobank’s Stephen Rannekleiv, South Africa’s Carina Gous, and Professor Eugenio Pomarici of the University of Padova join me for this discussion. Together we plan to break down the economic impacts and reactions in ways that generate useful insights. We are followed by important panels on reviewing and reversing discrimination, how to deal with the unexpected, and then a keynote by UNESCO Director General Irina Bokova.
The program on days 2, 3, and 4 follow with more important programing by global leaders and wine industry luminaries including keynote talks by Pancho Campo, UNWTO Executive Director Manuel Butler, and OIV Director General Pau Roca. Click here for a list of all the speakers and here for the complete program.
WineFuture 2021 is kind of a big deal. It thinks big, acts big, and seeks to set a high standard for the wine industry as we move into the future. I am proud of the wine industry for its support of and commitment to big ideas and big initiatives like this one.
I’m the luckiest person I know and one aspect of my good fortune is that I have had the opportunity to moderate and/or speak at the Unified Wine & Grape Symposium‘s “State of the Industry” session each year since 2012. Last week’s program was therefore my tenth appearance on the “State of the Industry” panel. How time flies!
Each year’s session brings together leading wine industry experts to talk about key trends and opportunities, recognize unresolved problems, and celebrate success. No wonder the big room (see photo above from a few years ago) is packed with industry leaders from around the world each year — until 2021, of course, when the pandemic moved us on-line.
I get a ringside seat for both the formal presentations and the backstage banter and discussions. I always come away with fresh ideas and a better understanding of the wine industry. Herewith a few observations from the 2021 program.
#1 Elusive Market Balance
A year ago one of the biggest concerns in California and Washington state was the structural surplus of wine grapes and bulk wine. With new vineyard acreage coming on-line,= a couple of big harvests already in the tank, and demand hitting a plateau, growers were encouraged to take a realistic look at their options and proactively manage supply until demand had time to catch up.
The market is much closer to balance as we enter 2021 and the big bulk wine hang-over seems to have receded. The 2020 harvest was short in California and Washington, too. The market hasn’t flipped, but things have tightened up constructively.
But that structural surplus is still there. The short term balance is more about a short crop and smoke taint issues more than long term strategies. And price is a factor, too, with coastal fruit selling for California appellation prices in many cases. That’s supply and demand, of course, but it only works in the long term if costs adjust to the new price realities.
#2 The Mandela Rule
“They say that time changes things, but sometimes you have to change them yourself.”
I first encountered this saying when I was on a speaking tour in South Africa. I heard it attributed to Nelson Mandela, which pleased me, although the interweb thinks that Andy Warhol said it first. Either way, it seems to apply to today’s wine industry.
Jeff Bitter of Allied Grape Growers advocates a proactive approach to the supply side of the market, for example. Last year he called for growers to take a hard look at their vineyards and pull out marginal vines sooner rather than later. Better to turn the page than to leave fruit unpicked when prices drop too low or demand dries up.
Cost can be addressed, too, at least in some market segments. Higher yields don’t necessarily mean lower quality any more. The same is true for machine harvesting, which addresses both cost and labor availability issues.
There is still a lot of work to do, but it has been inspiring to see the industry rise to the occasion of all the challenges that we face in these “perfect storm” times of pandemic and recession.
#3 Pathways to Success
The “State of the Industry” panel concludes with a brief presentation by market guru Danny Brager where he spotlights “best of the best” wine firms that have been especially successful in the previous year. The awards are modeled on the Olympic games awards, with bronze, silver and gold medals. It is always fun to try to guess who will get the prize.
The specific criteria for the gold medal means that it generally goes to big firms that have achieve high levels of both absolute and relative sales growth. This years winners were Riboli Family, Delicato Family, Deutsch Family wineries. If you are familiar with these firms you know that they are very different in terms of their product lines and marketing strategies. Their success proves what Jon Fredrikson always told us when he was on the State of the Industry panel: there are no one-liners in wine.
This point is even clearer if you look at the wineries that received silver medal recognition this year. Regional, national, and international wineries. Iconic brands alongside firms that fill private label needs.
What do they all have in common? Wine, of course, but it is obviously more than just fermented grape juice that connects this diverse list of successful wineries. Let me make this a discussion question. Give this some thought and leave a comment below with your ideas.
I don’t want to discount the hardships that many wine businesses have faced. I know a number of wineries, distributors, and sellers that have been forced to close their doors or dramatically reduce operations. I wish there was more support available for these businesses and that counter-productive policies like the U.S. wine tariffs could be reversed quickly. But Danny Brager’s lists of most successful wineries suggests there are still good opportunities for growth if you are in the right place and the right time with the right products and strategy.
#4 Bonus insights
Bait-and-switch alert: there were a lot more than three key points presented at the State of the Industry session last week. Herewith a few of them in quick-fire bullet format.
Cab Bubble Deflates? One of my concerns in recent years is that Cabernet Sauvignon has been over-planted and that the bubble would eventually pop. Well, it looks like the Cab bubble is losing pressure, at least in California (I’m not sure about Washington state) as some vines are being replaced with other grape varieties. But …
Pinot Noir Over-Inflated? All the attention to Cabernet may have hidden irrational exuberance in Pinot Noir plantings. Is this a bubble ready to burst?
Sauvignon Blanc the Next Big Thing? Sauvignon Blanc sales have been growing steadily for many years. Initially this phenomenon was associated with New Zealand wine imports, but now it seems to be a broader trend. Will growers move out of over-supplied Cab and Pinot and away from Pinot Grigio to Sauvignon Blanc?
It’s a War Out There. Both Danny Brager and Jon Moramarco made an important point about the nature of competition strategy. Wine, beer, and spirits are all segments within the broader beverage alcohol category. It is typical to think about competition within each segment: wine vs wine, beer vs beer, etc. It makes sense that you would target customers of close substitutes for incremental sales. But really the bigger war is between and among the segments: wine vs beer (wine does well here) and wine vs spirits (a tougher battleground). Overall beverage alcohol sales have been and likely will be flat, it is a battle for market share.
And the Winner is … Hard seltzer! Hard seltzer sales have boomed in recent years and continued to rise during the pandemic, the fastest-growing slice of the beverage alcohol category. What’s the appeal? Single serving size. Low calorie, low alcohol. Maybe even a healthy image (because they have low alcohol, hard seltzers feature nutritional labels that most wine brands don’t have). The low alcohol sweetish wine segment has done very well — Stella Rosa sales have boomed, for example, and Indiana-based Oliver wines have thrived here as well.
That’s all for now. Looking forward to 2022 when (fingers crossed) we will be able to meet in person in Sacramento in the new and improved convention center.
Will wine’s next chapter be characterized by continued crisis and austerity? Or is a return of the Roaring Twenties on the cards? Herewith some thoughts about the changing wine market and where it might be going next.
I became an economist because I’m interested in change and economics provides a logical framework to study cause and effect. I gravitated to the study of wine economics as I began to learn more about global wine markets and saw in them case studies of the sort of dynamic forces that fascinate me.
There are many ways to think about the economics of change. The first formal model that I discovered in my first year university economics course was the “cob web model” of agricultural markets, which explains why some markets are in constant flux and seldom static or idle. Under some conditions markets will gradually converge to equilibrium, but sometimes they can blow up! Change is the rule, not the exception. It is no surprise that the cob web model applies to the wine market as the Turrentine Brokerage wine business “wheel of fortune” aptly illustrates.
The Dynamics of Change
I studied globalization for many years and developed an analytical framework to help me understand global change. It isn’t original by any means and doesn’t apply to every situation, but it is a way of thinking that helps me work things out. Here’s a way to think about change. Start with a dynamic force, the source of change. Could be a change in policy, technology, or even nature. The dynamic force stimulates responses in the form of actions, which attempt to accommodate or exploit change. The actions further disrupt existing systems and bring forth reactions to both the initial change and the actions it produced. If the reactions are strong enough, they can produce another wave of change.
Change. Action. Reaction. Change. Once you think about it you start seeing these forces everywhere.
The Wine Wars Scenario
If you’ve read my book Wine Wars you can already see how this analysis can be applied to the wine industry. Globalization is the dynamic force in this case and it comes in many flavors and has many impacts both positive and negative. Globalization has spread wine around the world and fostered the exchange of international investment (think Chandon China), expertise (think Flying Winemakers like Michel Rolland), and grape varieties (Rkatsiteli in the Finger Lakes of New York, Gruner Veltliner in Australia’s Adelaide Hills, Chardonnay and Cabernet just about everywhere).
Globalization brings a world of wine choices to your doorstep, inducing many actions is response. The one that I focused on in Wine Wars was the commodification action. With so many choice at so many price points, consumers can feel overwhelmed. Risk and uncertainty discourage wine consumption, so a logical action is to simplify wine. I identified “the Miracle of Two Buck Chuck” as a particularly successful example of this action. Consistent commercial quality wine plus low price backed up by Trader Joe’s bulletproof reputation equaled a phenomenon. Two Buck Chuck gave millions of Americans the confidence they needed to try wine and to enjoy it. It helped democratize wine, if you see my point.
But not every attempt at commodification grows the wine pie the way that TBC did. And sometimes simplification can go too far, as the current hard seltzer phenomenon attests. It is no wonder that there is a reaction that I called “the revenge of the terroirists.” The reaction also took many forms, with the natural wine movement just one highly visible aspect.
We have experienced a lot of change in the last 12 months in terms of the pandemic and the resulting economic crisis. This prompted a flood of actions ranging from dramatically aggressive monetary policies and fiscal stimulus packages to lockdowns of bars, restaurants, cities, regions, and sometimes whole nations. It’s been a “K-shaped” situation: some people have profited from the pandemic syndrome while others struggle and sometimes fail to hang on.
Now there is relief in sight with the emergency release and slow roll-out of vaccine. How will people react when the dark clouds begin to lift? I have argued that we are unlikely to see a sudden return to what we used to call “normal” life. You cannot simply flip a switch and bring back business and lives that have disappeared.
The Punch Bowl Overflows
But not everyone shares this cautious view and there are plenty who look forward to a “Roaring Twenties” of fast growth and exuberantly high times as Financial Times columnist Martin Sandbu recently noted in an op-ed titled “Goodbye virus-ridden 2020, Hello Roaring Twenties.” One hundred years ago the world was traumatized by a bloody world war and the devastating Spanish flu. When the fog cleared, people looked around and decided it was time to celebrate — to live for now since tomorrow is always uncertain.
From a financial standpoint, there is reason to think that the twenties might roar, at least for a while. I used to teach my university students the conventional wisdom that it was the role of the Federal Reserve to take the punch bowl away just as the party was really getting rolling. But these days central banks are pledging to keep interest rates very low and easy money available far into the foreseeable future. It is easy to see how this could pump up a bubble (for bears) or sustain solid growth (for bullish types).
Sandbu writes that
Public health restrictions have disproportionately hit the more hedonistic end of the consumption spectrum: what we have stopped doing is eating together, drinking together, entertaining one another and going on holiday together. Vaccine-induced herd immunity will, quite literally, make it OK to party again. And my goodness will we have reason to party.
It is not just the numbers that point to a consumer boom; behind them lies something less tangible but yet more convincing. You do not have to be an economist, only human, to understand the desire to let loose, get together, and take risks after a year of cautiously locking down at home and distancing ourselves from one another.
This scenario suggests a roaring decade for wine, too, as the travel and hospitality sectors take flight. It won’t be a simple reset, however. As any Marty McFly fan can tell you, the future changes when you tweak its past. But the wine sector should share the good times in Sandbu’s roaring economy scenario.
There are no guarantees, however. The roaring 1920s didn’t end very well. The current economic expansion depends upon both good health policy and good economic policy. What happens when fiscal stimulus ends, as it much eventually, and the monetary punch bowl runs dry? What will the receding tide reveal?
And then there is inequality to consider. Sandbu notes that
What all this calls for are measures which ensure that everyone feels the economic and social system has their back. A dark underbelly was, of course, also as much a feature of the previous Roaring Twenties as the glitz of its Great Gatsby surface.
The economy and the wine economy, too, have been K-shaped so far, with some sectors rising sharply while others struggle or fall. That’s not a recipe for sustainable growth.
As the door to 2021 slowly swings open, the landscape looks both familiar and transformed at the same time. When the U.S. wine industry entered 2020, for example, the problems seemed to be stagnant demand on one side and excess wine grape supply on the other. Not a good situation for the world’s largest wine market, but not something beyond our ability manage, either.
Those problems are still with us, although they’re a bit lost in the fog. Structural wine production capacity is still too large, but this is disguised a bit by a smaller 2020 harvest in California and widespread smoke damage, which took some grapes off the market.
Overall wine demand is still under-performing, too, but that is hard to gauge exactly because of the way that wine channels have been disrupted by the covid pandemic in general and bar/restaurant restrictions in particular. Consumers are buying much more through retail channels, a good deal more direct-to-consumer and much less in the on-trade. Whatever the net impact, which seems to be negative, the effects on individual wineries in particular sales channels is significant.
The Unified Sine & Grape Symposium‘s “State of the Industry” session is about two weeks away so those of us on the panel are working to put our thoughts about 2021 in order. Here are some of my working notes. The theme here is that, while there is plenty of bad news going into 2021, if you take an international perspective on the U.S. situation, it quickly becomes clear that things could be much worse. If that sounds like a “glass half full” perspective, well it is.
Take the loss of on-premise sales. These lost sales are costly indeed, but producers in Europe had it much worse because they depend much more on bar and restaurant sales. No wonder their industries are hurting to badly and that crisis distillation is back in some E.U. countries.
If people in the U.S. wine industry are looking for something to be thankful for, they might consider how lucky they are not to be Australia. The U.S. industry has been caught in the trade war crossfire to be sure. Importers and distributors have been hit by U.S. tariffs on many European wines, for example, and China has imposed tariffs on the relatively small amount of U.S. wine sold there.
As if matters weren’t bad enough, the U.S. recently imposed 25% tariffs on French and German still wines above 14% abv, which had been spared in earlier rounds of the trade wars. U.S. firms that import, distribute, or sell these wines are collateral damage in the bigger trade fight, which has nothing to do with wine. These are daunting challenges, to be sure, but nothing in comparison to what Australia is experiencing.
The Australian wine industry invested heavily in opening the door to the Chinese market and moving up-market once inside. And they were remarkably successful. As you can see above in data from Wine Australia, China was by far Australia’s largest export market by revenue in 2019, accounting for $1.3 billion of the $2.9 billion of wine exports. China bought almost three times as much as the #2 export market, the United States.
Australian wine is #1 in China, too, measured by value. Australia overtook France in the Chinese sales league table in 2019.
This was good news for Australian producers back with economic relations with China were happy ones, but now a variety of tensions exist and China was imposed up to 212% tariffs on Australian wine. I don’t know if sales will go to zero immediately, but that is a lot of tariff to absorb. Although anti-dumping measures are cited in this case, the real conflict is elsewhere. Economist have long held that anti-dumping tariffs, ostensibly designed to deal with damage from predatory pricing, are often subject to political abuse.
Australian producers hope to be able to divert previously China-bound production to other Asian markets and some of it may end up in the U.S. and U.K., too. But realistically there is just too much wine for these markets to absorb and margins in the pivot markets are unlikely to match those in China.
But things could be even worse. What if Australia was even more dependent on Chinese market? The turn of the political screw would be even more painful then. And that is what happened in the past to Moldova and to Georgia when their biggest wine export market, Russia, decided to use wine as political tool.
The Good News is That the Dollar is in the Dumpster
You can find another good news story by looking at the foreign exchange markets. Typically when there is any kind of crisis around the world there is a rush to the security (and liquidity) of the U.S. dollar. Uncertainty drives the dollar in turbulent times. Or at least that’s what we thought.
A strong dollar translates into cheaper imports, which would not have helped in any way restore domestic balance in the U.S. wine market. A strong dollar isn’t the worst thing for domestic producers, but the negatives outweigh the positives for many firms.
As I noted in a Wine Economist column back in August, this crisis is different and the dollar didn’t soar, it plunged as this graph (above), which shows the dollar versus the euro, indicates. And then, after bouncing around for a while, it plunged again.
Now this is bad news for consumers who want to buy imported wine because a cheap dollar buys less on international markets, so European wines, many already subject to U.S. tariffs, are even more expensive. But it is good news for U.S. wine producers who compete against euro-priced imports. The cheap dollar gives them a cost advantage in the domestic market. There is also a theoretical advantage in export markets, but honestly those markets are pretty congested right now with lots of unsold wine (some of it from Australia) looking for a home.
But foreign exchange news isn’t completely sunny for U.S. wine because the dollar isn’t falling against all currencies. As this graph shows, the Argentina peso is even weaker, so the U.S. dollar steadily increased in relative terms, making wine from Argentina a fierce competitor where price is the key factor, especially bulk wine trade.
Economics is often called the dismal science and these examples of good news have a decidedly glass-half-empty feel. Stay tuned for glass-half-full analysis in coming weeks.
The Wine Economist World Tour is back on the virtual road in 2021. We hope for the return of in-person events before too long, but until that’s possible virtual events will do very well. Here are the first three stops for the new year.
The Unified: State of the Industry
The Unified Wine & Grape Symposium (January 26-29, 2021) is going virtual this year, including both the seminars and the amazing trade show. It will be quite an experience.
The program addresses a host of important issues, with special attention to wildfire threats and diversity and inclusion initiatives. Several sessions analyze changing wine market conditions including the State of the Industry session on Wednesday, January 27. Danny Brager, Glenn Proctor, Jeff Bitter, and Jon Moramarco join me on the virtual panel.
Idaho Wine Commission: State of the Industry
The Idaho Wine Commission’s annual meeting goes virtual this year, too, with half-day sessions on February 22-23, 2021. This is the third time I’ve spoken at this event and I am sad that I won’t be able to visit Boise in person to refresh friendships, exchange insights, sample great Idaho wine, and enjoy Boise’s amazing Basque food scene.
I will anchor the first day’s program with a special take on the State of the Industry. Greg Jones, the world’s foremost viticultural climatologist, will speak the following day. Economic change, climate change. Food for thought for Idaho’s dynamic wine industry.
Wine Future 2021: Challenges & Solutions
WineFuture 2021, an incredibly ambitious international event, will happen on February 23-26, 2021. This big international conference boasts an all-star cast. I will lead a panel on the economics of the crisis on February 23.
The folks behind Wine Future 2021 think big. The theme of the first day is the four crisis challenges facing wine (and the world): climate, economy, pandemic, and inequality. Day 2 focuses on solutions and sources of inspiration. The final two days look to the future from many different points of view.
Wine Future 2021 has been hosting a pre-conference webinar series since November to get ideas in the air and discussion flowing. You can view previous webinars (including one I did with Rabobank’s Stephen Rannekleiv) and register for upcoming broadcasts on the Wine Future 2021 Webinar home page.