Theories of the Global Wine Glut

September 12, 2023 By Mike Veseth in economic crisis, Supply and Demand, wine markets 10 Comments

The world is awash with wine, or so it seems from reading the news. Down in Australia, they are counting up the gallons of unsold wine in a new (to me) measure: number of Olympic-size swimming pools full. Rabobank estimates that the surplus would fill 859 big pools or, if you want a more conventional measure, about 2.8 billion bottles. That’s a lot of surplus wine.

In France, the government has allocated two hundred million euro for crisis distillation. Surplus wine will be bought up to support local prices, and then distilled into industrial alcohol. The next time you use alcohol-based hand sanitizer at your favorite Paris restaurant it might be based on wines from Bordeaux or the Rhone.

Rioja is swimming in wine, too, and here in the United States, there are big stocks of bulk wine for sale in California and thousands of acres of surplus vineyards in Washington state.

This Time is Different

Surplus wine is not a new thing. Wine is an agricultural product and so it is prone to the famous “cobweb” market theory that predicts periodic booms and busts. Turrentine, the California wine and grape brokerage, has cleverly adapted this idea to the wine sector with their “Wine Business Wheel of Fortune.” But this kind of surplus is relatively short term and what we see in the market today looks more permanent.

Sometimes government policies create wine gluts. This is a big part of Australia’s problem today, of course, as Chinese foreign policy has essentially cut off Australian wine from its biggest export market for several years. And the European Union’s famous “Wine Lake” was filled up by price support policies that encouraged over-production to stabilize producer incomes.

If wine surplus is not unusual, what is different about this time? Surpluses today are global not just national. And the driving force is primarily insufficient demand, not excess supply. Something’s changed to create a new global wine environment. What happened? It is a complicated situation, but I’ll try to scratch the surface in a helpful way today and in next week’s Wine Economist.

The Global Wine Glut in Perspective

The graph above (taken from the most recent OIV global wine market report) shows the volume of global wine consumption since 2000. Wine consumption rose steadily for the 20 years that ended with the global financial crisis in about 2007. This was the golden age of wine with many producers (think Argentina and New Zealand) entering global markets with great success and worldwide wine consumption on the rise.

The pause during the financial crisis was thought at the time to be a temporary phenomenon, but in retrospect, we can see that it was the start of what I have called “wine’s lost decade” with stagnant wine sales. The years of steady growth were no more.

Wine consumption fell during the COVID-19 pandemic period, but we expected it to bounce back when the health crisis passed. It hasn’t and in fact, global consumption has fallen back recently to levels not seen since the early 2000s. The picture looks different if we measure the value of sales not the volume of purchases because of the premiumization trend. But people are drinking less wine and less wine than we are growing.

Is there a general theory to explain what happened to global wine? There are lots of special theories that, in an ad hoc sort of way, try to explain individual circumstances. I’ve identified three general theories that help me think about this situation. I’ll analyze two of them briefly below, saving the third for next week’s Wine Economist.

Theory 1: The Generation Gap Hypothesis

The Generation Gap Hypothesis is much discussed here in the United States. The Baby Boom generation powered that long rise in wine consumption, the theory holds, but the following generations failed, for one reason or another, to engage with wine with the same ardor as their parents and grandparents. Total demand cannot be sustained because younger drinkers have not increased consumption to replace the falling demand by boomers as they age.

The younger audience is just different, in this telling, and the task ahead is to introduce them to wine’s appeal through marketing or perhaps cultural education programs. In many wine countries, affiliates of an organization called Wine in Moderation are active to present the positive case for wine in opposition to prohibitionist forces.

It is difficult to organize a response to the Generation Gap problem because generic marketing programs are costly and not always effective (and wine producers and regions have strong incentives to invest in private promotion as opposed to generic programs).

The assumption that generations are fundamentally different leads to the uncomfortable question: Which generation is the anomaly? Are Boomers the norm and the problem is to get Millennials and others to get in line with them? Or, in fact, are Boomers a special case? Was that long wine boom the result of special circumstances? If so, how likely are those circumstances to reappear? Tough questions.

I think generational analysis is very useful in understanding the global wine glut, but it is important to be careful in drawing conclusions. I remember a university colleague of mine who cautioned his Asian Studies student to avoid popular “Asian Values” explanations of political and economic conditions in Japan, Korea, Singapore, etc. “Asian Values” can be twisted to explain anything that might happen, he told his students, so it isn’t valid on its own. Economic events ought to have economic explanations, too, and ditto political events. That’s how I see the Generation Gap hypothesis.

Theory 2: The Life Cycle Hypothesis

The Life Cycle Hypothesis presents a very different theory of the global wine glut. The hypothesis holds that generations are more alike than different in many ways. In particular, the demand for wine remains latent until consumers reach a certain stage in their lives. Millennials are just now approaching this stage and later generations are still in the queue. Wait for it, as Radar used to say on M*A*S*H, and they will discover wine.

This sounds like good news, but it really isn’t because post-Boomer generations are smaller and so, even if and when they find wine, there won’t be enough of them to replace Baby Boomer consumption levels. No use waiting for wine consumption to surge (and not much use in generic promotion, etc.). Supply adjustments are necessary and the sooner the better.

One question that the Life Cycle Hypothesis raises is why the big boom in wine sales only happened when the Baby Boomers came of age. Why didn’t previous generations get the wine bug before them? An answer is, of course, that Boomers represent a surge in the population curve, so anything they do has had a bigger effect, and the generations that immediately preceded them might have understandably had their normal cycle patterns interrupted by the Great Depression and World War II. So maybe the cycles will repeat as this hypothesis suggests, smaller than the Boomers but otherwise much the same.

An Economic Theory?

I find both hypotheses useful in understanding the global wine glut, but my Asian Studies colleague’s voice haunts me. I would be more satisfied if there were an economic theory to explain the economic fact of wine’s over-supply.

Come back next week for my attempt to provide an economic theory of the global wine glut.

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A book that I have found useful in thinking about generational analysis is The Generation Myth: Why when you’re born matters less than you think by King’s College London professor Bobby Duffy. Generations matter in Duffy’s analysis, but only when taken in context. Food for thought.

Wine and the Curse of the Inverted Yield Curve

August 8, 2023 By Mike Veseth in economic crisis, Economic impact, wine, wine markets 3 Comments

These are uncertain times for the global and U.S. economies and for the wine industry’s economy, too. The International Monetary Fund recently released its World Economic Outlook mid-year update and the story it tells can be as optimistic or pessimistic as you want it to be.

Landings: Soft, Hard, Trampoline

The “glass half full” story is that, for the world economy as a whole, inflation seems to be slowing and global growth is slowing, too. But nothing is crashing … yet. That makes the possibility of a “soft landing” scenario seem more likely than it did just a few months ago. Maybe the slowing economies will moderate rising prices without the need for a sharp, job-destroying recession. And perhaps key central banks will be able to halt interest rate increases before they go too far.

A “soft landing” is far from certain, but it might be possible. That’s good news for a dismal scientist like me because one alternative is the “hard landing” scenario, where jobless numbers zoom to bring inflation down (or the “trampoline landing” possibility, where anti-inflation nerves fail and prices jump pop back up again).

Down the Up Yield Curve

These same issues apply here in the United States, where economic growth seems to be holding up better than in some other regions. But concern is especially heightened by a phenomenon called the “inverted yield curve.” A yield curve plots government bond yields from short-term (30 days) to long-term (30 years). The curve normally slopes upwards as in the chart above from 2021, which makes sense since long-term investors should receive higher returns for taking on the risk associated with longer-maturity assets. You can better guess what economic conditions will be like in 30 days than in 30 years, so the 30-year return should be higher.

A lot of attention is paid to the yield curve among investors. The New York Times and the Wall Street Journal publish yield curve charts daily. And Japan’s central bank actually makes yield curve management one of its policy targets.

In this context, an inverted yield curve, where bond yields are lower for longer-term assets as in the recent chart above, is a puzzle and an alarm. It is a puzzle because it is not clear why investors would be willing to lend longer-term for less. Do they think that inflation, which is relatively high today, is likely to be much lower in the future and so the inflation premium necessary to compensate for price hikes would be lower than today?

What? Me Worry?

Or is it because they expect today’s high-interest rates to push the economy into a recession? Falling incomes tend to drive interest rates down because loan demand is less. And a deepening recession would likely force the Federal Reserve to push interest rates back down. Down to the level, the yield curve seems to predict? That’s something to worry about.

And investors are worried because the inverted yield curve has a very strong record of predicting recessions. The economy doesn’t tank immediately, but eventually. Growth turns negative a year or so after the curve inverts and recession alarms go off.

This Time is Different?

So it has been about a year since the yield curve turned topsy-turvy and it is no wonder that investors are getting nervous. Will the curse of the inverted yield curve take hold later this year or perhaps in the first quarter of 2024? Some so believe in the yield curve’s track record that they are positive that bad news is in the offing.

It is dangerous to argue “this time is different” in the face of a theory that has both logic and history on its side, but maybe this time is really different, and that soft landing will happen. After all, how many times in the past have the conditions that led up to the yield curve flip included a global pandemic, supply chain breakdown, massive fiscal stimulus, and a very hot shooting war involving major powers?

So maybe the curse of the inverted yield curve won’t strike the U.S. economy in the near future. A recession is bound to happen eventually and some people will look back at today’s yield curve situation and see cause and effect, but there are just enough wild card shocks to the system in the past few years to make it plausible that the U.S. economy might “stick” its soft landing after all.

This Wine is Different?

That said, it makes sense to consider how a recession might impact the wine sector. After all, even if the U.S. economy avoids a recession, many of the other major global economic engines including Great Britain, the E.U., Japan, and China look vulnerable today.

If we exclude the short, sharp shock of the covid pandemic period, the last sustained recession was about 15 years ago during the global financial crisis. The weak economy affected the wine industry in many ways, but trading down (to lower prices) and trading over (to more casual wine brands) were part of the story. Would that happen again if a recession showed up now?

Yes, I suppose so, at least to a certain extent. But the wine market has changed in many ways since the last big slump. For example, U.S. wine sales growth was still pretty strong going into that crisis, whereas the market is already slack today and a recession could be more damaging.

Luxury Market Woes?

The trend towards premiumization has strengthened, too, which could affect trading down and trading over. The heart of the market has moved to higher price points that may well display different characteristics than before. And of course, wine sales seem even more dependent on a relatively small segment of the total market, so their particular reactions are very important.

The fact that growth in wine sales has become increasingly concentrated in the luxury part of the spectrum is troubling right now. Sales of luxury goods in general surged during the covid pandemic. Cash from government stimullus payments plus the money that wasn’t being spent on services financed a luxury spending spree. Recent financial reports suggest that tighter consumer budgets have brought a lot of this spending to a halt except at the very high end (think Birkin bags). Even Champagne is feeling the squeeze, I’m told.

The wine economy is experiencing lots of stress and uncertainty these days. It would be great if the inverted yield curve turned out to be a false alarm this time. Fingers crossed!

Unsustainable? Anatomy of California Vineyard Economics

April 18, 2023 By Mike Veseth in economic crisis, Economic impact, wine, wine markets 9 Comments

The April 2023 “Vineyard Issue” of Wine Business Monthly features articles that address many different important winegrower issues. I find W. Blake Gray’s analysis of “Prices Don’t Pencil Out for Growers Who Saw Production Costs Double” particularly interesting because it deals with a problem that I wrote about earlier this year in a Wine Economist column titled “Margins? What Margins? The Big Squeeze in Winegrowing 2023.”

Red Ink Harvest

The Wine Economist column was provoked by a conversation with some California growers at this year’s Unified Wine & Grape Symposium and connected the dots linking their observations with Vinpro data presented a few weeks earlier for South Africa. Only 9 percent of South African winegrowers earn a sustainable return on their vineyard investment. A little more than half break even or earn small nominal profits, but not enough to sustain continuing investment. And almost 40 percent reported losses. And the margin gap is getting wider.

My California grower friends said their situation was not much different from the South Africans and, indeed, this is a problem I have seen around the world, although not typically backed by the sort of data that Vinpro collects for the South African industry.

The two simple strategies to claw back margins are to reduce yields to try to raise quality and therefore price or to reduce unit cost by increasing yields. South African growers have found it difficult to raise prices enough to make the first strategy work, so many are focusing on higher yields. But it is not as simple as that, the California growers told me, because sometimes buyers won’t allow higher yields and, in any case, some older vineyards just aren’t set up to make high yields possible.

Losing in Lodi

W. Blake Gray’s article digs deeper into the California situation, specifically for District 11, the San Joaquin Valley North, which includes Lodi. He quotes Aaron Lange of Lange Twins Family Winery and Vineyards in Lodi, for example, who explains that average grape prices are lower now than they were 25 years ago (despite higher costs throughout the production chain). Lodi Cabernet Sauvignon, for example, sold for an average of $695 per ton in 2022 according to the UDSA grape crush report. It sold for an average of $794 in 1997. The figures for Chardonnay grapes are $627 in 2022 versus $774 in 1997. That, my friends, is a big squeeze.

Is it possible to increase yields enough to break out of the big squeeze? Gray provides data from a 2021 UC/Davis study of the District 11 situation that suggests that higher yields can sometimes, but not always, solve the problem. At a price of $650 per ton (which is close to the average current Chardonnay and Cabernet prices), for example, the Davis study calculates a $156 per acre profit at 12 tons per ace and a $780 per acre product at a yield of 13 tons, but losses at lower per-acre yields.

The situation is only a little different at a price of $750 per ton. Profits ($633 per acre) appear at a yield of 11 tons per acre, rising to $2080 at a yield of 13 tons. But yields below 11 tons per acre still generate red ink even with the higher price.

Lower prices make things much worse. At a price of $550 per ton, no level of yield between 7 tons and 13 tons generates a profit. It’s red ink all the way down.

Unsustainable Yields

These data and reports make me wonder if winegrape growing is economically sustainable for many producers in District 11 and similar regions and these doubts are heightened by Gray’s interview with Jeff Bitter, the President of Allied Grape Growers (and a grower himself). Bitter notes that the economics of winegrape growing have made it difficult or impossible to focus solely on grape production.

Why continue to farm grapes? Some farm winegrapes because it is what they want to do (a “lifestyle” choice), Bitter suggests at one point, or because the alternatives are unattractive. There are a lot of factors that define the situation, including market conditions in different regions (Central Valley, Central Coast, North Coast) and farm size. There is money to be made in winegrapes under the right circumstances, but there are plenty of losses, too, and it is easy to understand why generational transitiions among growers are often in doubt.

When we talk about sustainable winegrowing, we usually focus on the environmental impacts, but Gray’s article suggests that we need to take the issue of economic sustainably more seriously, too.

Thanks to Wine Business Monthly for all the great articles in this issue and to W. Blake Gray for his focused report on the vineyard margin problem and the economic issues facing growers generally.

Manias, Panics, Crashes, and Wine

March 21, 2023 By Mike Veseth in economic crisis, wine, wine markets 1 Comment

One of the highlights of our visit to the Catena winery near Mendoza a few years ago was the opportunity to spend a few minutes in Nicolas Catena’s private study. Catena was an economics professor before he returned to the family wine business to guide it through the turbulent wine markets of the time and I was interested to see what was in his library (and on his mind) from those days.

As I scanned the bookshelves I was struck by the fact that, back in the late 1970s and early 1980s, Catena and I were following the same news reports and reading the same research, including books such as Charles P. Kindleberger’s classic Manias, Panics and Crashes: A History of Financial Crises. Relevant reading then and now, too, don’t you think?

This Time is Different?

It is easy to imagine that financial instability, including manias, panics, and crashes, is something that happens in other places to other people at other times, but the recent banking crisis in the United States (and elsewhere) brings the problem clearly to our attention, especially given the involvement of Silicon Valley Bank (SVB), an important part of the U.S. wine industry’s financial ecosystem,

It has always been the case that financial instability potentially affects all types of businesses and, as Professor Catena understood all too well, the wine business. But, as I argued in my book about the global financial crisis, it is easy to ignore risks, forget the lessons of crises of the past, or to simply conclude that “this time is different.”

Financial instability is baked into the cake, as they say. Crises are a durable feature of modern capitalism so businesses are unwise to ignore potential risks, both direct (the risk that someone who owes you money can’t pay) and counter-part risk (the risk that someone who owes money to someone who owes you money can’t pay).

Wine’s Minsky Moment

It is possible to argue that the four most relevant economists of the 20th century were Schumpeter, Keynes, Friedman, and Minsky. Joseph Schumpeter studied growth. John Maynard Keynes helped us understand unemployment. Milton Friedman’s ideas of money and inflation are very important. Schumpeter, Keynes, Friedman — these are names you might know. What about the fourth, Hyman P. Minsky?

This is a Minsky moment because his work examined instability and crisis, which he thought were an inherent part of the financial system. I first studied Minsky when I was writing my book Selling Globalization. Using Minsky’s analysis, I argued that globalization was more fragile than most scholars believed because it was built, fundamentally, on the unstable foundation of global finance. People thought I was crazy as I worked through my ideas … and then the Asian Financial Crisis hit!

How do financial crises start? And how do they end? Like Tolstoy’s unhappy families, each is different in the details, but Minsky established a general seven-stage pattern that is a good guide. I will paste an excerpt from my book Globaloney 2.0 below so that those of you interested in the details can follow along. Pay particular attention to the distress, revulsion, and contagion stages and see if they sound familiar.

Try to Remember …

So how should the wine industry react to financial crises like the one we are experiencing today? It would be easy to say that crises are a finance problem, not a wine industry problem. Wine just happened to get caught in the cross-hairs this time because of the SVB’s particular pattern of business. What are the odds of that happening again? That’s a fair point. Wine loans had nothing to do with the bank’s collapse.

My view is a little different. Financial crises are a wine problem because wine is a business and businesses are necessarily disrupted by unstable finance. Businesses need to take their financial risks more explicitly into account. That goes for wine businesses, too.

I don’t think that wineries in Argentina have forgotten this lesson, mainly because they have suffered repeated and severe crises (the current 100+ percent inflation rate suggests another crisis in on the cards).

The wineries who found their accounts at SVB frozen for a few days (because they exceeded the $250,000 limit to FDIC insurance that applied at the time) will not quickly forget this lesson, although I wouldn’t be surprised if the memory eventually fades once “normal” operations are fully restored. That’s one of the reasons why Minsky moments like this return.

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Excerpt from Chapter 2 “Financial Globaloney: Safe as Houses” in Michael Veseth, Globaloney 2.0: The Crash of 2008 and the Future of Globalization (Rowman & Littlefield, 2010).

The leading authority on the theory of financial crises is Hyman P. Minsky, an economist who never received the respect he deserved within the profession because his theories challenged the orthodoxy that markets are generally quite stable (I will have more to say about this later).i Every financial crisis is different in the details (and not all bubbles or potential bubbles actually burst), but there is a family resemblance that Minsky explains as the seven stages to a financial crisis.ii

The first stage is called Displacement and it represents a change in expectations. It could be a new invention, discovery or government policy or it could be simply a change in expectations about the future. Whatever it is, Displacement creates a new object of speculation and at least some insiders rush in to take advance of the news.

Displacement happens all the time, of course. That’s why the stock markets go up and down every day and every hour of the day and every minute of every hour. People constantly react to real news, fake news and changing expectations. So there are a million little potential financial bubbles filling the market like fizz in a glass of Champagne, rising up and popping all the time. But some of them are a bit more substantial and gather the attention of both insiders and outsiders. It is hard to predict in advance when it will happen, but when it does a speculative bubble starts to form.

Minsky’s second stage is called Expansion. More and more money begins to focus on the speculative object, whatever it is – gold, silver, real estate or even tulip bulbs. The market can expand in several different dimensions. The most obvious, of course, is through money creation. When central bankers expand the money supply, as they sometimes do, they may expect that new funds will flow pretty much everywhere, but sometimes they are disproportionately diverted to particular investments fueling bubbles.

Leverage is another source of expansion. Leverage refers to the use of borrowed funds (other people’s money) to increase the return on your money. Suppose you have $1000 and you believe that XYZ Corporation’s stock will double in the value in the next month. You could invest your $1000 and, if you are correct, earn a $1000 profit, a 100% return. Or you could take your $1000 and borrow $9000 to invest $10,000 in total. This would be a leverage ratio of nine to one. If your expectations are fulfilled, the profit would be $10,000 on your $1000 investment (minus whatever interest costs you had to pay). Instead of a 100% return you would receive something approaching a 1000% return. Leverage is a wonderful thing when it works, but it is of course very risky. Just as you can earn much more than your initial stake you can also lose much more.

Expansion also takes place as the population of potential investors grows. Insiders (people with specialized investment knowledge) are joined by well-informed amateurs and then rank amateurs who sometimes just follow the herd based on what they read on the internet or hear from friends and co-workers. Water-cooler investors, I guess you could call them. The movement from professionally managed employee pension funds to individually managed 401k and similar retirement instruments has facilitated this sort of expansion in many countries. It is easy to belittle the ill-informed financial decisions that “blind capital” makes, but highly paid geniuses do not always out-performed them.iii

Finally, expansion can occur if the speculative object draws the attention of international or even global investment markets. Interconnected global financial markets are capable of focusing enormous sums on particular speculative objects, with predictable results. It is as if a giant magnifying glass focused the full power of the sun on some object or creature. Destruction seems assured, but first comes the heat.

Expansion does not always produce a crisis because investors can be fickle. There is always something new to consider, always a million different things to displace expectations and the funds that fuel expansion now can quickly withdraw and move on. The markets can achieve a state that Minsky calls Euphoria, however, if attention remains focus and expansion sustained. Euphoria produces a sense that investors can do no wrong. It is impossible to make a bad decision, since the general rise of the market covers any poor individual choices.

Economic logic simply evaporates in the Euphoria stage. Logic warns to buy less as price rises. Euphoria whispers that rising prices today are harbingers of even higher prices now – time to buy! And buy even more as those future price increases appear. The buying binge and the higher prices they produced are indeed self-fulfilling prophecies, which are the best kind. Sometimes Euphoria just fizzles out, but sometimes it can be sustained, especially if expansion from whatever source is maintained.

Distress comes next in the classic seven stage scenario. Distress is the moment when insiders begin to believe that the market cannot be sustained. Doubts creep in and alternative scenarios are reviewed. The market may pause or slow or the collapse could begin.

Revulsion follows as some investors begin to act upon their doubts. Insiders head for the door first, often leaving with substantial profits in their pockets. Others follow, causing the Crisis stage. The self-fulfilling rising price prophecy of Euphoria is reversed as lower prices trigger sell-offs that drive prices even further down. Everyone wants cash in this market, but it is hard to come buy. Who will lend in a falling market? Who will buy when prices are falling to fast? Someone does, obviously, but at much lower prices.

Crisis is often accompanied by the seventh stage, Contagion. The crisis in one market spreads to others. Contagion can happen in several ways. Sometimes the bubble in one market expands to others and all collapse at once. This was the case with the Peso Crisis of the 1990s. Unlucky investors, drawn to Mexico by the prospect of NAFTA gains, ended up putting money into many Latin American markets, all of which surged and then collapsed together. They called it the “Tequila Hangover” effect.

Leverage creates another contagion vector. As prices fall, leveraged investments go “under water” and speculators are required to put up additional funds. Since credit is hard to come by in the crisis stage, there is often little choice but to sell off good investments to cover losses on increasingly bad ones. Thus the Russian financial crisis of 1998 triggered contagion in Brazil as speculators sold off Brazilian investments to cover their rouble losses.

Finally, contagion can take place as credit markets freeze up generally. Businesses that are accustomed to ready access to credit (for themselves or their customers) are shocked as liquidity disappears. Economic misery spreads from the financial sector to the so-called real economy as declining wealth and restricted credit affect change buyer and seller behavior.

This is how a classic financial crisis unfolds. Not every crisis goes full term, of course, and the damage when they do is not always substantial. But as Kindleberger explained 30 years ago and Reinhart and Rogoff’s study has more recently confirmed, major damaging financial crises happen often enough to be considered a common feature of international finance. So no one should be surprised when these markets behave as they so frequently do.

i John Kenneth Galbraith is another economist whose status outside the profession was much higher than within it due to his failure to his unorthodox views.
ii See chapter 2 of Kindleberger Manias, Panics, and Crashes.
iii Walter Bagehot coined the term “blind capital” to refer to uninformed but enthusiastic amateur investors who are drawn into speculative bubbles.

Got Wine vs Not Wine? Wine and the Generation Gap

February 14, 2023 By Mike Veseth in economic crisis, Unified Wine & Grape Symposium, wine, wine markets 7 Comments

We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress … is over; that … a decline is prosperity is more likely than an improvement.

The economist John Maynard Keynes wrote these words in a 1930 essay called “The Economic Possibilities of our Grandchildren” and I have been thinking about them quite a lot recently in the context of the wine industry. Keynes was writing in the depths of the Great Depression. Is wine in (or headed towards) a Great Depression of its own?

On the Other Hand …

Certainly the mood at last month’s Unified Wine and Grape Symposium was mixed. Obviously I didn’t talk to all the 10,000 people who attended the 3-day event, but I think I got a general sense of what wine industry people are thinking and feeling from those I encountered.

On one hand (a classic economist opening phrase), there was an upbeat mood because the meetings and trade show themselves felt back-to-normal after several years of covid-driven disruption. The house was packed for our State of the Industry session, for example, and there was a record number of exhibitors at the trade show (and a waiting list for next year). Glass at least half full, for sure.

One the other hand (you knew that was coming), it was impossible to ignore some of the discouraging news in the air (I reported on some of this in last week’s Wine economist column). Some people blamed this on the recently released Silicon Valley Bank report, but I think that is unfair. Like our State of the Industry session, the SVB report has an obligation to be objective — to report the straight facts without a lot of spin. And I think their report does that well. Facts are facts. The question is what you do with them and whether, like Keynes, you can see beyond the current crisis to the possibilities of the future?

The Generation Gap: Got vs Not

Keynes was thinking in generational terms when he wrote his famous essay and a lot of the analysis of wine’s current malaise is generational, too. The baby boom generation powered the golden age of American wine, the story goes, but the generations that followed haven’t embraced wine with the same warm hug. What can we do to make Gen Z consumers love wine as much as their grandparents do? How can we close the wine generation gap?

This is a good question (and I am glad so many people are asking it), but it by-passes part of the problem. Yes, boomers as a group drink a lot of wine, but in fact wine consumption is concentrated among just a small fraction of boomers. The baby boom generation is large — it contains multitudes. It is both Gen Got Wine and Gen Not Wine. Generalizing about generations like the boomers is a risky business.

This is true, I believe, for other generations, too. What makes the wine drinking boomers different from the boomers who don’t drink wine or don’t use alcohol at all? And what, if anything, does the boomer wine cohort have in common with wine-drinking members of other generations? Maybe generational differences aren’t the whole story (or even the most important part of the story)? Is the gap as much within generations as between them?

How Full is your Glass?

Should we be optimists or pessimists as we consider the future of wine? Well, our situation is nowhere near as dire as what Keynes faced back in Depression days. The wine market requires only relatively small adjustments by comparison to restore a balance and a bit more to kick-start growth. Not easy by any means, and it might not happen, but not at all hopeless.

Keynes was an optimist and he used this essay to look far into the future, peering past the short term problems necessarily on his readers’ minds. The prospects for our grandchildren are bright, he said, so long as we are able to avoid certain obstacles — over-population, violence and war, and the politicalization of science. Our current economic situation, since we are the future of Kaynes’s past, is indeed prosperous compared wtih 1930 if not quite so bright as he hoped.

A Half-Full Future?

Let me follow Keynes’s example in talking about the future of wine. Wine has endured for thousands of years and survived many dark periods, so it is not unreasonable to imagine a bright future for wine as both culture and industry. But there are obstacles to be avoided.

In my recent book Wine Wars II I propose that wine must deal with a triple crisis: environmental crisis, economic crisis, and identity crisis. The identity crisis is most relevant to today’s topic. Wine is an alcoholic beverage — the fermentation process doesn’t just add alcohol, it transforms the grape juice in miraculous ways. If, as I think is possible, wine becomes defined by its alcoholic content — grape juice alcohol the way that hard seltzer is fizzy water alcohol — then something very important is lost and wine’s future grows dark.

Another obstacle — and this allows me to circle back to the generational issue — is occasion. Opening a bottle of wine is an occasion (there is both an element of ceremony in the cork-pull and the more-than-single-serving quantity to deal with) and must align with occasions in consumer life.

Mind the Gap?

Dinner is an occasion sufficient to pull a cork at our house, but that’s not true for everyone. I wonder how much of the wine that is sold is consumed with meals versus other types of occasions and how this might differ for different demographics? The wine industry would be wise to try to adapt to the occassions that younger consumers (and older consumers, too) actually experience rather than the ones we imagine they should enjoy.

An article in yesterday’s Wall Street Journal suggests that at least one big beer company is rethinking its marketing plans in light of the threat of recession. Home consumption is rising at the expense of on-premise, for example, so marketing will work to put beer at the center of home and family occasions. Smart thinking!

A recent Financial Times column by Gillian Tett provides food for thought regarding Generation Z attitudes. The article doesn’t talk about wine, but maybe there are implications for wine. Tett cites studies that show that Gen Z workers demand more control over work environments than employers are used to. If they can’t customize the job, they prefer to quit, one expert suggests. Dangerous to generalize, of course, but it makes me think about how the wine experience compares with, say, cocktails in this context?

The generation gap is complex. Lots of food (and drink) for thought!

Margins? What Margins? The Big Squeeze in Winegrowing 2023

February 7, 2023 By Mike Veseth in economic crisis, South Africa, Unified Wine & Grape Symposium, wine markets 7 Comments

I was talking with a group of California winegrowers just before the Unified Wine & Grape Symposium‘s State of the Industry session a couple of weeks ago and the stories they told me made me understand that The Big Squeeze, which I wrote about around this time last year, is still going strong.

Margins? What Margins?

The Big Squeeze? Many winegrowers have for some time been caught in a squeeze between rising costs and stagnant or sometimes even falling wine grape prices. Your margins are getting squeezed, I asked? Margins? What margins? they replied. Margins got squeezed away some time ago.

The Big Squeeze is significant and not limited to the United States. When I travel the world speaking to wine industry groups I will ask quietly about how the growers are doing? Often the reply is a shrug, downward look, and slow shaking of the head. Not so good, they tell me.

South Africa is a good case in point. Every year Vinpro, the important South African winegrowers organization, reports its survey of vineyard profitability. Rico Basson, Vinpro’s executive director, released the results for 2022 at the annual Nedbank Vinpro Information Day last month and the chart above summaries the conclusions.

Unsustainable Operations

Only about 9% of the South African winegrowers were earning a sustainable level of income per hectare — a high enough return to support long-term investment. Fifty percent were caught in a low profit zone, with positive net income, but less than they might earn elsewhere. (If you remember your Econ 101 definitions, this would be positive accounting profit but zero or negative economic profit — it’s an opportunity cost thing.)

The actual level of income per vineyard hectare (the green line in the chart above) is far below the sustainable income level (black line). Fully 41% of the South African winegrowers in the survey were either at break-even (3%) or bleeding red ink (38%). The average return on investment in 2022 was minus 2.4% and the gap between costs and revenues was widening. That, my friends, is a really big squeeze.

Volume or Value?

Which is the better strategy to escape the squeeze: volume or value? Do you push to raise vineyard yields or try to raise price though lower yields but higher value?

I don’t know the answer for South Africa today, but when I spoke at the Vinpro event a few years ago the answer was clear. The higher the yields, the better the chance for success. Sacrificing quantity for quality didn’t consistently pay, I was told, because South African wine found it hard to break through the premium price-point ceiling on international markets. Most producers couldn’t manage to raise price enough to compensate for the higher unit costs. Ouch!

I told this South Africa story to my winegrower friends and they shook their heads. Pretty much the same here, they said. Given the limits on what buyers would pay for their grapes, the best way to profits was to increase yields to, say, 12 tons per acre or more depending on grape variety.

Limited Yields, Limited Opportunity

But there were two problems,, I was told. First, some buyers won’t go along — they were concerned about loss of quality at the higher yield, although modern viticulture practices make it possible to raise yields without loss of quality possible in certain circumstances. So in these situations raising yields is a non-starter.

And it isn’t always possible to get yields up to an economically sustainable level because many older vineyards just aren’t set up for that and have built-in limits that were OK when they were planted years ago, but make life difficult today.

So what are you supposed to do, one grower asked me, if you have an older vineyard that needs to be renewed at high cost? This is where the unsustainable profitability issue really hits. Do make a big bet that the Big Squeeze will loosen up in the future? My winegrower friend was less than optimistic.

Unsustainable?

Not all vineyards bleed red ink, of course. The situation is different in different winegrowing regions with different market conditions and vineyards of different ages and farming set-ups. But the problem remains. As I reported last year, wine prices have fallen in real terms recently and one result has been to make the already-serious vineyard squeeze even worse.

When you talk about sustainable vineyards, people naturally think about environmental sustainability. But economic stability is an issue, too.

What’s Ahead for U.S. Wine? Searching for a Crystal Ball

November 15, 2022 By Mike Veseth in economic crisis, wine, wine markets 5 Comments

We are starting to gear up for the State of the Industry session at the 2023 Unified Wine & Grape Symposium and it looks like we will have a lot to talk about. The challenges the wine industry faces are significant and this year’s expert panel (Danny Brager, Glenn Proctor, Dr. Liz Thach MW, Jeff Bitter) is well-prepared to help us navigate the wine-dark seas.

Everyone wants to know what’s in the future — what will the U.S. wine market look like a a year? Five years? Ten years? Prediction is difficult for a variety of reasons, however, not least because the wine economy is embedded in the national and global economies, which are themselves full of uncertainty these days.

Looking for a Crystal Ball

Back in the days when I was writing university-level economics textbooks I told students looking for clues about the future to consult what are called leading economic indicators. The idea is that there are a lot of economic statistics available. Some tell you what has already happened (these are the lagging indicators), some give you an idea of what’s going on right now (coincident indicators), and a few offer a glimpse of possible future trends (leading indicators).

The number of new building permits and housing starts are leading indicators, for example. Once a permit is issued or construction begun, that sets in motion a chain reaction of economic activity that extends out into the future.

Durable goods orders are another leading indicator of economic activity in general, but they speak to attitudes and expectations. Durable goods, by definition, are long-lasting and need not be re-purchased every week or month. If consumers and business increase durable goods purchases, then it suggests that they are optimistic about the future and willing to make an investment now rather than wait for the future.

One economist, famous for his mastery of esoteric details, used to focus in particular on sales of new brooms on the theory that an old broom will always do if you are concerned about future finances. Buying a new broom is therefore a clear statement of economic optimism. That makes sense when you think about brooms as a gateway durable good.

It is maybe a little bit disturbing to learn that Alan Greenspan, the former Fed chair, once identified sales of men’s underwear as an important leading indicator. Really? Apparently, underwear sales are pretty steady, so any blip one way or another says something significant about consumer expectations. If you want to start an interesting conversation, try asking your male friends how long it has been since they re-stocked their underwear drawer. “Why are you asking?” People are so suspicious!

Where is Wine Headed?

There are many other recognized leading indicators for the overall economy — the yield curve, for example — but there isn’t room here today to talk about them because I’m interested in the wine industry and I wonder what statistics might be particular useful in forecasting the future of wine sales?

One approach is to use the chain-reaction theory. Where does the decision to buy more or less wine begin? What early indicator can we monitor today that will reveal something about how much wine, what kind of wine, and at what price consumers will choose in the future? Corkscrews? Well, I suppose that’s a wine-specific durable good, but I don’t think tracking corkscrew or even wine glass sales is going to help much.

Recently I stumbled upon news that I think is relevant to the “wine leading indicator” search, even if the data is not exactly what I am looking for. The news? Costco has decided not to raise its membership fees this year. Here’s why I think the Costco news could be important.

The Costco Effect

Lots of people enjoy wine and it is sold in lots of ways and places. But, as we all know, the core wine market is surprisingly narrow. When you take away the U.S. consumers who don’t consume any alcohol (about 35% according to a Wine Market Council study a few years ago) and then those who use alcohol but not wine (21%), the residual is surprisingly narrow.

While 29% of consumers buy wine a few times and month or year, the industry actually relies on a relatively small number (15%) of high frequency wine drinkers who pull corks or unscrew caps pretty much every week. The demographics of this group — and especially the high-end buyer subset — is key to the future of American wine.

If you want to know what these consumers look like, I think a good place to start is by going to your closest Costco warehouse store. I am not saying that the Costco demographic matches up perfectly with wine demand or that purchases in other sales channels are unimportant. It is just that the relatively affluent user base at Costco, the people who are willing and able to pay the $60 to $120 annual membership fee here in the United States, are a group worth watching closely. They buy lots of stuff at Costco, including a surprisingly large amount of wine given the limited number of stores.

Now you might think that tracking Costco wine sales would be good economic indicator, but it doesn’t serve our purpose here because it would be a lagging or maybe coincident economic indicator and not the forward-looking insight needed. But there is one bit of Costco data that I think it useful — and it is flashing yellow (but not yet red) right now: the annual membership fee.

Hot Dogs and Rotisserie Chickens?

Most prices at Costco rise and fall with market forces (the costs of rotisserie chickens and the hot dog meal are notable exceptions having been fixed for years). The membership fee is a critical factor at Costco. The fees themselves account for a substantial amount of the company’s net profit and the renewal rate is high — over 90 percent. Costco typically adjusts its membership fee about once every five years, according to news reports, and the last time they did was in 2017. So no one would have been surprised if a rise was announced in 2022.

But this time around the Costco gurus looked hard at their customer base … and blinked. They decided to pass on a fee increase, which could mean a lot of things but might mean that they believe even their affluent member base is feeling the economic heat. And that’s not good news for wine, since these are the customers driving the U.S. market these days.

Is this the leading indicator for wine sales I was looking for? No, it isn’t, so I am still looking. Ideas? Please let me know. In the meantime, while as a Costco member I am glad that the annual fee is frozen this time around, it will be good news for the wine trade when Costco decides that their affluent, wine-drinking patrons are secure enough to tolerate a rise in rates.

Storm Clouds Ahead for Global Wine Trade

October 18, 2022 By Mike Veseth in economic crisis, wine, wine markets 3 Comments

Storm clouds are on the horizon for the global wine trade and I am worried because I can’t really say how things are going to develop in the short and medium terms.

The problem is that the disruptions are both broad and deep. They are widespread throughout the commodity chain and impact both the supply- and demand-sides of the market. It’s a lot to take in. Herewith a brief sketch of the situation as I see it today.

Storms on the Supply Side

Some of the storms on the supply side are literally storms — wind, hail, freezing temperatures in the main winegrowing regions of Europe plus drought and wildfire smoke taint elsewhere, especially California.

The increasing extreme weather impacts are unlikely to diminish and inject elements of risk and uncertainty into the supply side of the market. Some of this risk is inherent to agriculture, of course, but it seems like the factors that punctuate equilibrium are both larger and more frequent. Increasingly hard to predict what’s coming over the horizon.

Storms on the Demand Side

From a global perspective, as I explain in my recent book Wine Wars II, a small number of countries and regions (France, Italy, Spain, California) shape supply conditions and an equally small number (USA, UK, Germany, China) are key forces on the demand side.

Each of these countries if facing its own economic crisis and taken together they suggest major impacts on both global wine imports and, according to a recent IMF report, the prospects for a global recession. JPMorgan CEO Jamie Dimon is predicting a US recession within six to nine months.

The storm clouds are somewhat different in each country but the fact that they have come together at the same time raises concerns. Inflation is both high and persistent in the US, for example, causing the Federal Reserve to double down on interest rate increases. The hope is a “soft landing” that would slow the economy enough to reduce wage growth without actually increasing joblessness and tipping the economy into recession.

This is a tough target, especially because monetary policies are subject to what are called “variable lags.” You roughly understand what will happen, but not when. Imagine driving a car with variable lags on the brakes, accelerator, and steering! In theory you might be fine but in practice you will probably end up in the ditch.

The recent declines in equity prices and widespread cooling of the housing market is another concern. A recent Rabobank report suggests that sales of super-premium wines, which seem to persist even when income takes a hit, are not immune to changes in net worth.

So it is entirely possible, following Dimon’s lead, that the US will spend 2023 with both falling income and rising prices. Some wine market niches might be little affected by this combination, but the broad market will certainly suffer.

German and UK Problems

Germany is known for its bulk wine imports, and these are likely to be squeezed by rising energy prices and falling output in its energy-dependent manufacturing sector.

What will German consumers choose: shivering in the cold while they drink their usual ration of wine? Or staying warmer but cutting back on price or quantity? I will leave the answer to you.

The UK market, which is in some ways the wine trade’s most important, will suffer higher energy bills this year and next, too. But its problems go deeper. Already more economically fragile than the other countries discussed here, it must now confront the fact that its new government seems to be both economically reckless and politically tone-deaf (an unusual combination — it is usually one or the other). So the Bank of England has had to raise interest rates even faster than expected and invoke emergency measures to prevent fire-sale losses among pension funds.

To invoke the car example once again, the UK’s drivers are stomping down on both the brake and accelerator pedals at the same time. Not a very safe situation according to most driving instructors. Jeremy Hunt, the newly appointed chancellor, signaled a big U-turn in economic policy yesterday, but much damage has already been done and fundamental problems remain. Watch for more shoes to drop.

Although there was some good wine business news in the original “mini-budget (scheduled duty increases had been postponed), the alcohol tax increases have been restored and the outlook for the wine trade is grim. Will UK consumers spend their inflation-reduced purchasing power on the higher mortgage bills that are coming soon due to rising interest rates … or will they buy wine? Once again, the answer’s up to you.

China’s Economic Bicycle

A few years ago we would have looked to China for a ray of sunlight in the global storm, both in terms of the wine trade and more generally. But not today. The Chinese economy is fragile right now, with many risks to consider, especially in the possibility that the property bubble might burst or deflate.

I have argued that the Bicycle Theory of Economic Growth applies to China. A bicycle is only really stable as long as it keeps moving forward. Once it stopes, staying upright is a real balancing act. I think China is much the same — it has to move ahead rapidly to keep its inherent contradictions from tipping it over. The property market crisis is a clear example of this. As growth has slowed, consumers are now refusing to pay their mortgage bills for housing still under construction.

Five years ago, China would have been the engine we counted upon to pull the global wine trade and, indeed, the global economy, out of its storm. Now its weakness on both fronts (covid lockdowns prevent a return to normal wine market conditions, for example) stand in the way of recover.

What Next?

What next? That’s the question on the cover of last week’s Economist newspaper. The Economist speculates that we are entering a new era of global economic policy. Hard to know where that path will lead.

What’s next for the global wine trade? The combination of demand- and supply-side storms I have outlined here make it hard to know. What next? Too soon to tell, I think. Stay tuned.

Wine and the No-Recession Recession

August 9, 2022 By Mike Veseth in economic crisis, Economic impact, wine, wine markets 2 Comments

Are we headed for a recession here in the United States? Or are we already there? What about the future — the second half of 2022 and 2023?

If you follow economic news reports you have encountered all sorts of answers to these questions. And you can be forgiven for being a little confused and maybe quite a lot frustrated that the answers to these important questions are not clearer. Herewith a brief guide for the perplexed with implications for the wine sector.

The Recession Question

The “rule-of-thumb” definition of a recession is when there are two consecutive quarters of falling gross domestic product (GDP). The U.S. economy is in a recession now by this definition because GDP fell in both the first and second quarters of 2022 (second quarter data subject to revision). By this measure, many of the world’s most important economies are either in recession, too, or teetering on the brink.

The two-quarter rule is very useful, but it is not the final world. The National Bureau on Economic Research (NBER) more formally defines a recession in a way that stresses depth, diffusion, and duration: a recession is a significant decline in economic activity that is spread across the economy and lasts more than a few months.

The NBER’s more nuanced definition is better than the two-quarter rule, but it has some downsides. How significant is significant, for example? And how widely spread need the decline be? There is also the problem, unavoidable with lagged economic indicators, that a recession can only be declared well after it has started and will probably be over before the conclusion is called.

So we might be in a recession now — one that started months ago in fact — or we might not. We will only know for sure later on — perhaps when the recession (if there is one) is already over. Argggh!

Up, Down, Twist

If you follow business and finance news you will find evidence to back up any hypothesis you may have about a recession. Prices in some sectors are rising quickly (have you bought a airline ticket recently?) and plunging steeply in other areas.

There are plenty of stories of firms with squeezed profits, declining sales, and employee lay-offs. But there are also stories about rising sales and profits and, of course, the labor market puzzle, where the number of unfilled positions is about twice the number of people who say they are looking for work (but apparently cannot find it).

Last week’s job report was unexpectedly strong — the unemployment rate is only 3.5% and total employment is back to the pre-pandemic level — suggesting that the U.S. is not currently in recession, despite what the GDP figures say. Ironically, some analysts speculate that this good jobs news actually increases the odds of bad news in the near future. The reasoning is that the Federal Reserve will be forced to raise interest rates even higher now in order to slow control demand-driven inflationary pressures.

What’s the story? Is the economy up or down? The correct answer (which applies to wine, too) is … yes. If you are looking for a generalized answer to the recession question you won’t find it. Maybe it is best to say that the economy is twisting. The devil is in the details here and the answer you get depends upon where you look and how.

The Price is Right?

There are several reasons for this complicated picture. One of them is that the economy — like the wine market — is never all one way or another. Like the climate, it is always running hotter in some areas and colder elsewhere.

But another, particular to this moment, is the fact of rapid inflation because an inflationary economy works by different rules. In an economic system with stable prices, consumers cut back purchases when employment falls or when there is fear of unemployment. In an inflationary economy, the pressure to cut back spending affects a much broader set of consumers who find their budget squeezed by rising prices of necessities. Higher energy and housing prices (although moderating somewhat in recent weeks) have put the squeeze on millions of households regardless of job market status.

And so that’s what we are seeing now. So maybe the recession question isn’t the right one to be asking.

The Squeeze: A Tale of Two Worlds?

The conventional wisdom is that wine is recession-proof. Maybe. But an inflationary squeeze and the twist it creates is different and I don’t see how wine sales can escape unscathed.

Under these circumstances it is more important than ever to know your customers and the product chain that connects them with your business. Based on recent quarterly reports, for example, it looks like selling wine into mass market Walmart World’s part of the retail spectrum, where both the retailer and its clients seem to be really feeling the squeeze — is much different from selling wine into high income Costco World, where the squeeze is still on but the impact seems more moderate. So far.

Wine & Stagflation: What Will Happen When Wine Prices Rise?

May 17, 2022 By Mike Veseth in economic crisis, wine, wine markets, wine price 2 Comments

The conventional wisdom is that we are likely entering the first significant period of stagflation — inflation + stagnant economic growth — in several decades. We have experienced recessions in the recent past, but not rising inflation, and not the two of them at once.

Inflation is in the headlines every day, but unemployment is very low — so why worry about slow growth or a recession? The answer is that while Federal Reserve policies will try to finesse the situation and bring inflation down to a “soft landing,” most observers think that a sharp contraction will be necessary to bring inflationary expectations down. Growth will fall while inflation still runs high, at least for a while.

So, these are uncharted waters for business and government leaders, especially since it comes on the heels of the covid crisis, which has shaken so many economic and social structures. It is, as I have argued here, uncharted territory for the wine business, too.

So far, as I suggest in last week’s Wine Economist newsletter, wine prices overall have not risen to the degree you might expect given the many cost pressures the industry confronts. Average wine prices seem to have actually fallen in real terms so far according to the data I have surveyed.

It may be premature to begin worrying about how wine consumers will react to higher prices in the stagflation context if and when they arrive. Or — and this is my point — it might be strategic to consider possible scenarios in order to prepare for the eventuality. Because this is uncharted territory — and because, as Jon Fredrikson says, there are no one-liners in wine — it makes sense to consider the range of consumers responses rather than to look for a single silver bullet answer.

Herewith, therefore, a brief and incomplete list of possible consumer responses to rising wine prices in the context of stagflation.

Econ 101: substitution, income, and wealth effects.

We begin with Econ 101 basics. An increase in the relative price of wine would create a substitution effect to some extent. It might be to substitute other beverage alcohol products for wine or — the trading down effect — to substitute less expensive types of wine for previous purchases. How this plays out depends on a number of factors. Younger drinkers, for example, are known to be less loyal to wine and more prone to dividing their purchases among many beverage types, so the substitution effect may be stronger for them than for boomers, for example.

Of these three effects the substitution effect is the most interesting to me because we don’t have much recent experience of supply-driven price increases in wine (versus demand-driven “premiumization”.

The income effect, driven by both higher wine prices and higher prices in general, points towards lower consumption of wine overall. Wine is already more expensive than most beer and spirits on a per-serving basis, and so vulnerable to income-driven consumption adjustments.

There is also likely to be a wealth effect, with wine consumption falling as consumers (mainly but not exclusively boomers) re-assessing buying decisions in light of changing net worth. Rising interest rates implemented to fight the inflation tend to reduce the value of bond holdings directly and equity values indirectly through their impact of the present value of corporate cash flows. Substantial interest rate rises are likely to affect portfolio balances and 401k holdings. If you have been watching the way that equity markets have reacted to the Federal Reserve’s initial 1/2 percent interest rate increase you know what I am talking about.

Stalking the Illusive Wine Bargain

In a perfectly competitive market the “Law of One Price” rules, but the wine market has many quirks and peculiarities, so similar products can sell for very different prices. Rising wine prices are likely to push price-sensitive buyers to even more aggressive bargain hunting efforts. Expect your local Grocery Outlet store to do even more wine business.

But bargain hunting doesn’t necessarily mean searching for rock bottom prices. We recently received samples of two wines that represent good value in their respective categories. The pitch that came with the wines was that these are inflation-fighters. The first wine was Villa Maria Marlborough Pinot Noir Private Bin, which retails for about $19.00. It is an excellent wine that sells for less that many comparable products from, say, Oregon or France.

The second wine was Le Volte dell’Ornellaia, a “Super-Tuscan” from the Bolgheri region that, at around $29, represents a way for many consumers to raise a glass in high style without breaking the bank. How do you find inflation-fighter wines like these? Start by asking whoever sells you wine to solve a puzzle — I’d like a wine like this, but I want to pay something more like that. A good wine seller will appreciate the challenge.

Risk Management

Buying wine is not easy because it is what economists call an “experience good.” You won’t really know if you will like a particular bottle of wine until you buy it and pour yourself a glass. Reviews and so forth help, of course, but the taste of wine is ultimately very subjective and the risk of disappointment almost inevitable.

As inflation pushes wine prices higher, the disappointment risk becomes more of an issue. One strategy that consumers are likely to adopt in this circumstance is to concentrate their purchases on a few tried-and-true brands or grape varieties that they trust to consistently please. Trying new wines from different regions and brands made from different grape varieties is great fun, but the high reward when you find an exceptionally pleasing wine comes with high risk of disappointment.

So don’t be surprised if consumers — and the stores and shops who sell them wine — react to wine inflation by doubling down on tried-and-true wines. This reinforces a trend that emerged during the pandemic wine surge.

But don’t forget that all this is predicated on wine prices finally rising as fast or faster than the general inflation rates. This hasn’t happened yet … and it might not happen at all. Stay tuned.