Whatever Happened to Argentina’s Wine Boom?

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

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

Anatomy of the Malbec Boom

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

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

Shift to US Exports

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

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

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

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

Argentina

The End of the Boom

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

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

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

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

The Red {Blend} Menace

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

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

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

Economic Policy Squeeze

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

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

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

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

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

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

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

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

China Market Meltdown and Contagion

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

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

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

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

The Contagion-Busters

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

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

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

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

Get Ready for the Wine Industry Financial Symposium

Sue and I have just returned from a week in Northern Italy as guests of the Valpolicella Consorzio (look for a series of industry reports on Valpolicella and Prosecco in the coming weeks) and now we are getting ready to head to Napa, California for the Wine Industry Financial Symposium that will be held there on September 22 and 23.

The theme of the symposium is “Let the Good Times Roll,” which will strike some as a bit off-key since the California headlines this year have been dominated by bad news — first drought and then the recent Napa earthquake. The program (see below) doesn’t sidestep the challenges, but seeks to put them into the context of a rising tide in the U.S. market. It should be an interesting couple of days!

Monday’s program features workshops that focus on specific issues of interest to wine industry professionals including the Hispanic wine market in the U.S., the rise of craft beer, the emerging talent gap in the wine industry, tax issues and vineyard finance.  Lots of interesting topics and great speakers — something for everyone.

The Tuesday morning program accentuates the positive, beginning with David Freed’s industry overview and ending just before lunch with Carolyn Wente and the celebration of 130 years of Wente Vineyards. In between Dr. Robert Smiley will present the results of his annual survey of wine industry CEOs and John Ciatti will report on U.S. and global harvest trends.

I will talk about “Lessons from the Global Wine Wars,” with an overview of important global market trends, focusing on two that I think are particularly relevant for the U.S. industry today: the “premiumization” of the wine market and the surge in “disintermediation” in the wine industry.

Tuesday afternoon features sessions on social media marketing, “next generation” consumers and wine distribution. Looking forward to hearing the speakers and seeing everyone in Napa next week. Here’s the complete program. Cheers!

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Wine Industry Financial Symposium

Monday Workshops – September 22, 2014

Session I: 1:30 p.m. – 3:00 p.m. – Choose One

1. NEW DIRECT TO CONSUMER TRENDS
Examine new ways to relate to consumers through the direct to consumer channel. Speaker-moderator Craig Root will present several new tips designed to enhance your operation. Featured speaker Norman Stolzoff, President of Ethnographic Insight, will offer a detailed look at ethnographic research. This important field uses anthropological insights to solve real-world problems. Ethnography helps better serve customers, leading to profitable results.
Craig Root, Visitor Management Resources
Norman Stolzoff, PhD, President, Ethnographic Insight Inc.

2. TRANSACTIONS: WHO ARE THE BUYERS AND WHO ARE THE SELLERS?
John Mackie,
Partner, Carle, Mackie, Power & Ross, LLP, Moderator
Tony Correia, Owner, The Correia Company
Matt Franklin, Principal, Zepponi & Company
Josh Grace, Managing Director, International Wine Associates

3. THE HISPANIC WINE CONSUMER
What does it mean to the wine industry and what do we do to make wine the beverage of choice?
Steve Rannekleiv, Executive Director, Research, Rabobank International
Natalia Velikova, PhD., Texas Tech University

4. THE EMERGING TALENT GAP POSES RISKS FOR THE WINE INDUSTRY
Ray Johnson, Director of Wine Business Institute, Sonoma State University
Carol O’Hara, Partner, Burr, Pilger & Mayer, Moderator
Tom O’Brien, Director of Human Resources, Trinchero Family Estates
Larry Smith, Senior Vice President, Human Resources, Jackson Family Wines
Dawn Wofford, Managing Partner, Benchmark Consulting

Session II: 3:30 p.m. – 5:00 p.m. – Choose One

5. EQUITY AND DEBT MARKETS: CURRENT TRENDS AND FUTURE OUTLOOK
David Freed, Chairman, The Silverado Group
William Beyer, Principal, Prudential Agricultural Investments
Hal Forcey
, American AgAppraisal
Perry F. Deluca, Senior Vice President, Wine Industry Team Leader, Wells Fargo Bank

6. WHO IS THE COMPETITION? WILL CRAFT BEER AND CRAFT SPIRITS HURT WINE SALES, OR SHOULD YOU JUST JOIN THEM?
Bill Leigon, President, Jamieson Ranch Vineyards
Mark Crisler, CS, Founder & Chief Everything Officer, Trellis Wine Group
Jesus Ceja, Ceja Winery / Carneros Brewing Company

7. USE PERMITS: CURRENT ISSUES AND FUTURE TRENDS
Phillip Kalsched, Partner, Carle, Mackie, Power, Ross, LLP, Moderator
Dean Parsons, Project Review Manager, Sonoma County Permit & Resource Management Department
Jeff Redding, Principal, Land Use Environmental Planning Service
Beth Painter, Principal, Balance Planning

8. COMMON TAX ISSUES FOR VINEYARDS AND WINERIES
Federal Income Tax Updates, State Income Tax Updates, Sales Tax Updates and Estate Tax/Valuations
David Pardes, Tax Director, PricewaterhouseCoopers
George Famalett, Tax Partner, PricewaterhouseCoopers
Joan Armenta Roberts, Managing Director, PricewaterhouseCoopers
Eric W. Nath, ASA, Principal, Eric Nath & Associates
Thomas Garigliano, Tax Partner, Burr, Pilger & Mayer


Tuesday General Session – September 23, 2014
7:45 – 8:15 a.m.
COFFEE & REGISTRATION

8:15 – 8:20 a.m.
WELCOME & INTRODUCTIONS
Lisa Adams Walter, Director of Programs, Wine Industry Symposium Group

8:20 – 8:30 a.m.
WINE INDUSTRY OVERVIEW
David Freed, Chairman, The Silverado Group

8:30 – 9:15 a.m.
WHAT WINE INDUSTRY LEADERS THINK IS IMPORTANT FOR THE FUTURE
Robert Smiley, PhD, Dean and Professor Emeritus, Director of Wine
Graduate School of Management, University of California, Davis

9:15 – 10:00 a.m.
LESSONS FROM THE GLOBAL WINE WARS
Mike Veseth, Editor, The Wine Economist Blog

10:00 – 10:30 a.m.
GET – ACQUAINTED BREAK

10:30 – 11:15 a.m.
THE CALIFORNIA AND GLOBAL HARVEST UPDATE
John Ciatti, Broker, Ciatti Company LLC

11:15 a.m. – 12:00 noon
WENTE VINEYARDS CELEBRATES 130 YEARS
Carolyn Wente, CEO, Wente Vineyards

12:00 – 1:15 p.m.
NETWORKING LUNCHEON

1:15 – 2:15 p.m.
HOW SKILLFUL USAGE OF DIGITAL MARKETING AND SOCIAL MEDIA
NEED TO BE INTEGRATED IN THE BIGGER PICTURE OF BRAND BUILDING AND POSITIONING
John Gillespie, President, Wine Market Council and CEO, Wine Opinions
Karena Breslin, VP Digital Marketing, Constellation Brands
Alisa Joseph, Vice President, Business Development, The Nielsen Company
Mark Gordon, Digital Marketing Manager, Jackson Family Wines
Mike Osborn, Founder and VP Merchandising, Wine.com

2:15 – 3:00 p.m.
NEXT GENERATION WINE
Liz Thach, PhD, MW, Professor of Management and Wine Business, Sonoma State University
Judd Finkelstein, Judd’s Hill Winery
Lisa Broman Augustine, Broman Cellars
Nicole Bacigalupi Dericco, Bacigalupi Vineyards

3:00 – 4:00 p.m.
WINE AND DISTRIBUTION
Jonathan Pey, Principal, TEXTBOOK Napa Valley
Jon Moramarco, Principal, BW 166 LLC
Dan Grunbeck, EVP Corporate Business Development & Strategy, Youngs Market

4:00 – 5:00 p.m.
FINANCIAL SPONSOR FINALE
WINETASTING & RECEPTION – Hosted by WIFS Sponsors

 

The One Diaper Wine Theory: South African Democracy After 20 Years

Wines of South Africa has released a series of videos celebrating the twentieth anniversary of democracy in South Africa. They call it The Democracy Series. I’ve inserted the first of the eight short films above, but I recommend watching them all.

Wine and Democracy: The Thandi Project

What do freedom, equality and democracy have to do with wine?  I don’t have a general theory yet, but I can tell you that they are very closely linked when it comes to South Africa. The birth of democracy coincided with the end of apartheid’s long years of isolation for the country and its wine industry. To a certain extent, the country and its wine industry were both reborn two decades ago.

As a reader noted in a comment to a previous article in this series, once upon a time not so long ago many people shunned South African wines and investments, etc. because of the lack of equal rights in that country. Things are much different twenty years on and The Democracy Series is a good way to make the point. Now, as I will try to explain below, a person with ethical concerns  might well seek out South African wines rather than boycott them.

Thandi Wines, the subject of the first video in the series, is a good example of how wine and democracy can mix. Thandi, which means nurturing love in the Xhosi language, was started in 1995 on the initiative of Paul Cluver. A partnership that includes more than 250 farm worker families in Elgin, it was the first black economic empowerment project in the agriculture sector and is today one of the most successful of them. In 2003 it became the first Fairtrade certified winery in the world! Thandi’s success has been contagious: South Africa now leads the world in Fairtrade wine.

My South African friends point out  that not all black economic empowerment initiatives in the wine industry have been as successful as Thandi or the other examples shown in the video — much is left to do, they say — and more resources are needed. South Africa’s social and economic problems are very large and I think it is important that wine — one of the country’s most visible global industries — is part of the solution.

The One Diaper Theory of Development

My good friend Aaron, who works on economic and social development projects around the world, once told me that he aimed to change the world one diaper at a time. His point was that while a lot of attention is focused on big money projects, micro-initiatives that change living conditions for even just a few families can have great value when replicated and compounded over time and space. If enough people take small actions and together change enough diapers for a long enough period of time, the theory goes, pretty soon they will have changed the world.

I think of Thandi as a model of the one diaper theory put into practice for wine and when we visited Paul Cluver and his family we saw that there is actually more to it than the winery. We attended a children’s theater performance at the Hope@Paul Cluver outdoor theater, which is set in a eucalyptus grove on the Cluver farm. The profits from the theater’s programs support local efforts to deal with HIV, TB and terminal diseases and to care for the children of the stricken.  This is just one of several local initiatives that Cluver supports. Do you see the one diaper connection? We saw many other examples during our visit.

Moving Up The Ladder

Even though it is the largest South African export brand in the U.S., for example, there is no way that the de Wet family of Excelsior Wine Estate can by themselves solve all the economic and social problems in the Robertson region where they are located. So they take small but important steps: resisting mechanization, for example, to preserve farm jobs in a region with high unemployment and making a serious effort to promote workers into jobs with more responsibility, moving them up the ladder.

We saw this moving up notion at work when we visited Gary and Kathy Jordan at the Jordan Wine Estate in Stellenbosch. Attention to workers and their conditions was a founding principle at Jordan, where worker housing was built before the owners’ own home in the early years.  Jordan has encouraged farm workers to move up by sponsoring education, including advanced WSET classes in some cases. Jancis Robinson recently wrote about another innovative Jordan program to provide “South Africa Women in Wine” internships.

Education is obviously a key element of any one diaper program and we saw winery worker education  initiatives in many places. One of the most striking was at Durbanville Hills, which is a  partnership between drinks giant Distell and a group of local farmers. Social justice has been a goal from the start for this winery, which formally includes workers in the profit structure and on the managing board. Albert and Martin took us to a pre-school that the winery runs to get the children of farm workers off to a strong start. The winery support for education, paying school fees and so forth, continues as far as a child can go in school.

While South Africa’s economic and social (and health and environmental) problems remain daunting, the wine industry it taking a stand, which is symbolized by a seal that you will find on almost all South African wine.

The Democracy Series videos show us what is possible. There is much left to do, of course, and an understandable debate on when, what and how to move forward. Sometimes it seems like common commitment about what needs to be done is forgotten in disagreements about strategy and tactics. What’s important is that  debate does not become too divisive and that inertia continues to build and change takes place.

Because change is what’s important. Even if it comes one diaper at a time.

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Thanks to the De Wet brothers, Gary and Kathy, Albert and Martin, and Annette.  Special thanks to Aaron.

 

 

What’s Ahead for Idaho Wine?


Everyone we met in Idaho was keen on the potential of this sometimes overlooked wine region but at the same time aware that greater success — in terms of sales, recognition, and premium prices — is far from guaranteed.

Idaho, as I discussed in last week’s column, is unique in many respects, but it is typical of emerging American wine regions in that it is searching for the key that will unlock the latent potential of the people and the land.

Idaho Wine Surprises

One thing that surprised me was the vitality of the local wine market. Although Idaho has wine roots going back to the 1860s, the industry and the local wine culture was destroyed by Prohibition and was slow to recover afterward even by American standards.

Boise — the state capital and largest city — has changed enormously since I first visited over 30 years ago. The downtown now boasts both a Whole Foods Market and a Trader Joe’s — a sure sign that there is a critical mass of resident upscale consumers — and the wine department of the Boise Co-op supermarket grew so large that it took over a nearby building (it was crowded with interesting wines from Idaho and the world and buzzing with activity when we visited).

Pluses and Minuses

Boise impressed me as quite cosmopolitan. We had lunch on the Basque Block, for example, a cluster of Basque restaurants, social clubs and community center. Boise celebrates the cultural diversity that its Basque community brings and is working to strengthen ties (including wine connections) with the Old World. A group of local winemakers recently traveled to Spain to exchange ideas with wine people there, which seems like a great idea given the success some wineries are having with Tempranillo. A lot of pluses here.

And some minuses, too. Idaho wine is not well known outside the region and this is a disadvantage for those with national ambitions for their wines although obviously less of a factor if you define your market territory carefully to include the mountain states and parts of the Pacific Northwest.

Focused effort seems to be what is needed. Greg Koenig looks to be on the verge of success in China, for example, where buyers may not know where Idaho is but they understand what he has to offer — delicious Snake River Valley Riesling Ice Wine!

Building Brand Idaho

The economic structure of the Idaho industry is not ideal with big dog Ste Chapelle dwarfing the rest of the industry. It would be great if Ste Chapelle were to play a hegemonic role, working to grow markets and develop the supply chain for all of Idaho wine the way that Chateau Ste Michelle did for Washington wine in that industry’s early days. Or at least that’s what I was thinking  before my visit.

But these are different times and Idaho is a different place. Ste Chapelle is part of the dynamic Precept Wine group which has important wine assets in Washington, Oregon and Idaho and competes in a market environment where important new players (Gallo in Washington and Kendall Jackson in Oregon) have recently entered. Ste Chapelle must necessarily act as part of an ensemble, not as a solo performer, and while I think that great success is possible for the winery itself, it might not necessarily be able to pull the rest of Idaho wine along with it. The smaller wineries need to make their own paths and they seem to realize this fact.

I noticed that some of the new Ste Chapelle “soft” releases were designated “American Wine” even though they are for now at least made using only Idaho grapes. This will help the Ste Chapelle brand if and when they scale up production using fruit from other areas, but it doesn’t promote Brand Idaho. Not a criticism,  because I understand the business logic, but true nonetheless. On the other hand, however, it must be said that the Idaho wine industry would be much less vital without Precept’s key vineyard investments, which provide grapes for many smaller producers.

Opportunities

What will it take to bring Idaho wine to the next level? Well, I’m tempted to say that a big critical success would do it and high scores certainly help. The quality of the best wines makes strong ratings more than a dream (and in the case of a few wines, already a reality). But the market is very crowded right now and my winemaker friends tell me that even 90+ scores don’t always have the impact on prices and sales that they would like.

Wine tourism is another strategy that holds promise. The Sunnyslope area is a short drive from Boise and a wine trail is in place although it is hampered a bit by state restrictions on signage that limit the ability of individual wineries to direct buyers to their tasting rooms. Visitors from adjacent states represent an obvious marketing opportunity that effective wine tourism promotion could enhance.

New investment in vineyard assets would be welcomed hereabouts, as I wrote last week. But what will it take to get major vineyard investments that would fill the barrels and bottles that Idaho winemakers long to produce? Well, it’s complicated of course. From a strictly economic point of view the situation is that land must be worth more as a vineyard than at its next best alternative use — orchard, pasture or residential development — and this isn’t always the case.

Economic Impact

Idaho wines are often a bargain given their quality and tend to sell for much less than the Walla Walla wines that some makers compare them to. This helps sell the wines, but it also limits vineyard growth. Low wine prices dictate low grape prices, which means low vineyard land valuation.

 An economic impact statement prepared in 2008 projected that the number of Idaho wineries would continue to grow from 11 in 2002 to 38 in 2008 to 78 in 2015. The current number is around 50, much less than that estimate, and the number of vineyard acres has probably declined a bit from the 2008 level.  Is this just an understandable (given the Great Recession) pause in the upward trend or has the industry plateaued?

Too soon to tell, really, but I am cautiously optimistic. The land is there and the people, too, both thoughtful consumers and smart, hand-working producers.  I sense a new energy in America’s regional wine industries (this energy was captured in the book American Wine by Jancis Robinson and Linda Murphy). Idaho’s time will come.

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Here’s a list of some wineries from our visit. Sorry that we didn’t have time to visit others!

Bitner Vineyards

Huston Vineyards

Koenig Vineyards

Fujishin Family Wine Cellars

Hat Ranch Winery

Ste Chapelle Winery

Cinder Winery

Coiled Wines

Mouvance Winery

Telaya Wine Co.

Shifting Perspectives on Idaho Wine

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The view down toward the Snake River from Bitner Vineyards

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We spent a weekend in the Idaho wine country last month and I’m still trying to make sense of the experience. It seems like every time I think I know what Idaho wine is I shift my ground a little bit and see something new and usually something different.

So the view keeps changing. Rather than trying to ignore this problem, I thought I’d make it the theme of this column.

Snake River Valley Views

Let’s start with the natural elements. The main vineyard area in Idaho winds along the Snake River and some of the views are spectacular — the photo above taken from Bitner Vineyards shows one of the best.

The vineyards reach down towards the river and the slope is key both because these  hillsides provide a natural solar-collector effect (the area is called Sunnyslope), but also because cold air drainage is an important factor in preventing frost damage to the crop and freeze damage to the vines.

The view shifts when you move along a few miles. This region is a high desert plateau. A lot of the land is pancake flat, ideal for many crops but not necessarily wine grapes, especially given the cold issues. Rainfall is surprisingly sparse here so access to irrigation water is key.

Although Idaho shares borders with both Washington and Oregon, there’s no question that its wine industry is more Columbia Valley than Willamette Valley. This might seem obvious since the Snake River joins the Columbia River on its way to the Pacific Ocean, but it’s mainly because they share that dry plateau feature.

No sense looking for a “signature variety” in Idaho as they do (in Pinot Noir) in Oregon. No, Idaho is more like Washington — lots of grapes can thrive here (in the right spots) and lots of interesting wines are possible. A blessing from a winemaker standpoint and a bit of a curse from a marketing point of view. Riesling to Tempranillo and lots of options in between.

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Looking down to the plateau from Sawtooth Vineyard

Big Dog Ste Chapelle

From an economic point of view, on the other hand, Idaho is a world of big and small without too much in between. This is also a bit like Washington state wine, where Ste Michelle Wine Estates (including Chateau Ste Michelle, Columbia Crest, 14 Hands and other wineries) dominates making more than half of all the state’s wine. Ste Chapelle is the big dog in Idaho to an even greater extent producing a total of about 300,000 cases of wine under the Ste Chapelle label plus other brands.

Ste Chapelle is part of the Precept Wine group these days, having been bought and sold several times since it was founded in the 1970s as the U.S. wine business went through consolidation and then financial crisis. I think there is a sense that the stability that Precept can provide is welcome after some years of drama. The largest privately held wine company in the Pacific Northwest, Precept controls half of Idaho’s vineyard acreage (variously estimated at 1200-1500 acres) in addition to its assets in Washington and Oregon.

Ste Chapelle makes several lines of wine. Their “soft” (read sweetish) wines are technically well made and perfectly in line with current sweet red and moscato-style market trends. The soft red and a soft pink wine with a subtle huckleberry flavor are the top selling wine SKUs in the state, crowding out the California “usual suspects.”

Ste Chapelle also makes smaller (but still substantial) quantities of dry wines, including 40,000 cases a year of an off-dry Riesling that nearly stole the show at Riesling Rendezvous this year. And they produce Precept’s wildly popular Chocolate Shop and Almond Roca wines at their facility.

Limits to Growth

If Idaho is the land of the big it is also a world of small. From 300,000 case Ste Chapelle we drop sharply down to 12,000 – 15,000 case Sawtooth (also a Precept Wine brand) and Greg Koenig’s operation of about the same capacity, where he makes his own products as well as those of four other wineries including Bitner. That’s a big gap between #1 and the rest in terms of size and market penetration. Not too many of the remaining 40+ wineries in the state have total production as high as 5000 cases.

What limits growth? Well, you have to sell what you make, so market demand is an obvious factor. But I got the strong sense from several winemakers that they could sell more if they could make more. Vineyard capacity is a real roadblock.

While they were glad to be able to purchase fruit from the Precept group’s 400 acre Skyline vineyard, they needed even more. Land surveys indicate that there are many good sites that could contribute to the industry’s growth if only new investors would enter the region.

Made In (But Not of) Idaho

If Idaho has not attracted as many wine growers as it needs, it certainly has attracted wine makers who see this area as a good place to live and to work. A number of small urban wineries have sprung up as wine enthusiasts from other regions are attracted here and others who have left to establish careers elsewhere return home.

Many of their wines are clearly Idaho products, but we tasted a number of them that were made from grapes imported from Washington, Oregon and even California. The practice of using out-of-state or region grapes or juice is not that uncommon in the Pacific Northwest. Oregon’s largest winery, King Estate, brings in fruit from the Columbia Valley for its NxNW wines, allowing them to produce a more complete portfolio of wine varieties and styles. And the  Pamplin Family Winery in the Willamette Valley is one of several that make high quality Bordeaux blend wines using Columbia Valley fruit. And of course most of the grapes used in Seattle-area wineries are trucked over the mountains from Eastern Washington.

Necessity (and limited local grape supply) dictated the use of non-Idaho grapes in some cases, but we met several winemakers who cited passion for a particular style of wine as a driving force. I did a University of Puget Sound alumni program at the Mouvance Winery tasting room while we were in Boise and enjoyed their Pinot Noir and Pinot Gris wines made from the fruit of the family’s own vineyard in Oregon. Pinot passion drives this project and so Idaho grapes just won’t work.

What should we think about Idaho’s cross-border wineries? Well, just like everything else in Idaho wine it depends on your point of view. They certainly do contribute to the critical mass of winemaking that the industry needs to move ahead and clearly help foster what I see as a vibrant emerging wine culture (more about this next week). But I also picked up understandable concern that their efforts didn’t contribute as much as some would like to building the local industry from the ground (the vineyards) up.

Where is Idaho wine headed? My thoughts next week.

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Thanks to everyone who met with us during our Idaho visit. Special thanks to Jim and Melissa Thomssen, Ron Bitner, Greg Koenig, Gregg Alger, Maurine Johnson, Moya Shatz Dolsby, and the Idaho Wine Commission. Thanks to Sue Veseth for the photos.

Wine in China: Government Investment, Civil Servants and Hospitality

I’m still in Australia (soon to step aboard a flight to Tasmania) and, through the magic of the Internet, simultaneously in Mendoza, Argentina, where I am a member of a virtual panel of experts (or is that a panel of virtual experts?) addressing the competitiveness of Argentina’s wine industry at the IX Foro Internacional Viniviticola. I guess you can be in two places at once these days!

Last week’s column by  Cynthia Howson, Pierre Ly and Jeff Begun on the search for Chinese terroir generated a lot of interest. Here is the second part of their report. Come back next week for the final installment.

Government Investment, Civil Servants and Hospitality in China

by Cynthia HowsonPierre Ly and Jeff Begun

 In the last post, we talked about the diversity of Chinese terroir and how the distinctive features of each region might be developed. It’s no secret that the government is a major player in the Chinese economy and wine is no exception. Each winery we encountered depends on some form of support or relationship with local government officials, usually at the local level (town, county or prefecture). And each wine producing region has a provincial government that is committed to upgrading in some way, but the issues they face and the resources they can provide vastly different.

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In this photo, a couple poses at the “World Wine Walk”, a street in Yantai, Shandong, where city has built a beautiful space to highlight the wine industry. Presumably, wine shops or other stores will fill the vacant spaces, but for now, it is just a very pretty place to walk near the beach and restaurants.

The State as Public Investor, Institutional Facilitator and Quality Control Monitor

Crucial government support can come in the form of investment, cheap credit, infrastructure or institutional support, like facilitating contracts or coordinating farmers. Each of these is critical and is likely to affect the types of wineries that will be most successful in each region. For some wineries, relationships with farmers require careful, daily supervision. In one case, the village head provides much of the human resource management for a winery, coordinating day laborers and making sure the vineyard has the right workers at the right time. Elsewhere, a manager for a large corporate winery said it’s not so much about financial support as good policy, helping to coordinate with banks and institutions. “They don’t interfere,” he said.

In Ningxia, local governments encourage new wineries by providing electricity, irrigation, pavement, signs on the road, subsidies for imported vines and even funds to invite foreign consultants and prizes for award-winning wineries. In Shandong, local governments coordinate lease agreements with farmers so that a winery can establish a single vineyard and control its grapes even if dozens of different farmers control the small plots of land.

Interestingly, the role of government as regulator came up less frequently in our discussions, but it is one of critical determinants of a successful wine industry. Pollution, pesticides and food safety are all critical features of a healthy vineyard and are very sensitive topics in China. Indeed, a 2012 scandal over contaminated wine stoked concerns about the largest producers and whether food safety inspectors should become stricter about pesticides. We took this photo of a pesticide-laden cluster at a major state-owned winery (although this may be just a very large demonstration vineyard).

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Needless to say, this is not what the grapes looked like in most of the vineyards we visited, including those of small farmers.  However, several wineries expressed concerns about producers using pesticides that are banned in China (where regulations are already looser than in Western countries). This is a particular concern in Shandong, where humidity is most threatening and where, it’s worth noting, some farmers are hesitant to eat the skins of their own grapes. Here, efforts to tighten enforcement of environmental regulations could be facilitated by ongoing efforts to promote agribusiness over more diverse types of wineries.

Another Public Investment: Government as Customer

The most successful wineries benefit from government contracts for banquets and from civil servants as high end customers. Those sought after consumers are not just wine drinkers, of course, but collectors, and most importantly, those who purchase wine as gifts. It’s no secret that gifts are an important part of business negotiations in China. Some experts have pointed out that a market for extremely expensive Chinese wine has benefited from civil servants and business magnates who are looking for an appropriately priced gift. Such a gift need not be consumed. At other times, negotiations might involve fancy banquets or informal meetings, where the spirit of friendship is facilitated by a meal and a bottle. Indeed, most people we spoke with emphasized food and drink as part of maintaining good relationships with local officials.

But conventional wisdom has it that civil servants have seen their belts tighten, a trend that the new President, Xi Jinping, is eager to continue. The national government has made some public efforts toward curbing corruption in addition to increasingly strict monitoring of accounts. Of course, careful control of public expenditure sounds great to a political economist, so we were surprised when even a taxi driver called it a “disaster.” The “disaster,” we are told, is that when civil servants are constricted in their use of expense accounts, the entire hospitality industry is affected, including hotels, bars, restaurants, taxi drivers, and of course, wineries. Now, it’s important to keep in mind that our informal conversations are just that. We can’t say whether civil servants have actually changed their spending habits or if, for example, announcements in the media have stoked the rumor mill, but we did find it curious to encounter the same perspective from very different people in the hospitality industry and to note that it was echoed by Beijing Boyce. We asked a driver in Shanxi province whether he sees a lot of tourists and he explained how changes in government spending have hurt the tourism industry. We discussed the prices of Chinese wine with a foreign barrel merchant in Shandong province and he explained how changes in civil servants’ accounts are crushing the market for low quality, expensive gift wines.

If our barrel merchant and others are correct, there may be important changes in Chinese supermarkets. If wine drinkers seek out higher quality at the same time as consumers limit their purchase of exorbitantly price gift wines, we might start to see some of the delicious wines we tasted taking up more space at the supermarket. Actually, we are pretty optimistic that those delicious wines are coming regardless of civil servants’ expense accounts.

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