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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In Search of Chinese Terroirs

I am in Australia this week where I am giving a talk called “Australia on the Global Stage” at Savour Australia 2013, the international wine gathering that Australian wine is using to relaunch Brand Australia on the global scene. I will have a report on what I learn in Australia in due course, but for now I’m busy just being there.

My friends and colleagues Cynthia Howson and Pierre Ly and their associate Jeff Begun have recently spent several weeks in China examining trends and issues in the Chinese wine industry. They have been kind enough to write three short essays that I will publish here while I’m away from the office. I think you will find their analyses very timely and interesting! Here is their first report.

In Search of Chinese Terroirs

by Cynthia HowsonPierre Ly and Jeff Begun

We were lucky to spend a month last summer traveling through several Chinese wine regions, meeting producers, farmers, and experts, and tasting some truly delicious wines. In past Wine Economist posts, Mike noted that China’s fragmented agriculture was the biggest challenge for Chinese wine producers. How can winemakers ensure a reliable supply of flavorful and fully ripe grapes, when they have to work with hundreds of implausibly small family-run vineyards?  Mike pointed out that the best producers are those who somehow solved this problem. Another serious and more permanent challenge comes from the climate. So how did they improve and what’s next?

The grape supply chain

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Stunning view at Grace Vineyard in Shanxi province.

Getting control over land is not easy in China and many producers still have to work in large part with hundreds of small family-run vineyards. Yet, some high quality producers have found ways to work with this difficult supply chain by developing relationships with growers. For example, Grace Vineyard, in addition to renting land to grow grapes with their own labor, works with hundreds of very small farmers, and provides them with training and credit for inputs. Grace is willing to pay the price for good quality grapes and provides incentives to farmers accordingly. Of course, at Grace like elsewhere, this takes a lot of work with supervisors going through the vineyards and checking on the work, relationships are not always easy and some compromises may have to be made in difficult vintages to sustain good relationships. But the excellent wines we tasted at places like Grace Vineyard in Shanxi, or Leirenshou in Ningxia, could not have been produced without flavorful, fully ripe fruit and a sizeable portion of it had to come from small family farms.

Of course, it is easier for wineries to secure high quality fruit when it is grown in-house, by renting land to farm with their own employees. Some wineries rent large plots of land directly from the government. Others have to rent from individual farmers, either by dealing with each individual grower directly, or by entering contracts with a village authority which then redistributes rents to individual farmer. In each case, relationships and the local institutional context determine which types of arrangements are feasible and on what terms. Future policies and reforms regarding land markets will certainly play a key role to spread existing improvements in Chinese wine on a larger scale.

Many Chinese terroirs?

So if wineries have found and continue to find ways to improve the grape supply chain, what about the climate? Isn’t China simply too difficult a place to grow high quality wine grapes? People seem to disagree on this issue but what we saw makes us hopeful and optimistic that pockets of high quality will continue to develop.

One source of hope is that China, as one would expect given its size, has many terroirs with incredible diversity. One winemaker told us that opportunities and challenges come together, and this applies to each region in a different way. This post by award-winning winemaker and consultant Professor Li Demei, does a great job explaining the pros and cons of the climate in seven wine regions. For example, toward the Northwest, in Ningxia and Xinjiang, although harsh winters require that vines be buried in winter, reliably hot and dry summers protect the grapes from disease. A reputation for limited or no pesticide use could be a strong selling point, given that food safety incidents in China (including some related to pesticide residue) have received a lot of media attention.

In Shandong province on the East coast, producers enjoy a mild winter and vines do not have to be buried. However, the location also comes with the challenge of humidity and rain during the summer, and especially at harvest. The risk is that people will use pesticides a bit too generously, but careful disease prevention programs can be developed. Emma Gao, from award winning winery Silver Heights, based in Ningxia province, told us she saw a lot of potential for Shandong winemakers, and she compared them to the Burgundians, in the sense that there are many people there willing to put in the hard work needed to overcome challenging conditions. Hardworking Shandong terroiristes overcoming adversity, how interesting would that be! It will be interesting to see future advances there, and it is worth noting that the DBR (Lafite) – Citic project is currently under construction there in a small village next to the resort town of Penglai.

Unlocking China’s terroirist soul

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Terroir labeling: the mountains of Alti-wine, and the sandy dunes of Skyline.

That’s what Mike hoped when he wrote about China in Wine Wars. There are many challenges ahead for producers of course, from contracts on land and grapes, to infrastructure and climate. But our last tasting before leaving China gave us further hope. Jim Sun, founder and chief editor of the leading industry media winechina.com, welcomed us at his China-focused cellar in Yantai to share insights, as well as five delicious wines. With passion, Jim told us the story of each of the wines he picked from regions we had not visited, to illustrate a variety of interesting microclimates. The terroir message of each wine was evident, from the Gobi desert vineyard of the Skyline Chardonnay, the vertiginous high altitude of vineyards of the “Altiwine” red produced in Yunnan province, to the proximity to a lake that keeps some Cabernet Sauvignon vines cooler than usual in Xinjiang.

Experts seem to disagree on whether China can become a serious producer of fine wine. But there are already some delicious wines, and they each come with their unique and interesting story. That may be enough to get wine enthusiasts interested in China and encourage further progress.

In our next post, we will discuss the role of government in Chinese wine.

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

He’s still #1

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

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

Small World After All

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

The new #2

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

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

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

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

New Names and Faces

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

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

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

More questions than answers

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

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

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

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

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

Australian Wine Outlook: Modified Rapture

“Modified rapture” is a line from Gilbert and Sullivan’s comic opera The Mikado. The dialogue as originally written was “Rapture!” but the actor who played Nanki-Poo was apparently a little too enthusiastic about it during rehearsals and Gilbert kept unsuccessfully asking him to tone it down. (You will understand why the rapture was incomplete if you view the YouTube video above.)

Finally, in complete frustration, Gilbert barked, “Modified rapture!” as a stage direction. And that’s exactly what the actor said, taking it literally as a text revision. Modified rapture, indeed! And it became a permanent part of this entertaining scene.

Dutch Disease Dilemna

Modified  rapture – that’s my reaction to the good news about the Australian dollar (AUD). The Australian wine industry has suffered mightily from the “Dutch Disease,” which is what happens when a boom in one sector of the economy causes an over-valued currency that makes other sectors less competitive.

Exports to China, especially mineral exports, have been the boom sector and they have pushed the Australian dollar to incredible highs relative to the U.S. dollar.  This has created a dilemma – pass the foreign exchange costs along to foreign buyers and you risk losing sales. Absorb the foreign exchange impact and margins shrink and sometimes dip into the red.

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Rapture: the short term view

The over-valued Aussie dollar has affected all segments of the Australian wine industry, but bulk wine sales have been perhaps the most impacted because international competition is so fierce for commodity wines. Bulk wine sales account for about 45% of New World wine exports, so lots of business (and grower incomes) hang in the balance when the exchange rate shifts by even a penny or two.

Good News: A Short Sharp Shock

So the recent fall in the Australian dollar as shown above must be greeted with joy by Australian growers and producers. Although it was expected that the AUD would depreciate eventually, I’m not sure anyone would have predicted such a “short  sharp shock” (to use another Gilbert and Sullivan line).

What caused the change? Well, Australians might say that it hardly matters – good news is good news.  But good news doesn’t always last as the graph below indicates. This isn’t the first time that the AUD has tumbled and we can’t be entirely sure that it will not rebound (hence my “modified” description). And although the recent trend is welcome it must be noted that the AUD is a long way from its value back in early 2009, when it was even cheaper relative to the dollar than the 85-cent valuation that one analysis has predicted.

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Modified rapture: the longer view

The AUD Trifecta

As I see it, the sudden shift is the result of a trifecta of effects. The first and most important is the slowing of the Chinese economy, with the resultant decrease in demand for Australian minerals. That’s one. The second is the shift in Japanese monetary policy. Abenomics, as it is called, is pumping up Japan’s money supply in an attempt to jump-start the economy.

This has driven down the yen’s value, which encourages some investors to repatriate funds previously placed abroad to take advantage of the fact that each host country Australian dollar (for example) now yields a larger home country yen profit. A good time to cash in your chips and bring your money  home.

Finally, the U.S. Federal Reserve has announced that it is “tapering” its expansionary monetary policy, which has boosted U.S. interest rates and perhaps caused some “carry trade” international investment to shift to the U.S. from other countries (like Australia, for example).

So the result is good news and I think it might last, but it is important to realize that the trend could be reversed if China’s growth rate picks up (as most people hope it will) or if U.S. and Japanese monetary polices change dramatically. Fingers crossed — there is a lot on the line!

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Foreign exchange historical tables are from Oanda.com.

I couldn’t resist adding this classic Mikado video — the “short sharp shock” appears at about the two minute mark. Enjoy.

Stein’s Law and the Coming Crisis in Argentinean Wine

Stein’s Law, named for famed economist Herbert Stein, holds that if something cannot go on forever it will stop.  Unsustainable trends ultimately yield to the inevitable in one way or another.

Stein’s Law seems to be simply stating the obvious, but you would be surprised how many people find a way to ignore the obvious when it is in their interest to do so.  As Upton Sinclair wrote, “It is difficult to get a man to understand something if his salary depends on his not understanding it.”

Argentina’s Inflation Problem

And so we consider the case of the Argentinean wine industry. It’s not just the wine sector, of course, it’s the whole Argentinean economy, but wine is especially affected.  Something’s going to happen according to Stein’s Law, because it can’t go on forever as it has up to now, but it is hard to know exactly what.

The problem begins with Argentina’s high inflation rate. The official statistic puts the annual increase in consumer prices at around 10%, but this number is viewed with disbelief by the international economic community. The Economist magazine quit publishing the official figure in 2012, saying “Don’t lie to me, Argentina” to the officials there. The most commonly cited estimate of the actual inflation rate is 25% per year.

Inflation is a sensitive political issue in Argentina as it is in every country that has ever experienced a hyperinflation crisis (think Germany, for example). Some in Argentina go to great lengths to deny the obvious reality of inflation.

The story (which may be true) is told about a McDonalds restaurant in Buenos Aires that displayed all the usual products on its big backlit menu board except the signature Big Mac. Where’s the Big Mac? Oh, we have that price hidden around the corner so that no one will see it — especially the people from The Economist magazine who use it to estimate the purchasing power of the peso in their Burgernomics index!

Inflationary Squeeze

As a recent article on The Drinks Business website suggests, high inflation is putting the squeeze on Argentina’s wine producers. (The squeeze is made worse,  I understand, by government policies that restrict imports of products used in wine production as part of a general policy to control foreign exchange reserves). Production costs (grapes, labor, etc.) may have doubled over the past four years, putting a squeeze on margins.

It is difficult to pass these peso costs along to consumers in the U.S., Canada, the U.K. and Brazil, the main export markets. Consumers are price sensitive and while the average export price of  varietal Cabernet and Merlot wines have risen by 7.2% and 24.8% respectively in the past year, this provides only limited relief from rising costs since Malbec takes the lion’s share of the export market and its dollar export price has risen by just 1% in the last year and by an average of only 2.8% per year since 2009.

Purchasing Power Inaction

The textbook remedy to this situation is for the foreign exchange value of the peso to fall to achieve what economists call Purchasing Power Parity. In a system of market determined exchange rates, according to the PPP theory, a 25% fall in the domestic purchasing power of the peso due to inflation should result in a 25% decrease in its foreign exchange value.

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And indeed the peso has depreciated, but not by nearly enough to overcome the inflation difference between Argentina and the four main export markets. The peso has fallen in value by about 20% in the last two years, if we look at the official exchange rate, so each dollar of export earnings brings in more pesos,  but inflation-driven peso costs have increased by much more.  That puts a real squeeze on margins. This can’t go on forever — something has to give.

[I’m told that the black market exchange rate is 8 pesos per U.S. dollar, far below the official rate of about 5 per dollar. Such a big differential is often an indicator of crisis to come.]

Something’s Gotta Give

What happens when a country gets itself caught in a squeeze like this? Well, the conventional wisdom is there needs to be a sharp currency devaluation followed by monetary tightening to control inflation. This is a painful process and Argentina has been through it before. What if the government ignores the conventional wisdom? Internal adjustment must eventually take place to restore competitiveness if external adjustment through the exchange rate is ruled out.

A recent Wall Street Journal article about real estate prices in Buenos Aires shows one pattern of adjustment. The dollar prices of luxury apartments have tumbled as owners seek to cash out of their real estate investments and buy into the more credible U.S. currency.  The WSJ reports that

In May last year, Argentine President Christina Kirchner strictly limited access to U.S. dollars and other foreign currencies in a bid to stem capital flight. With the Argentine peso facing about 25% annual inflation (government figures, widely discredited, set the rate much lower), and an unofficial exchange rate that has effectively devalued the peso sharply, demand is high for dollars.

These days, the main feature that foreign buyers say they look for in a Buenos Aires property has nothing to do with closet space or a wide terrace. It is a seller with a bank account outside Argentina to which they can legally wire funds. This is a way to get around having to convert any dollars wired into Argentina into pesos at the official rate, after which it is nearly impossible to convert back into dollars at the official rate.

Something will have to give in the wine industry, too, if the exchange rate doesn’t adjust and the currency controls continue. In the meantime, I think every effort is being made to control costs and to keep margins out of the red. But, as Herb Stein might say, this can’t go on forever so somehow it will stop.

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Herbert Stein may be best known today as father of Ben Stein, the actor, law professor, and columnist, but he was ever so much more famous in his day as a chairman of the president’s council of economic advisers

Little known fact: the Pabst beer company held an economics competition in 1944 (the year of the Bretton Woods conference)  for the best plan to sustain high employment in the post-war era. Herb Stein’s plan was named the winner from among the more than 36,000 entries. He was 28 years old and the prize was $25,000 — the equivalent of $330,000 today.

The Scrooge Report: Holiday Wine Gifts

No wonder economics is called the “dismal science” — sometimes our rigorous analysis threatens to spoil everyone’s fun.

Take holiday gift-giving, for example. The conventional wisdom is that “it is better to give than to receive” and while there is some merit in this if everyone gives (so that everyone receives), I think you can probably see the collective action problem here. Only an economist (or maybe an excitable child) would point out that, strictly from a material accumulation point of view, there are real advantages in being on the receiving end!

A Badly Flawed Process

But it gets worse because some economists suggest that it may be better not to bother with gifts at all. Don’t give gifts, give cash. Or, better yet, keep the cash and spend it on yourself. Gift-giving itself is a badly flawed process. This Scroogish sentiment is in part the result of Joel Waldfogel’s famous article on “The Deadweight Loss of Christmas.” Waldfogel concluded that Christmas, for all its merriment, was actually welfare-reducing because recipients do not generally place a value on gifts that is as high as their cost. They end up receiving stuff they would never have purchased with their own money.

The cost of giving gifts exceeds the benefits, so gift giving is an economic drain. Dismal, huh?  Here’s how it works.

Your aunt paid $50 for the sweater that she gave you. How much would you have paid for it? $50? $45? $40? Well, the fact is that you had the option of buying it for $50 and didn’t, therefore you must not have valued it at the full amount. So its value to you is probably  less than what your aunt paid. But how much less?

Economists seem to agree that the best case scenario is that there is about a 10 percent average loss in gift-giving, which I call the “Santa Tax,” although the “yield” as reported by survey respondents varies a good deal. The National Retail Federation estimates that Americans will spend more than $550 billion on holiday gifts in 2012. If the deadweight loss rate is just 10 percent, that would be a $50+ billion Santa Tax this year. Yikes!

There are many problems with this way of calculating holiday giving gains and losses. It is pleasing to give gifts, of course, and this should be taken into account. But how much would you be willing to pay for the pleasure?  And would your pleasure have been less if you had just given cash? The efficiency loss might be less with a cash gift, but perhaps the pleasure of giving (and thus the incentive to give) would be diminished, too.

Santa Tax Wine Edition

Then we can argue about the size of the Santa Tax. Is 10 percent about right … or do you suspect (as I do) that it might be much higher, especially when you are buying gifts for people who are much older or younger or who have very different tastes or needs from your own? Have you ever received a gift that was 100 percent deadweight loss? If you are honest you probably have. But it’s the thought that counts, isn’t it? How big a Santa tax is too much?

Which brings us to the wine part of the problem. Doesn’t it seem like the Santa tax is probably even larger for wine gifts than for many other things? Most of us have experienced the deadweight loss when a bottle of wine that we’ve paid good money for doesn’t turn out to be worth what we’ve spent. So it is no surprise that the loss rate might be even worse when other people are doing the buying (and giving) for us.

Giving wine as a gift is risky (unless it is someone you know very well) because there are so many different choices and individual tastes differ so much. There are lots and lots of good wine  gift choices, of course, but it is easy to get caught in the Santa tax trap. I’m sure that a lot of holiday wine gifts miss the mark badly.

Maybe that’s why wine enthusiasts receive so many “wine gizmo” gifts instead of wine — but those gadgets are subject to the Santa Tax, too.  The New York Times‘s William Grimes recently complained about this problem.

Across the land, Christmas trees spread their fragrant branches over packages containing monogrammed Slankets, electric golf-ball polishers and toasters that emblazon bread slices with the logo of your favorite N.F.L. team.

But for some reason, the culture of wine and spirits provides especially fertile ground for misbegotten concepts like these. Year after year, it yields a bumper crop of inane but highly giftable innovations like wineglass holders that clip onto party plates, leather beer holsters and octobongs, the most efficient method yet devised for eight college students to consume a keg’s worth of beer simultaneously.

Tyler Colman, writing on his Dr Vino blog, singled out gifts of fancy automated corkscrews for particular criticism. You can probably think of some high Santa tax wine paraphernalia that you’ve either given or received yourself.

Beyond the Octobong: Wine Economist Gift Guide

OK, I suppose the octobong is out, but some of the wine gizmos that Grimes reviews in the article are sort of weirdly fascinating. I guess I can see why they are given as gifts (even though you might never spend your own money on them). So where does that leave us when it comes to wine gifts?

My first bit of advice is simple: don’t give a bottle of wine to friends or relations, share it with them. There is something about a shared experience that transcends a simple commodity transfer. (From a technical economics standpoint, I think sharing adds  some “public goods” elements to the deadweight loss equation that can cushion the Santa Tax loss). Trust me, from an economic theory standpoint, sharing is the way to go.

In fact the more I think about it the more I believe that sharing rather than giving is the key. Sharing a bottle of wine rather than just giving it may seem a bit selfish and is certainly more expensive (since time as well as money are involved), but sharing changes the game from transaction to relationship and this seems to me to be the essence of both the holidays themselves and wine, too.

More Gift Advice (and Shameless Self-Promotion)

Back to giving and receiving. Best gift to give a wine enthusiast? A copy of the new paperback edition of Wine Wars, of course. (Shameless self-promotion never takes a holiday).

Best wine gift to receive? It’s gotta be Wine Grapes by Jancis Robinson, Julia Harding and Jose Vouillamoz — the brilliant 1242 page survey of 1368 wine grape varieties. So many grapes, so much information, such beautiful illustrations. This jeroboam-sized book will provide years of detailed research use (including very cool DNA analysis of wine grape origins!) and hours and hours of simple browsing pleasure for any curious wine geek.

Weight? Yes, quite a lot of it; 6.8 pounds shipping weight according to Amazon.com (although my copy feels light for its size). Deadweight loss? Forget about it!

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Click here to view a pdf of Waldfogel’s original article, which appeared in the December (of course) 1993 issue of the American Economic Review. The illustration is of a certain Mr. Grinch, who may or may not have been an economist.  Happy holidays everyone!

Wine Uncorked: The Rise of Big [Really Big] Box Wine

This is the fourth in a series of articles on Tight, Fat and Uncorked, the three trends I see shaping the wine industry. This week’s topic is how wine is becoming increasing “uncorked” and what this implies.

If you take the “uncorked” metaphor and add it to the “box wine” reference in the title, you might reasonably assume that I’m going to talk about alternative wine packaging — boxes, bags, 1-liter tetrapak containers and so on. That would sure make sense.

But you’re wrong. The box I’m talking about is big [really big] as in 20 foot ocean shipping containers holding maybe 25,000 liters of bulk wine in a “flexitank” bag.

Welcome to the New World of international wine trade — the ultimate ‘uncorked’ experience!

The Incredible Bulk

I’ve known about Big Box wine for a while — my 2009 post on “Wine’s Future: It’s in the Bag [in the Box]” is one of the most-read articles in Wine Economist history. But I didn’t realize how big the big box wine trade had become until I received a Rabobank  report titled “The Incredible Bulk: The Rise in Global Bulk Wine Trade” earlier this year.

Rabobank’s report focuses on New World wine trade since 2001 and the change in the composition of wine shipments (in terms of bottled versus bulk) is dramatic. Bulk wine (the big box stuff) accounted for about 22% of New World wine exports in 2001 (the remaining 78% was shipped in bottle). By 2010 the bulk share increased to over 40% while the bottle share fell to less than 60%. That’s a near doubling of the bulk wine share of New World wine trade in less than a decade, an amazing shift that is all but invisible to consumers.

Big Green Wine

What drives the shift from bottle to bulk in New World wine trade? The short answer is Big Green, but green in two ways. Green, first, in the environmental sense. Bottled wine is both heavier and bulkier than bulk wine (glass accounts for more than 40% of a standard bottle’s total filled  weight). All else being equal (a big assumption in wine economics) shipping wine in bulk and bottling closer to the final consumer should lower the wine’s carbon footprint.

Tesco, the world’s largest wine retailer,  is reported to be particularly aggressive on this front with bulk wine imports being bottled in screw cap-topped lightweight glass for its high volume private label brands. (Click here to read about their very green “furnace glass” wine bottles!)

Cost is another green (as in greenback) factor and there are savings here as well. Rabobank estimates that bulk shipping yields an average cost savings of $2.25 per standard 9-liter case (they estimate total annual savings of $142,300,000 in 2010 compared with the 2001 level of bulk shipments).  This is a very substantial saving for commodity wines of the type that often appear in private label brand portfolios.

The movement towards increased bulk wine exports started in the Age of Abundance, when surplus wine flooded the markets and it was important to move it as cheaply and efficiently as possible. Those days are now in the past; rising costs and tight margins are likely to make that $2.25 per case saving even more attractive to producers now, especially as they scour the world for supplies of wine (did someone say “Moscato?”) to supplement scarce domestic juice.

Subtracting Value Added

For vertically integrated international wine producers, the decision to ship in bulk and bottle in the domestic market is mainly about these cost savings.  They pay less to ship the wine and pay lower import excise, too, since the wine enters the country at the lower bulk value rather than a higher bottled value.

But more is at stake, as the Rabobank report notes, for wine makers who sell to third party importers. In this case bulk shipping results in a new division of value added in the supply chain, with less in the producing country and more further down the line. The impact is thus complicated: bulk wine shipment subtracts some value added in the producing country, although the lower overall cost encourages exports.

There are also relative price effects to consider. Bulk shipping increases the relative price of traditional bottled wine imports relative to bulk products, a difference that may be magnified as wholesale costs differentials are passed along through the supply chain.

Economic Impact: The Box

The standard 20-foot shipping container (a.k.a. “The Box”) revolutionized international trade when it became widely adopted. It changed everything (OK, maybe not everything) because it was so much more secure and efficient than the previuosly standard “break bulk” shipping system. One of the things it changed was the scale of international transactions because the greatest economies were realized by those who could reliably fill ocean containers.

I don’t think the rise of “uncorked” big box bulk wine shipments is going to change everything in the same way the ocean container did, but I do think the effects will be significant. I’ll talk about this more in my next post where I consider how the world of tight, fat and uncoked wine is likely to unfold.