Category Archives: Hedges Cellars

Desperately Seeking Somewhere

March 8, 2010 By in globalization, Hedges Cellars 4 Comments

I gave the after dinner talk for a group of 36 visiting college counselors on Sunday. Since I didn’t want to give them indigestion, I spoke about wine instead of the economy. We tasted an after dinner wine made by one of our alumni winemakers (see below) and wrote a collective tasting note to commemorate the experience.  It was a lot of fun and very serious at the same time. Here’s the short “45 rpm” version of what I had to say.

Nowhere Man

It seems to me that the world is increasingly stretched and fragmented, processed and globalized.  Many elements of our everyday lives are efficient, impersonal and shallow. The things we buy and use could come from anywhere and end up anywhere. Anywhereness is the same as nowhereness in my book, the lack of real personality or a distinctive sense of time and place.

Given the prevalence of nowhere, it is not a surprise we desperately seek somewhere to fill the empty places in our lives. This is what makes wine especially appealing to so many people today. Wine has the ability to express somewhereness, the intangible quality we often call terroir. More than most products, we know (or can find out) who made a particular wine and how, in what place at what time. Wine somehow manages to hold all these messages together and to show us through its variations the influence of personality, the impact of nature, time and place.

Fixing a Hole

Wine is more likely than most products to be a shared experience, too, consumed in a social setting, the subject of conversation and perhaps some conversational introspection (like our collective tasting note). Music once filled these gaps (and still does to some extent) because we typically listened to it in the company of others. Now the iPod has made music an efficient but more solitary experience. Thank God there is no equivalent iWine (at least not yet).

I told the counselors all this because I think the search for somewhereness that draws people to wine is also what leads students and their families to seek out the intimacy and somewhereness of liberal arts colleges like the University of Puget Sound. Students can efficiently acquire a pretty good education at universities constructed on an industrial model (do you see the similarity with wine here?), but something is sacrificed in the process, something that makes the experience complete and the person whole.

Desperately seeking somewhere — that’s who and what we are. My talk covered more than this, of course, but you get the idea.

Somewhere, Man

The wine we tasted together was a somewhere wine: Hedges Family Estates Red Mountain Fortified Wine. It is a wine made using traditional Port wine grape varietals and methods but it isn’t Port because Port can only come from Portugal. It’s a non-vintage blend of wines from several harvests of Hedges estate fruit, bottled in 2004 and drinking pretty well right now.  Here’s a recent tasting note:

The wine is so dark and rich it is nearly a blue-black color. The nose is full of dark fruits, orange zest, tobacco, herbs, and violets. The flavors of the sweet brandy hit your tongue first, followed by orange, chocolate, and cherries. At 21.6% alcohol, and 5.6% residual sugar, this is pretty smooth stuff.

This wine captured the essence of my talk quite well, I think.  It’s a personal wine (just 206 cases produced) that uses the style of Port wine to express the particular terroir of Washington’s Red Mountain AVA. It’s a somewhere wine if I ever tasted one and a good reminder of the power of wine to bring people together and remind us of life’s deeper purposes.

Wine and the China Syndrome

October 13, 2009 By in Australian wine, China wine, Hedges Cellars, wine markets, Yellow Tail 1 Comment

A few years ago I edited a book on globalization for a New York Times series. I was given everything that was published in the NYT in the 20th century and asked to tell the story of globalization’s rise and fall and rise again. One of the things I uncovered as I studied the history of world trade over those 100 years was what I call the China Syndrome.

Nightmares and Dreams

The China Syndrome is both the dream that China will buy all the goods we try to sell her and the fear that she will return the favor and take over our markets. The Times was full of China Syndrome a hundred years ago. History buffs might want to look up an article called “The Future of our Trade with China” that promoted the dream on April 13, 1900 and an early suggestion of the nightmare in “Japan and China find a Ready Market Here” published on September 3, 1905. Both are reprinted in my NYT volume.

The same dreams and nightmares are commonplace today. I was reminded of this recently while reading the Grape Wall of China blog, a reliable source for China wine news and views.  An article by Jim Boyce (aka Beijing Boyce) caught my eye: “No Worries: Australian targeting China wine market at every level.” The article tells of Australia’s dreams for Chinese wine sales.

The Blunder Down Under

The Australian wine industry is dreaming about a Chinese future because their present reality is an emerging nightmare. Australian wine is being battered by a number of factors, both natural and market driven. Australian wine sales are falling here in the United States and in Britain, too, I understand. Although there are many distinctive and delicious Australian wines, “Brand Australia” is pretty much defined by one-dimensional Shiraz and over-oaked Chardonnay, both of which have fallen from consumer favor. The “brand” was easy to understand and promote, but it didn’t have legs. Many consumers seem to have moved on and there are plenty of options for them to choose from. The recession only makes things worse.

The situation in some parts of Australia is really dire. Constellation Brands, for example, is closing its second Australian winery for lack of either a market for its output or a buyer for its assets. The global recession puts the big multinationals like Constellation under more pressure than in the past. They are less able to afford to nurse along failing brands. That’s bad news for the particular part of Australian wine that seems to define the brand. It’s time to dream up a better plan.

Australia has adopted a new marketing plan called Landmark Australia that is meant to highlight the quality and diversity of its fine wine industry. It’s a good idea but a difficult one to put into practice — hard to un-ring the Yellow Tail bell, if you know what I mean. And I am generally suspicious of regional or national marketing plans because I think collective brands (especially quite diverse and ill-defined ones) are always harder to sell than private brands.

Working in China … or Not

The Landmark Australia plan may be working in China. Or maybe not.

Beijing Boyce reports that Australia is promoting its new image pretty vigorously and has risen to #2 in bottled wine imports after France. The French have 40% of the fine wine market to Australia’s 20-22%. The U.S., Italy and Chile trail far behind. So perhaps Australia will be successful in redefining itself in a new market and maybe, ultimately but with more difficulty, in markets like America and Britain where it is already established. The geographical proximity to China is certainly an advantage.

There’s evidence of the China Syndrome dream in the data, but also hints of a possible nightmare. It seems that Australia is doing even better (in terms of rising market share) in the bulk wine market than in sales of bottled wine. Grape Wall reports that

… in the first half of 2009, Australia ranked second as a source of imported bulk wine. While Chile (~15 million liters) represented half of the ~31.5 million liters entering China, Australia came second with a quarter. Argentina (last year’s number two, with a quarter share) and the United States (~6.5 percent each), Spain (~5 percent), and South Africa and France (just over 1 percent each). This is quite a leap from the past four years, when Australia represented from 2 percent (2005) to 10.5 percent (2007).

One reason for higher sales at the low end of the market is that surplus bulk wine is being dumped (sold below cost). Hard to compete with that, of course. I know it is better to get something than nothing for all that surplus wine, but it is hard to be optimistic when this market segment is Australia’s greatest Chinese success. Australia wants to get out of the bulk market, in terms of its brand, not deeper into it.

China versus Colorado

How real is the dream part of the China Syndrome for wine? I asked Tom Hedges of Hedges Family Estate (an important independent producer here in Washington State and a pioneer in the Red Mountain AVA) because he is particularly knowledgeable about export markets in Asia. Tom put the dream into perspective. Here is his take:

As an American producer, we have the U.S. market, which today is number one or number two in the world for total consumption.  An example is flying to Denver costs $300 round trip, and takes no time.  Our potential to sell in Colorado alone is equal to or better than that in all of China;  the Chinese consume very little wine, in total, of which 85% is Chinese production.  And, being [an emerging] consuming market, they want only two kinds of wine:  Famous and cheap.  About 99% of the world’s wineries are neither, which means you have to develop a market for your brand.  Costly!

Tom’s clear conclusion was that he could achieve more and do it more economically by focusing on Denver and Boulder instead of Shanghai and Beijing.“The allure of China is great,” he says, “the economic reality not so great.  American producers still have lots of Colorados to conquer here in the U.S.”

This view aligns perfectly with my own, for now at least. Not many of those folks who dreamed the China Syndrome dream a hundred years ago woke up to great wealth, although a few probably did. I guess that’s why the call them dreams.

Wine Recession: Winners & Losers

August 30, 2009 By in Argentina, Australian wine, Barefoot wine, economic crisis, Economic impact, Hedges Cellars, Supply and Demand, Washington wine, wine bargains, wine markets, wine price 2 Comments

Some people think that the long hard winter of the economic crisis is coming to an end and “green shoots” are emerging. It is too soon to tell if this view is correct, but not too early to begin to assess which parts of the wine economy have been hardest hit by the recession and which have actually benefited. Herewith a brief analysis of winners and losers.

Wine Market Breakdown

There are several ways to break down the winners and losers in the wine market. The first and most obvious is by price segment. Distributors are finding wines in the $25 and up category difficult to move through normal retail or “off premises”  sales channels. This doesn’t mean that everyone is buying Two Buck Chuck, however. The “super-premium” $10-$15 segment continues to grow, for example, although the trading down effect is still significant. The woman who was willing to pay $20 two years ago now aims to spend $15 or less, with similar changes further down the line.

Some wine brands have been particularly well positioned to attract value-seeking buyers. Gallo’s Barefoot wines, for example, have gained market share among the “fighting varietals” and the CMS by Hedges red and white blends have done well in the $10-$12 category, as have many others.

Since most Wine Walls are arranged with the most expensive wines on the top shelf and the cheapest at the bottom, it is almost as if the top shelf has been eliminated and all the other wines moved up one rank. Whether this is a temporary or a permanent shift remains an open question. I explicitly do not assume that everything will reset back to “normal” once the recession’s game of musical chairs has come to an end.

On-premise sales have declined, too, as restaurants have felt the recession’s sting. It has been especially interesting to watch as restaurants adjust by switching to lower cost wines from beyond the “usual suspect” regions. Reds from Spain and whites from Oregon, for example, can be sold profitably at lower price points than the better known French and Californian alternatives. Because buyers may not be as familiar with these wines they can enjoy the adventurous experience of “switching over” rather than simply “trading down.” Restaurants can maintain their margins at lower prices.

Wine Geography

Inevitable the recession has had uneven effects on different regions and countries. The news from Northern California is not good, for example, with many reports of surplus grapes, some that will not find a buyer this year. Cost is a big factor. Napa and Sonoma are high cost growing regions. The rule of thumb is that $2000/ton grapes produce $20/bottle wine — that’s how it pencils out when all the costs and mark-ups are accounted for. It is difficult to know who will buy wine made with $3000/ton grapes in the present market if, as we are told, the $25+ segment is a “dead zone.”

There is better news here in Washington state, on the other hand. Sales of Washington wine are rising at a 9% rate according to recent data. This makes sense because so much of Washington’s wine is positioned in the $15 and under category. About three quarters of all Washington wine is produced by Ste Michelle Wine Estates’s brands such as Chateau Ste Michelle and Columbia Crest that provide good quality and good value.

Argentina is another winner. Much like Washington State, Argentina produces good value wines at every price point and has increased sales across the board, although I suspect that Malbec at $10-$12 leads the way. While the overall US wine market has grown by 4.8% over the last year according to the most recent Nielsen Scantrack numbers, sales of Argentinian wines have risen by 46.8% — a tremendous if unsustainable rate of growth. By comparison Chilean wines sales have risen by 12.7%.

New Zealand’s wine industry is heading toward a crisis, as I have written before, but this seems less about the recession than a simply matter of demand and supply. You cannot double and redouble vineyard acreage forever and expect the export market to absorb every drop.

Australia is suffering, too, but like New Zealand I think the recession is a secondary “tipping point” factor. Wine imports from Australia are down 2.5 % for the last 52 weeks and Syrah/Shiraz sales are off 5.2% for the same period. Australia is facing all sorts of problems — drought, fire, recession and so forth — but the biggest problem maybe that “brand Australia” has gone out of sytle, taking the whole Syrah/Shiraz category with it. Even unfashionable Merlot has done better, with 0.8% growth.

The French Connection

I think France is the big loser from the recession, especially the segments that previously earned a “prestige premium,” particularly Bordeaux and Champagne. There is enough Champagne squirreled away in producer cellars to supply the market for several years. I think the big houses would pass on making any new wine this year if they could.

Even the famous chateaux are cutting price in Bordeaux this year, so I can only imagine what things are like for the producers of ordinary bottlings and bulk wine. French wine is a drag on the market even in Britain, where South African wines are surging ahead. Brand France, like Brand Australia, is in steep decline, although for different reasons.

There is a lot to be learned from a close study of the wine recession. The most important, at this point, is that it is more than a decline in demand. There are hints of more profound structural changes taking place. The more things change, the French say, the more they stay the same. I wonder if that will be true this time as the recession’s grip slowly weakens?

8/31/2009 update: An article in today’s Times of London suggests how severe the crisis is in Champagne. (Click on the link to read the rest of the story.)

Hopes of a glut of cheap champagne are set to be dashed when vineyards meet next week to agree on a big cut in production to prop up prices.

With sales falling, producers may be ordered to leave up to half their grapes to wither on the vine in an attempt to squeeze the market.

Merchants are pushing for an historic reduction in yield as they seek to ensure that champagne remains an expensive luxury. “Everyone agrees that production has to be cut because no one here wants to see prices fall,” an industry insider said. “The only disagreement is on the scale of the cut.”

The backdrop to the debate is a slump in sales for champagne makers, from 338 million bottles in 2007 to 322 million last year and a predicted 270 million this year. The fall stems in part from a slide in demand, estimated at about 10 per cent, and in part from destocking by distributors, notably in Britain and the United States.

9/3/2009 update:  A great article in today’s Wall Street Journal on the crisis in Champagne. Check it out!

The Chernobyl Effect

January 26, 2008 By in Hedges Cellars, Systembolaget, Washington wine 2 Comments

How a Nuclear accident in the Ukraine launched Washington wine in Europe.

chernobyl_fallout1.jpg

Economics has been called the science of unintended consequences because economists are good at tracking down the complex indirect effects of seemingly simple policies and events. The study of global wine markets always makes me appreciate the power of unexpected connections.

The Washington and Oregon wine industries are making a major push right now to get attention (and distribution) in Great Britain and other export markets. I hope that these programs have their intended effect, but one the first significant Washington exports to Europe was not planned; it was the unexpected consequence of a freak accident. Here is a story that I have pieced together from various sources about how Washington wine made one of its first important impacts on foreign markets.

It started with an accident that occurred on April 26, 1986 in a town called Pripyat in the Ukraine. Pripyat was home to the Chernobyl nuclear reactor, which experienced a catastrophic failure on that April day, resulting in panic and loss of life. Pripyat was evacuated and remains a ghost town to this day. But the effects extended well beyond the reactor site. Plumes of radioactive fallout rose high into the atmosphere and were taken by the prevailing winds north and west as the map above shows (click on the map to enlarge it).

The northern radiation plume caused panic and alarm in Scandinavia, as you might expect. The uncertain long-term consequences of an unavoidable invisible threat continues to haunt residents of this region. At the time, of course, the priority was to avoid radioactive contamination: stay inside, don’t eat food that was grown in the fallout zone, don’t drink milk from cows that grazed on fallout-dusted fields, and so on. The health concern naturally extended to wine.

Systembolaget, the Swedish national retail alcohol monopoly, faced a dilemma. Much of the red wine it sold came from regions of France that were squarely in the path of the western fallout plume (although not, as the map indicates, among the most severely affected regions). There was no way that it could sell this French wine to anxious Swedish customers.

So the word went out through wine networks: Systembolaget was looking for sources of uncontaminated Bordeaux-style red wines to fill their shelves until the French wine scare was over. And so Tom Hedges received a call. Tom (a 1973 graduate of the University of Puget Sound) was hard at work trying to sell Washington wines in Taiwan — a difficult task in the 1980s as you may imagine. Tom saw an opportunity to act as a middleman between the Washington winemakers he knew who had Cabernet and Merlot to sell and the Swedish wine retailer. He became a négociant as such middlemen are called in the wine business. He bought up surplus wine from various Washington sources, blended and bottled it (under the Hedges Cellars label) and shipped it off to Sweden, where it found customers who might not otherwise have been willing or able to try a Washington wine.

The wines were good enough that Systembolaget came back from more. In fact, they wanted to visit Tom’s Chateau and Estate, to see how good wine was produced in what was to them an unlikely part of the world. This was a problem, of course, since Hedges Cellars was what we would call today a “virtual” winery. And so he responded by planting a vineyard (one of the first on Red Mountain, which is today one of Washington’s premier AVAs) and building a winery (which is now Hedges Family Estate).

Thus did a nuclear accident in the Ukraine help bring Washington wines to the international market.