Category Archives: New Zealand

In Vino Veritas: Surprising New Zealand Wine

February 7, 2012 By in New Zealand 5 Comments

A different wine tasting ...

The invitation was impossible to resist.

In association with Wine Channel TV we’re celebrating Waitangi Day (NZ’s National holiday) with a virtual wine tasting and cooking demonstration – and you’re invited to ‘come along’! With a NZ winemakers in attendance and online, and a live audience in Chicago, you’ll have the opportunity to message in questions as you sip along with us from the comfort of your living room. Gather up a group of friends, register, and tune in with fellow-wine lovers from around the globe for this fun, social way to taste and learn about New Zealand’s finest wines!
Winemaker Sarah Burton of Cloudy Bay will be co-hosting the wine tasting, while Chef Bill Kim of Urban Belly will be preparing mouthwatering dishes with Cervena Natural Tender Venison and New Zealand King Salmon.
Be sure to stock up with a few bottles of our featured wines at a participating retailer beforehand. To stay up-to-date with #nzwineday news including competitions, participating retailers and restaurants, like us on Facebook and follow us on Twitter.
See you online!   – The Complexity Team

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 I’ve written a good deal about New Zealand wines and did research fieldwork there a few years ago, so what could be more interesting than to catch up with developments via a virtual tasting? Complexity, I learned, represents 21 of New Zealand’s best wineries and was the organizer of the  Waitangi Day tasting.  I signed up for the program and lined up some research assistants to help out with the heavy lifting.

As the big day drew closer I began to wonder what the program’s theme would be?  Yes, tastings are always about the wines (and Complexity would be sure to showcase its clients’ best products), but the wines need to be part of a larger narrative. What message would we find in the bottles? Looking at the list of wines we would be tasting (see below) I could imagine several possible story lines.

Beyond Marlborough

Mike and Ron

New Zealand wines have been very successful in the U.S. market in recent years — Marlborough Sauvignon Blanc and Argentinean Malbec are the fastest growing import segments.  Perhaps the tasting would argue that there is more to New Zealand than Marlborough?

This theory was backed by the inclusion of wines from Auckland, Gisborne, Hawkes Bay and Martinborough on the North Island and Central Otago and Nelson in the South. New Zealand is a surprisingly large and diverse country in terms of wine terroirs and the tasting’s theme could easily be “Marlborough … and Beyond.”

Beyond Sauvignon Blanc?

You could say the same thing about Sauvignon Blanc. Despite the success of NZ Pinot Noir, Sauvignon Blanc is still the defining factor for the New Zealand export brand. And that’s a good thing I suppose given the huge amount of it that is now produced and must find markets abroad.

There is some comfort in having one of the world’s most successful regional wine brands, but there is also some anxiety. Mark Twain famously advised that his readers should put all their eggs in one basket — and then watch that basket! — but diversification remains the conventional wisdom.  Sauvignon Blanc, yes. But Chardonnay, Pinot Noir, Riesling, Cab, Syrah and more — that might be a useful message.

Avoiding the Shiraz Trap?

Or maybe, I thought, the theme would be complexity (is that too obvious for an event organized by a company called Complexity?). Wine regions sometimes fall into a stylistic trap — a popular and successful type and style of wine emerges and pretty soon everyone is making a stereotype version of it. Individual differences disappear and a certain sameness settles in. It has been said that this was part of the downfall of Australian Shiraz. It would be easy for Marlborough Sauvignon Blanc to fall into this kind of trap and maybe NZ Pinot Noir, too. Some people say it has already happened, at least at the lower price points.

It would make sense that you might choose wines for the tasting that are really distinctive that would reinforce the idea that New Zealand is many things, not just one, and that the different wine regions and makers offer a complex pallet for the adventurous wine drinker’s palate.

In Vino Veritas!

So which message did we find when we pulled the corks (2 bottles) and twisted the screw caps (4 bottles)? Well, actually I never learned what the scripted message was because technical difficulties prevented many of us online from viewing the video feed and interacting with the studio guests until the tasting was almost over.  Whatever message was there was lost on us.

That left only the wines to speak for themselves and In Vino Veritas, as they say. So my team focused on them and here’s what we think they have to say:

Surprise!

All three of the possible story lines just mentioned emerged from our tasting of six bottles of wine, but a bigger theme surfaced: surprise! Although we all know New Zealand wines pretty well and enjoy them, these wines surprised us and made us rethink them.

The Saint Clair Sauvignon Blanc was the essence of what we expected — the classic wine taken to its logical extreme so it made us think about what we really look for in Marlborough SB. Then we sampled the Cloudy Bay Te Koko and wow was it something completely different! Is this a New Zealand wine? Is it even a Sauvignon Blanc? Quite a long discussion took place as we tried to make sense of two wines so different along such different dimensions.

The two Pinot Noirs (from Escarpment and Seresin) went in opposite directions, too, and personal favorites changed and changed back as the wines developed in the glass.

The Craggy Range Syrah that ended the tasting for us was another stunner — a distinctive interpretation of the Gimblett Gravels terroir that encouraged both conversation and introspection. A real stereotype-breaker.

The wines really did speak for themselves in this case and, if they told the truth, then maybe it is time to reconsider what we think we know about New Zealand wine.

Full of surprises

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 Thanks to the folks at Complexity for inviting us to participate in this interesting event. Thanks to Mary, Ron (and Coco) and Sue for their work decoding the NZ wine message. Here is the list of wines we tasted.

WINE LIST (the wines we tasted are marked with *)

Flight 1

Quartz Reef, Methode Traditionelle NV, Central Otago

Nautilus Estate Sauvignon Blanc, Marlborough

Cloudy Bay Te Koko Sauvignon Blanc, Marlborough*

Saint Clair Wairau Reserve Sauvignon Blanc, Marlborough*

Ata Rangi Sauvignon Blanc, Martinborough

Flight 2

Kumeu River Estate Chardonnay, Auckland*

Pegasus Bay Semillon Sauvignon Blanc, Waipara

Neudorf Moutere Riesling, Nelson

Spy Valley Envoy Pinot Gris, Marlborough

Vinoptima Gewürztraminer, Gisborne

Flight 3

Seresin Rachel Pinot Noir, Marlborough*

Vavasour Awatere Valley Pinot Noir, Marlborough

Escarpment Pinot Noir, Martinborough*

Palliser Pinot Noir, Martinborough

Craggy Range ‘Le Sol’ Syrah, Gimblett Gravels, Hawkes Bay*

Flight 4

Felton Road Bannockburn Pinot Noir, Central Otago

Mt Difficulty Pinot Noir, Central Otago

Amisfield Pinot Noir, Central Otago

Villa Maria Reserve Cabernet Sauvignon Merlot, Gimblett Gravels, Hawkes Bay

Trinity Hill ‘The Gimblett’, Gimblett Gravels, Hawkes Bay

The Paradox of [Wine] Choice

December 27, 2010 By in Argentina, Gallo, Marlborough Sauvignon Blanc, New Zealand, popular culture, wine markets, wine ratings 8 Comments

I always look forward to the week between the Christmas and New Year holidays because that’s when the pace seems to slow down a bit and I can settle in to read The Economist‘s special double issue.

Of particular interest this year is the essay on page 123 called “Tyranny of Choice: You Choose.” The main point is simple, but the implications are quite broad, with particular relevance for today’s wine markets.

Good — Up to a Point

The simple point? Choice is good, but only to a certain degree. Too much choice is, well, too much and can sometimes stop decision-making dead in its tracks. I say that this is a simple point because we have all suffered from the problem of too many options overloading our preference systems. Or am I the only one who sometimes has trouble ordering coffee at Starbucks or a sandwich at Subway?

Government is a good example of this Paradox of Choice. One party rule is notoriously problematic.  Multiple parties provide useful competition. But at some point more political choice is really less –particularly less in terms of stability.  Fragile, shifting multi-party coalitions mean short governmental half-lives with no one looking after the whole since everyone’s focused on their own tiny slice of the electoral pie.

What makes The Economist article interesting is that it ties together so many elements of this dilemma, from literature to academic research and from potato chips to human reproduction.

Rollerblading Monstromart

Super-abundant choice is a fact of modern life. The Economist suggests that you …

Wheel a trolley down the aisle of any modern Western hypermarket, and the choice of all sorts is dazzling. The average American supermarket now carries 48,750 items, according to the Food Marketing Institute, more than five times the number in 1975. Britain’s Tesco stocks 91 different shampoos, 93 varieties of toothpaste and 115 of household cleaner. Carrefour’s hypermarket in the Paris suburb of Montesson, a hangar-like place filled with everything from mountain bikes to foie gras, is so vast that staff circulate on rollerblades.

One cost of this embarrassment of riches is confusion or, put another way, higher transactions costs. Making a choice means comparing the qualities and value of different options, which is difficult enough when there are only two brands of breakfast cereal, but mighty time-consuming and complicated when there are 200.

The Economist explores several dimensions of this problem, citing a Nobel Prize winning economist (Daniel McFadden), an Italian novelist (Italo Calvino) and cartoon character Marge Simpson!

Expectations have been inflated to such an extent that people think the perfect choice exists, argues Renata Salecl in her book “Choice”. … In one episode of “The Simpsons”, Marge takes Apu shopping in a new supermarket, Monstromart, whose cheery advertising slogan is “where shopping is a baffling ordeal”. “How is it”, muses Ms Salecl, “that in the developed world this increase in choice, through which we can supposedly customise our lives and make them perfect leads not to more satisfaction but rather to greater anxiety, and greater feelings of inadequacy and guilt?” A 2010 study by researchers at the University of Bristol found that 47% of respondents thought life was more confusing than it was ten years ago, and 42% reported lying awake at night trying to resolve problems.

Greater choice first delights us, then overwhelms us, then it can sometimes drive us crazy. There must be a “best” among all the rest. Which is it? And how will I know? The quest for the best can sometimes destroy the pleasure of the very good by introducing an unwanted but unshakable sense of doubt.

The Age of Anxiety

Which brings us to wine. It does seem like the problems of exaggerated choice apply especially to wine. Of those 48,000 items on the upscale supermarket shelves, chances are that 1500 or more are bottles of wine. Wine is the largest choice space in the modern grocery store, ten times richer in terms of the number of options than the #2 area (breakfast cereals) and much more complex.

Wine buyers have never had it better in terms of the number of choices available from around the world. And we’ve never had it worse regarding the possibility of confusion and the pressure to find our perfect wine. It’s the Age of Anxiety for wine.

I find it interesting that some of  the hottest products in the wine market seem to simplify wine just a bit and perhaps unintentionally  address this anxiety. Gallo’s inexpensive Barefoot brand wines have very done well in the last few years; most people view this as a price thing — the result of trading down. But Barefoot also offers consumers a more casual idea of wine that would appeal to anyone who wants to get out of “perfection” rat race and just enjoy wine without over-thinking it. (And every Barefoot bottle features a “Gold Medal” from a wine competition, giving buyers the security of a sense of quality.)

The hottest wine sectors today are Marlborough Sauvignon Blanc and Argentinean Malbec; is it a coincidence that these wines are easy to understand, with many good producers at various price points? The problem of choice still exists for buyers of these wines, of course, but perhaps more of the pleasure of choosing survives.

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Several people have asked about the series on BRIC wines.  Fear not — it will resume in a few days with a report on Russia,

Retail Wine Sales: Big versus Hot (Hot Hot)

November 30, 2010 By in Argentina, Australian wine, Constellation Brands, Gallo, New Zealand, Supply and Demand, wine markets, wine price, Yellow Tail 18 Comments


I thought it would be interesting to take a look at what’s “big” in the wine market (where the most consumer dollars are going) versus what’s  “hot” (or “hot hot hot” as in the video above), showing the fastest growth.  I’m using U.S. off-premises wine sales data from Nielsen for the 52 weeks ending 9/18/2010 taken from the December 2010 issue of Wine Business Monthly.

Baseline information: Off-premises wine sales in the U.S. totaled $9,172 million in the period covered here according to the Nielsen report, with an overall growth rate of 3.2%.

Which product categories are the largest in absolute terms and which are growing the fastest? I’m going to break down the data by wine varietal, country of origin (for imported wines) and price category. Take a minute and write down what wines/countries/price points you think will be at the top in each category and see if you’re right. Here goes

Chardonnay Leads the Way

Forget what you thought you knew about Chardonnay being so yesterday and Pinot Noir kicking Merlot’s butt. In terms of the overall retail market sales, the giants (or are they dinosaurs?) still dominate.

BIG varietals

Varietal $ million
Chardonnay $1,996
Cabernet Sauvignon $1,347
Merlot $911
Pinot Gris/Grigio $734
Pinot Noir $526
White Zinfandel $427

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American wine drinkers are nothing if not traditional, reaching again and again for familiar varietals, so the usual suspects come top of the table. Pinot Noir has indeed surged in the post-Sideways era, but its lead over wounded White Zin is not large and it still lags far behind arch nemesis Merlot.

Obvious Chardonnay is the consumer default with a 50% lead on Cabernet and double the sales of Merlot. Pinot Grigio, the #2 white varietal, lags far behind.

I find the varietal “hot list” below quite interesting. The fastest growing wine varietals  are Riesling, Pinot Noir (of course), Sangiovese and Sauvignon Blanc. (Interestingly, varietal Sangiovese is rising while Chianti is a shrinking category in the Nielsen league table.)

HOT varietals

Varietal Increase
Riesling 9.4%
Pinot Noir 8.9%
Sangiovese 8.7%
Sauvignon Blanc 8.5%

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It seems to me that while the “big” varietals are wines that many consumers purchase to drink on their own (because of their high alcohol levels and for other reasons), the “hot varietals” are a bit more likely to be food wines. I wonder if that’s a trend?

World Wine Web

Most of the table wines that Americans drink are American — there is a very strong home country preference. Domestic wine sales totaled $6,524 million for the period covered here while imports accounted for $2,648 million. What countries supply the most imported wine as measured by total expenditures? Here’s the Big list:

BIG import countries

Country of Origin $ million
Italy $804
Australia $771
Chile $243
France $228
Argentina $187
New Zealand $125

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As the table shows, Italy and Australia are #1 and #2 respectively in off-premises sales. It is interesting that France has fallen to #4 behind Chile. Argentina and New Zealand make the cut here (Spain did not!) as you might expect, but bear in mind that Italy still sells more wine in the U.S. than Chile, France, Argentina and the Kiwis combined. The concentration ratio in this market is very high: Italy and Australia may be struggling at the moment, but they are in a league of their own.

Italy and Australia will not be over-taken soon, but the market momentum seems to have has passed. Look at the big growth numbers that Argentina and New Zealand are putting up below! Wow. Annual growth rates of more than 20%!

HOT import countries

Country of Origin Increase
Argentina 27.6%
New Zealand 21.1%
Germany 4.4%
Chile 1.7%
Spain 0.6%
Portugal 0.3%

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Now look at the gap between the really hot ones and the rest! Germany comes in at #3 on hot list, but with a low 4.4% increase for the year. Sales of most wine imports (including Italy and Australia) have actually fallen in the last year. Spain and Portugal squeeze onto the list at #5 and #6 by simply avoiding utter collapse. The import wine segment is slumping badly, with Argentina and New Zealand the only significant exceptions.

The Price is Right

Finally, let’s look at the market in terms of price points.  What are the biggest and hottest parts of the wine wall in terms of price?

BIG price points

Price Segment $ million
$3.00 – $5.99 $2,688
$6.00 – $8.99 $1,903
$9.00 – $11.99 $1,868
$12.00 – $14.99 $910
$0 – $2.99 $794
$15.00 – $19.99 $557
$20+ $446

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You can see from the data why Gallo is having a good year (or probably having a good year, since they are a private company and don’t release data so I can only guess). Their brand portfolio is aimed at the heart of the market, from $3.00 to $11.99. Lots of good targets there!

You can also see why Constellation Brands is probably finding this a challenging year. They reconfigured their brand portfolio to take advantage of what they saw as upmarket opportunities.  They moved up the wine wall a bit but the market changed directions and went downmarket, leaving them in a less competitive position.

HOT price points

Price segment Increase
$9.00 – $11.99 9.1%
$20+ 7.4%
$12.00 – $14.99 5.0%
$3.00 – $5.99 4.5%
$15.00 – $19.99 2.5%
$0 – $2.99 (0.1)%
$6.00 – $8.99 (4.0)%

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But Constellation’s upmarket bet may yet pay off. The hot price segments are all in the wine wall’s upper strata.

The Old Elasticity Trap

The rise in spending in the super-premium + categories is an encouraging sign, but I think some caution is necessary in interpreting the data. Many observers see the big increase in expenditures on $20+ wines and conclude that consumers are coming back to this segment strongly — that the demand curve has shifted. But I suspect that there is a lot of bargain hunting taking place and that margins are falling – bad news. Maybe we are just following discounted prices down the demand curve.

For many of today’s buyers a $20+ retail wine is a highly discretionary purchase and so the demand curve may be quite elastic. Econ 101 students will remember that total expenditure increases when price falls for a product with an elastic demand.

The large percentage expenditure increases we seen in the data could result from discounting — $30 wines being sold off for $25 and so on — rather than an actual increase in demand or shift in the demand curve.  The increased revenues are good and inspire optimism, but they may disguise the bad news of shrinking margins.

(As I am writing this, the neighborhood Safeway is offering an extra 20% off any wine selling for $20 or more. I suspect sales revenue will increase at the lower retail markup.)

Overall conclusions? I’d rather not, thanks. These data are interesting more for the questions they raise than the answers they provide. But the questions about how the U.S. wine market is changing are worth pondering (hopefully over a nice glass of wine). Cheers.

Extreme Value Wine Goes Mainstream

November 1, 2009 By in Aldi, brands, economic crisis, Marlborough Sauvignon Blanc, New Zealand, Supply and Demand, wine distibution, wine price 1 Comment

groc_receiptOur friend Jerry doesn’t seem like the kind of guy who would go digging around in the closeout bin or shopping for wine at Aldi — too classy for that — but there he was at Joyce and Barry’s house on Friday showing off his latest finds: cheap wine from a Grocery Outlet store.

The wine wasn’t so much good or bad as simply intriguing — is it really possible for a sophisticated wine enthusiast like Jerry to be satisfied shopping for wine at an “extreme value” store? Only one way to find out, so we got in the car the next day and headed for the strip mall.

Searching for Extreme Values

Headquartered in low-rent Berkeley, California, Grocery Outlet bargain market is America’s largest extreme value grocery chain with more than 130 independently owned stores in six western states. It has been in business since 1946. Prices are low, low, low. The website tells the story:

The premise is simple: We offer brand name products at 40% to 60% below traditional retailers. Our offering is wide: groceries, frozen, deli & refrigerated, produce, fresh meat (selected stores), general merchandise — seasonal products, housewares, toys, and gifts — health & beauty, and a most impressive inventory of beer & wine.

How can they charge such low prices?

We source product opportunistically. Simply put, we buy brand name products directly from their manufacturers for pennies on the dollar. When a manufacturer has surplus inventory like excess packaging or manufacturing overruns they call Grocery Outlet first.

About 75% of our product is sourced this way. Some of our greatest buys are in Health and Beauty Care, Wine, Frozen Foods, Organics and Produce. To ensure that the basics are always available at Grocery Outlet, some product is sourced conventionally, like other grocery stores. Because we cannot source these products opportunistically, the savings may not be as phenomenal; however, we think it’s important to provide them for your convenience—to save you that extra trip.

Grocery Outlet stores here in the Pacific Northwest are supermarket sized spaces filled with off brand and closeout products along with a wide enough selection of fresh goods to allow families to do all their grocery shopping in one place. They are nice if not especially fancy stores. I can see why budget-minded families shop there.

Mystery Wine

The wine corner at the nearest store was large and well-stocked. Most of the brands were mysteries (one was even named “Mystery” as in “Mystery Creek” or something like that), although a few third and fourth tier products from recognized mass-market makers were available. Mainly, I think, these were leftover wines closed out by distributors to raise cash or make room for incoming shipments along with no-name brands “dumped” under a bogus label.

The wines came from all over — California, naturally, Australia, France, Italy, Chile. There was even a $3.99 “Champagne” from Argentina. Honest — it said “Champagne.”

Prices were suitably low — most of the wines sold for $2.99 to $5.99. It isn’t hard to make money selling extreme value wine when you can buy up surplus bulk wine for just pennies a liter and package it up for quick sale.  Extreme value retailers are the perfect distribution channel for wines like these.

As you can see from my receipt, I walked out with three bottles of wine for a total of $13.97 plus tax. “By shopping with us you saved $28.00.”  That would mean an average of 67% off the retail price.

Unexplained Tales from Down Under

I wasn’t really surprised at what I saw as I surveyed the wine wall. Then, slowly, a different kind of wine mystery began to unfold.nz_wines

Sue must have sharp eyes because she picked out the first surprise. Sam’s Creek Marlborough Sauvignon Blanc 2008 for $3.99.  That’s awfully cheap for a New Zealand wine here in the U.S. I’ve read about heavily discounted NZ wines in Great Britain but not here in the U.S. — until now.

New Zealand is a high cost wine producer that has succeeded in charging a premium price for its wine. Indeed, NZ earns the highest average export price of any country in the world despite surging production that threatens to create unmarketable surpluses. Everyone worries that one day the export limit will be hit and prices will start to tumble from $12-$20 down to, well, $3.99. Is that what this Sam’s Creek wine really means? The end of NZ wine’s premium price?

Frighteningly, Sam’s Creek isn’t a no-name closeout wine. The label says that it is made and bottled by Babich, one of the famous names in New Zealand wine, and the internet tells me that Waitrose sells it for about $10  in Britain. I wonder if the unsold British inventory has somehow made its way here?

Prestige Wine at Extreme Value Prices

Two more bottles raised more questions about New Zealand wines. I paid a whopping $5.99 for a 2008 Isabel Estate Marlborough Sauvignon Blanc.  I almost overlooked it, but the label caught my eye. Isabel Estate is one of the most famous Marlborough quality producers, exceedingly well-known in Great Britain where this wine sells for about £10, but not so widely distributed here in the U.S., I think.

How did it get here and who among the Grocery Outlet clientele would recognize its quality sitting there surrounded by cheap and cheerful closeouts?

The third wine makes the puzzle more complicated. It is a 2004 Te Awa Merlot from the Gimblett Gravels of Hawkes Bay. Te Awa Farm is another famous NZ producer and, while this wine — a estate product from a distinguished producer in a famous region — may be slightly past its prime and therefore a typical closeout risk, it is still very surprising to see it sold at a place like Grocery Outlet for $3.99 rather than the $16-$20 retail price.

These three New Zealand wines may be random surplus wines found in the sort of place where random wines go to be sold. Or they may be indicators of important changes in the world of wine. Kinda makes you wonder, doesn’t it?

Wine markets are all about supply and demand. It is pretty clear that a supply of interesting wines has appeared along with the rock-bottom remainders at extreme value stores like Grocery Outlet, pushed along, no doubt, by the slump in fine wine sales.

What about demand? And what does Grocery Outlet tell us about the wine market more generally? Some thoughts in my next blog post.

Stein’s Law and New Zealand Wine

August 20, 2009 By in British wine market, decanter, economic crisis, Economic impact, globalization, Marlborough Sauvignon Blanc, New Zealand, wine markets, wine price 1 Comment

Stein’s Law, named for presidential economic advisor Herb Stein who coined it, holds that if something cannot go on forever it will eventually end.

If that sounds like an obvious conclusion remember that, Freakonomics aside, most of what economists do is point out the obvious to people who somehow fail to see it.

Think about everyone who was surprised that the housing bubble imploded and that credit crashed. Everyone knew that rising housing prices and expanding mortgage debt couldn’t go on forever, but many acted like it would never end. If only they had remembered Stein’s Law!

I wonder if this is a Stein’s Law moment for the New Zealand wine industry?

Objectively the New Zealand wine industry has all of the classic characteristics of a bubble (and I’m not talking about sparkling wine here). The industry has expanded at a break-neck pace in recent years, fueled by foreign investment. The home market is quite small, so increasing output has been pushed into export markets, especially Australia, the U.S. and Great Britain. New Zealand wines are best sellers in each of these markets.

Incredibly, New Zealand has been able to continually expand export sales while maintaining its historically high export price. (No country has received a higher average price for its table wine exports in recent years.) The high prices, of course, draw in more investment, so production continues to grow and the cycle repeats.

Chateau Ponzi

If I told you a story like this about a financial investment of some sort you’d probably tell me that it sounds like a Ponzi scheme — no way this can go on forever. Pretty soon the market will be saturated and prices will have to fall. This is what worried the New Zealand winemakers I talked with when I visited there a few years ago: the moment when exports at a premium price would become unsustainable. They worried that their fine wines would become commodities, sold in bulk at permanently lower price points.

Any luxury good retailer will tell you that it is hard to push prices back up once buyers come to expect discounts.

Yesterday’s Marlborough Express suggests that the tipping point may have been reached. The article reports that

New Zealand Winegrowers’ annual report released yesterday shows exports surged 24 per cent to $992 million and the industry is on track to reach the $1 billion mark this year, a year ahead of expectations.

This was largely driven by bulk exports, which Mr Smith said were a concern to the industry. Historically, bulk wine exports have accounted for less than 5 per cent of total export volume; in the past year this quadrupled to nearly 20 per cent as producers looked to shift excess inventories.

Bulk exports might relieve pressure on wineries in the short term, but in the long term they could damage the market positioning and the reputation of New Zealand wine, Mr Smith warned.

The fact of falling prices due to bulk sales is hard to dispute.  I have not seen big discounts on New Zealand wine here in the U.S., but the Marlborough Express reports that

A surplus of Marlborough sauvignon blanc is driving down wine prices, says a Nelson wine producer. Brightwater Vineyards’ owner, Gary Neale, says his company is up against an oversupply of discounted Marlborough sauvignon blanc exports.

Mr Neale sells his wine for 10.50 (NZ$25.80) in Britain, but British consumers are being offered three bottles of Marlborough sauvignon blanc for 10 , or 3.99 for one bottle. An email from his Sydney agent tells of New Zealand wine being sold at A$4 a bottle, and Marlborough sauvignon blanc is selling there for as little as A$2.75 when buying six bottles.

“In the past, Australia has been a very easy and a profitable market, but Australia is absolutely flooded with cheap Marlborough sauvignon blanc,” says Mr Neale.

Two Buck Kiwi Wine

With the Australian dollar trading at about 83 U.S. cents this morning, that makes makes the Marlborough six-pack price a little over $2.25 US per bottle — Two Buck Chuck (TBC) range.

An article posted today on Decanter.com reports low prices in the U.K. market, too, although not so low as in Australia, and sounds an optimistic note.

The sale of £3.99 Marlborough Sauvignon Blanc is a short-term ‘blip’, according to the European head of New Zealand Winegrowers.

Following the record 2008 and 2009 vintages, increased production created an oversupply problem, giving rise to the first-ever £3.99 New Zealand wines as producers tried to clear tank space.

But David Cox, European director for New Zealand Winegrowers told decanter.com: ‘We are going to see the odd £3.99 New Zealand wine but not very often. I don’t think the consumer will ever get to the stage where they think they can get New Zealand wines for under £4.’

£3.99 translates to about $6.50 US — well clear of the TBC price, but frighteningly low for New Zealand wines in the UK market. Let’s put this price in context.

New Zealand producers received an average price of $6.00 for their exports in 2001-2005. Retail prices in the export markets were necessarily much higher to reflect transportation and distribution costs, tariffs and retail mark-ups. No wonder so many Marlborough Sauvignon Blancs have been priced in the $15-$20 range in the past.

If NZ wines are retailing for the equivalent of $6.50 in London then, working backwards, this suggests that net producer prices have plunged to less than $3, at least for the bulk wine product. That’s a huge drop and it is hard to see how production is sustainable at this price point.

All Black?

So is this it? Has the bubble burst? Is the future of New Zealand wine all black? No. The reputation of New Zealand wine is very strong and it may well be that consumers will be able to differentiate the bulk product at bulk price from the premium product higher up on the shelf as they do for products from France and California. The danger is that the whole national brand is devalued. That would be a devastating blow.

It would be a mistake to over-react to this news, but it would also be a mistake not to react at all.

Stein’s Law holds here as it does in so many cases and the surpluses will go away one way or another — either because the growers act to control them or else because the market collapses and they get sold off at bulk wine prices.

Supply and Demand in New Zealand

June 19, 2009 By in book reviews, globalization, Marlborough Sauvignon Blanc, New Zealand, Rabobank, Supply and Demand, wine brands, wine markets 1 Comment

My copy of the second edition of Michael Cooper’s Wine Atlas of New Zealand arrived this week and I am having trouble putting it down. Cooper’s coverage of the wines, the wineries, the people, the industry and the market is exceptional. And it is stunningly beautiful, too, with excellent maps and spectacular photos. A coffee table book in terms of size and weight, but with real substance. One of the two best regional wine atlases I own (the other is Burton Anderson’s Wine Atlas of Italy, which is still a valuable reference 20 years after its publication).

(Note: Cooper’s NZ Wine Atlas hasn’t been released yet in the US, but it is easy buy from UK online sellers like Amazon.co.uk.)

The Amazing NZ Wine Story

I’ve always been fascinated by the New Zealand wine story — how a tiny (0.5 percent of global output) wine producer at the far corner of the earth could become a leading global brand (a NZ wine is the #1 Sauvignon Blanc in the US) and earn the highest average export price of any country in the world.

I couldn’t wait to get Cooper’s second edition because a lot has changed for New Zealand wine since the first edition was published in 2002 and my last research trip there in 2004.  A lot has changed, but a lot has stayed the same, too.

The biggest threat to New Zealand’s success has stayed the same: the problem of balancing supply and demand. New Zealand was plagued by boom and bust cycles for many years. Overproduction of low quality wines created a crisis in the 1980s. Many winemaking businesses collapsed and were snapped up by NZ or foreign buyers, leading to the internationalization and consolidation of the industry. The NZ government initiated a grubbing up scheme in 1986 to reduce vineyard plantings, especially of low quality wines, setting the stage for the current boom.

New Zealand has been extremely successful in this era of global wine, which has been characterized by high quality, a strong global brand (Marlborough Sauvignon Blanc and now Pinot Noir as well), and a liberal trade regime that accepts high import levels of inexpensive wine as the price to be paid for high levels of higher-priced exports.

The Spectre of Surplus

Despite this success — or more precisely because of it, fear of wine and grape surpluses, price wars and market collapse continue to haunt New Zealand producers — at least those who are old enough to remember the crisis of the 1980s. In agriculture we know that nothing generates a surplus tomorrow faster than high prices today.

Cooper’s data make this boom-bust concern easy to understand. New Zealand’s industry has grown rapidly — can it be sustained? Producing vineyard area in New Zealand tripled from 10,000 hectares in 2000 to more than 31,000 hecrates (projected) in 2010. Wine production rose from 60 million liters in 2000 to 200 million in 2008. The number of wineries risen, too, if not quite so quickly: about 600 today, up from 334 ten years ago.

NZ domestic wine sales and wine imports have been relatively flat over the last ten years, so essentially all of the increased production has been targeted for export: 87.8 million liters in 2008 compared with just 15.2 million liters in 1998.

So far the world market has been wiling to absorb this rising production (and without diluting the NZ brand and the price premium it commands).  Can this continue into the future or does Stein’s Law (see note below) apply?

A recent Rabobank report on “New Zealand Wine Supply — Testing Limits” provides mixed indicators. Rabobank acknowledges the importance of balancing supply and demand, especially given the world economic crisis, and notes that nature may limit runaway growth. Marlborough is running out of land suitable for vineyards, according to the report.

The day will come when the quantities of Marlborough Sauvignon Blanc available … will reach its physical limit and the long term supply and demand outlook looks very favorable for growers and producers in the region. It is vital that in the next 10 years the reputation and bargaining power of producers in this region be maintained in order for the region to enjoy higher returns in the future.

In other words, things look good in the long run, it’s the short run that NZ needs to worry about. Persistent short term surpluses could devalue NZ wines from premium products to commodities. That would be enormously damaging to the industry.

There are some indicators that the damage is happening now. I have heard of deep discounts on some New Zealand wines in Britain, for example, and I even saw iconic Cloudy Bay on sale at Costco this week for just $20, about $10 less than its price last year.  More to the point, however, today’s Gisborne Herald reports that Pernod Ricard, which owns a number of important NZ brands, is terminating many or most grower contracts in the Gisborne region (North of Hawkes Bay on the North Island). The president of the Gisborne Winegrowers group is quoted

I have fielded a lot of calls from very concerned and distressed growers — my advice to them is to certainly not spend any more money on any of those blocks … Meantime, they should talk to their accountants and bankers.

Gisborne is a major producing area, but it doesn’t have the name recognition abroad of Marlborough, Martinborough, Hawkes Bay and Central Otago. It is Chardonnay country with 52.8% of producing vineyard area in that varietal compared to 8.2% planted to Pinot Gris and less than 4% each to Sauvignon Blanc and Pinot Noir. Chardonnay has become unfashionable — it is not where the market growth is these days. It makes sense therefore that Gisborne might be the first area to feel the combined effects of an overall surplus and shifting demand.

The Next Big Thing?

What is to be done? The Rabobank study looks to Pinot Gris, arguing that it could join Sauvignon Blanc and Pinot Noir as a leading NZ export wine thereby expanding and diversifying the NZ export market. The expected growth of wine consumption in Asia is one factor in this optimistic scenario, since Pinot Gris is said to pair well with Asian foods. Food friendly and premium price — these are attractive qualities it is said in the growing Chinese wine market, according to Rabobank.

Pinot Gris is also thought to be a style that younger wine drinkers will find fun, friendly and easy to like (but also flavorful, unlike certain Pinot Grigio  you may have been served …). Michael Cooper is optimistic, too, in his Wine Atlas discussion of the varietal., citing “high potential” and “impressive weights and flavour richness” on both North Island and South wines.

Pinot Gris is profitable, too. Made in stainless steel tanks with no oak aging, Pinot Gris is a good cash flow wine.  I can’t remember seeing NZ PG on store shelves here in the U.S., however. Perhaps I’ve just missed them or maybe NZ producers are focusing on different markets — Britain, Australia or Asia? — to avoid undercutting Sauvignon Blanc sales here.

“Demand for Pinot Gris,” the Rabobank report asserts, “should underpin even greater returns for growers in the medium to long-term.” A good thing, I think, if things hold together until the medium- and long-term arrive (there’s a famous Keynes quote about this, although I don’t think he was talking about wine). There is still the old problem of the short-term supply-demand balance to be worked out.

Note: Stein’s Law (named for Presidential economic advisor Herbert Stein, is that if something cannot go on forever it will stop. Stein’s point was not that all bubbles burst but rather that market forces tend eventually to rein in unsustainable trends (although not always in a gentle way) and you don’t necessarily need government to do the job for you.

The #1 Sauvignon Blanc

June 9, 2009 By in brands, Constellation Brands, globalization, Marlborough Sauvignon Blanc, New Zealand, Supply and Demand, wine brands, wine markets 1 Comment

Decanter.com reports that Nobilo Marlborough Sauvignon Blanc has overtaken Kendall Jackson as the best selling Sauvignon Blanc in the United States. The ranking is based upon sales volume, but the wines retail for about the same $10 to $12 price,  so Nobilo probably ranks first by value as well. An amazing achievement, given the many obvious challenges the New Zealand wine industry faces in terms of size, production cost, shipping distances, access to US distribution and so on.

A Matter of Style

It is interesting to consider how Nobilo and the New Zealand industry have  managed to achieve this success. The first reason is the distinctive quality of Marlborough Sauvignon Blanc itself. Even wine critics who don’t think very highly of Sauvignon Blanc in general (I’m talking about you, Jancis Robinson) acknowledge that the Marlborough wines are distinctive and that the best of them are truly exceptional. In my house they set the standard for Sauvignon Blanc.

Why are these wines so good (and so popular)? Winemakers always start with the vineyard and it is certainly true that Marlborough seems ideally suited to produce Sauvignon Blanc grapes. (Ironically, no grapes at all were grown there before the mid-1970s). The skills of the winemakers are also important. The distinctive style of the wines is another factor. The June 2009 Wine Business Monthly includes a fine article by Curtis Phillips on Sauvignon Blanc yeasts that nicely explains the NZ style. NZ SB, he writes, emphasizes a varietal style, letting the fruit speak forcefully. The French SB style is “anti-varietal,” he says, emphasizing texture and minerality over fruit aromas and flavors.

Finally there is the oak-influenced style, which originated in France but was made famous by Mondavi as Fumé Blanc. This barrel-fermented SB style remains very popular in the U.S., but has obviously been eclipsed in the marketplace by the fruit-forward Marlborough product.

The New Zealand varietal style is a hot commodity. New Zealand producers should hope that it stays hot and doesn’t fade as some popular regional styles have done (I’m thinking about how quickly Australian Shiraz has fallen from favor).

The International Influence

Nobilo’s rise to #1 in the US market is not an accident, according to the Decanter.com article. Nobilo is a Constellation Brands product — one of five New Zealand export brands of ConstellationNZ (see logos above).  Joe Stanton, the ConstellationNZ CEO, explains that his company’s strategy was to make Nobilo the top US SB by focusing on “traditional” wine buyers and giving them what they expect in the way of packaging for premium wine: cork instead of screw-cap, for example, and flint-colored glass bottles instead of traditional French green. Plus, of course, the intense Marlborough aromas and flavors. New wine in old bottles (and closures), I guess, and it worked.

ConstellationNZ accounts for 40% of all NZ wine sold in the US — an astonishing figure, but understandable given the strong brands that it has acquired (Nobilo, Kim Crawford, Drylands, Selaks) or built (Monkey Bay)and the efficient distribution system that has evolved to get these wines and all the other Constellation products on store shelves and restaurant wine lists.

In fact, the New Zealand industry is dominated by foreign-owned wineries, as wine writer Michael Cooper points out in the new edition of his fine Wine Atlas of New Zealand. Of the top wine producers only two (Delegat’s and Villa Maria) are Kiwi-owned. The largest producer is Pernod Ricard NZ (formerly Montana wines), part of the big French drinks group. Pernod manages 25 NZ brands according to their website, including of course Montana (sold as Brancott Estate in the US), Corbans, Church Road and others.

The most famous NZ wine — Cloudy Bay — is owned by LVMH Möet Hennesy-Louis Vuitton, the French luxury goods conglomerate.  Matua Valley, another leading NZ producer, is part of the Australian Foster’s Group. The list goes on.

It is tempting to consider the pluses and minuses of international ownership as Michael Cooper does briefly in the article linked above. This is a topic that I plan to analyze in more detail my next book. In the meantime, however, it is perhaps best to consider how the combination of the local (New Zealand’s wonderful terroir) and the global (big multinationals like Constellation and Pernod Ricard) have combined to both produce New Zealand’s tasty wines and to deliver them to our doorsteps.

New Zealand has done specutacularly well in the global wine market so far. What lies ahead? Watch this space!

Wine, Recession and Argentina

April 30, 2009 By in Argentina, Australian wine, brands, Chateau Ste. Michelle, economic crisis, exchange rates, globalization, Marlborough Sauvignon Blanc, New Zealand, Supply and Demand, Washington wine, wine brands, wine markets, wine price Leave a comment

The global economic crisis has been bad news for Argentina, but good news so far for Argentinian wine. Will the wine part of the story have a happy ending or, like so many Argentinian economic booms, turn eventually to bust?

Bad News and Good

The Economist Intelligence Unit reports that Argentina’s economy has been hard hit by the economic crisis. The economic forecast is gloomy (see below) with the only good news being that inflation, while still high, is falling.

Given rapidly declining business and consumer confidence, the government’s fiscal stimulus measures will have a limited effect, and we expect the economy to contract by 3% in 2009, before only a mild recovery in 2010.

Unofficially measured inflation will ease to 10-15% in 2009, as private demand falls. The official rate will end 2009 at 6.8%, with a similar rate in 2010.

The peso will continue to depreciate in 2009 owing to weaker foreign-exchange inflows, before the pace of depreciation slows in 2010. The current-account position will weaken in 2009-10.

The Argentinian wine economy situation is sunnier.  The May 2009 issue of Wine Business Monthly includes two reports that paint a bright picture of Argentinian wine trends.

The first story is a competitive analysis of Argentina wine in the United States market.  It reports that U.S. imports of Argentinian wine have risen dramatically in recent years, from 2.6 million cases in 2006 to 4.3 million in 2008.  The total value of Argentinian wine in the U.S. rose from $75 million to $146 million in this period.

It is important to put this increase in perspective, however. Total Argentinian imports are roughly equal to the annual output of a single US winemaker, Washington State’s Chateau Ste. Michelle. So the Argentinian presence is rising, but from a modest base.

Molto Malbec

Unsurprisingly, Malbec is Argentina’s calling card in the U.S. market. Malbec’s share of Argentinian wine imports increased from 35% to 48% over 2006-2008 measured by volume and from 44% to 55% measured by dollar value. I was interested to learn that Argentina wine sales are rising at all price points, not just in the value brand segment as you might imagine.  But value is still important.  Argentinian wine prices are rising, but still relatively low.  The article reports that the average FOB price has increased from $29 to $33 per standard 9-liter case.

In the same issue the results of the Nielsen company wine market survey for the period ending 2/7/2009 are reported.  Argentinian table wine imports were up 40% by dollar value for most recent year.  This compares to a 10 percent increase for Chile, one percent for Italy and a one percent decline for Australia.  Overall growth in imported wines was 2.4 percent by dollar value for the most recent year.

The 40 % annual rise is spectacular, but  Argentinian wines account for just 1.4 percent of U.S. domestic wine volume compared with two percent for Chile, nine percent for Australia, almost 10 percent for Italy. This shows that Argentina either has a lot of room to grow in the U.S. market, as optimists will perceive, or a lot of work to do to escape niche player status.

American Exceptionalism

I think the Argentina producers were wise to focus on the U.S. wine market for their export surge.  Although the European Union is more important to Argentina in other major export sectors, the U.S. is the target wine market, and that’s a good thing in this economic environment.  EU wine consumption has long been in decline because of demographic and market shifts, for example, while wine sales have been rising in the U.S.

The recession is likely to depress wine sales growth in both the U.S. and the EU, but the impact will be less in the U.S., I believe, if only because I think the recession will be shorter here. My current thinking is that the U.S. economy will benefit from greater short term fiscal and monetary stimulus, compared with the EU, and more effective medium term structural adjustment.  That said, the recession is and will be very severe.

Early U.S. evidence suggests that wine sales have actually continued to rise during in the first year of the recession, when measured by case volume, although the dollar value of those sales has declined as consumers trade down.

Opportunities and Threats

Reading the latest articles on WineSur, a noteworthy Argentinian industry website,  it pretty clear that Argentina producers appreciate both the opportunities and threats inherent in the current situation.  The opportunities — to establish a market presence built around good value and the rising popularity of Malbec — are significant. But I think it must be hard for Argentinians to see silver linings without looking around for associated dark clouds — their country has suffered repeatedly from the global market booms and busts.

Some of the threats are strictly economic. Argentinian producers are currently benefiting from a falling peso value relative to the US dollar, for example, which helps their wine hit market-friendly price points in the US.  But the falling currency is in part a reflection of high domestic inflation rates, which ultimately lead to higher production costs. A lot will depend upon how the inflation (cost) and exchange rate (export price) factors balance out in the future.

Some of the threats relate more to the fickle nature of the wine market itself.  Malbec and Argentina are nearly synonymous today, but this could change as other wine regions adopt their signature varietal. A recent visit to the Walla Walla AVA, for example, found many producers experimenting (successfully, I think) with Malbec.  Argentina has the first mover advantage in Malbec and must capitalize on this because it will face more competition in the future.  This happened to New Zealand (Sauvignon Blanc) and Australia (Shiraz) and I do not think Argentina will be different.

In exploiting its Malbec lead Argentina will need to strike another difficult balance, between establishing a useful “house style” that will build market identity and letting this deteriorate into a stylistic “monoculture” that soon bores consumers.  It seems to me that Australian Shiraz is currently suffering from the “monoculture” curse, perhaps unfairly, while New Zealand still benefits from a popular “house style,” although I’m not sure how much longer it can ride the gooseberry wave, especially given the vast quantities of Sauvignon Blanc that need to be sold.

Argentina is at a crossroads at a critical moment and moving in the right direction.  Count me cautiously optimistic regarding the future of Argentinian wine.

Update: Just hours after I posted this piece about Argentina the following item appeared on the Decanter.com website.

Argentine wine harvest down 25%

May 1, 2009  / Jimmy Langman

Due to climatic conditions, this year’s wine harvest in Argentina will be down 25% as compared to last year.

According to Argentina’s National Wine Institute, hail in some provinces, and overall higher temperatures in February and March, are factors in the lower production output this year.

The lower production this year has occurred despite Argentina having a 12% increase in land under cultivation for wine grapes.

Guillermo Garcia, president of the National Wine Institute, said: ‘If there had not been an international crisis, we would not have been able to provide wine to countries with developed markets.’

Garcia added that Argentine wine companies need to begin keeping more than three months of stock on hand to make up for such production shortfalls.

Exequiel Barros of the Mendoza-based Caucasia Wine Thinking consultancy told decanter.com that many Argentine wineries are worried about their ability to supply medium-priced wines but added: ‘We need to see how the international outlook develops this year before we can dare to make any projections.’

In Chile, wine growing areas that are not irrigated, such as Cauquenes in the Maule Valley, are predicting a similarly low harvest, with an estimated drop in production from 30 to 40% because of higher temperatures and low rainfall.

Most wineries in Chile, however, are reporting a good harvest. ‘The lack of rain has been good for this year’s harvest. But wineries in the far south, such as in the Bio Bio, may experience changes to quality because of the higher temperatures,’ said Edmundo Bordeu, professor of oenology at Chile’s Catholic University.

Dollar Daze on the Wine Wall

June 21, 2008 By in exchange rates, New Zealand, Supply and Demand, wine markets 1 Comment

You know that wine economics has become mainstream when you find yourself listening to it on the car radio.

The Dollar and the Wine Wall

Marketplace, a program of American Public Media that is broadcast by many National Public Radio stations, recently featured a story called U.S. Winemakers Toast a Strong Euro. Go ahead and click on the link to listen to the story or read the transcript.

The basic idea, which my International Economics students will recognize immediately, is that exchange rate changes create many direct and indirect winners and losers. This is particularly true in the increasingly integrated global wine market. The Euro has appreciated from about USD 1.35 per Euro to about USD 1.55 in the last year, which means that a wholesale €10 bottle of French or Italian wine’s dollar cost has increased from $13.50 to $15.50. This pushes the retail price from about $20 to $23 or $24, assuming a full cost pass-through, which puts it at a different price point on the supermarket shelf. Higher shipping costs will nudge the dollar price a bit higher still. Basically, you’re looking at a $20 wine selling for as much as $25. U.S. wines are corresponding cheaper in Eurozone countries.

U.S. winemakers hope that the falling dollar will be their ticket to higher sales abroad. I wrote about this in January when a group of Washington and Oregon wineries organized an export event in London. It is difficult to get traction in foreign markets, but the dollar’s weakness should help.

In the meantime, rising import prices here give domestic wines an advantage. Wine buyers tend to make most of their purchases around particular “comfort zone” price points and rising import prices should create some advantageous substitution effects. This comes out in the Marketplace interview. One wine professional puts it this way

Say if they used to enjoy a Sancerre for $20 and now their favorite producer is $25, they’re going to look for a comparable producer in that same price range that they originally purchased.

And the idea is that the “comparable producer” might be from the U.S., although this isn’t always the case.

Now Things Get Complicated

A falling dollar encourages exports and discourages imports — so far we are following the textbook pretty closely. But real world economics, and wine economics in particular, is seldom so simple. Foreign wine producers and distributors obviously have an incentive to keep from losing their market and there are many strategies to soften the exchange rate effects. The New Zealand producers, for example, seem to have been pretty successful in finding new markets for their wine and strengthening their reputation in response to the rising New Zealand Dollar. So far NZ wine seem to be defying gravity — higher quantities and higher prices too. But not everyone can pull of this bit of magic (or necessarily do it forever in New Zealand’s case).

One way to retain market share is for European exporters, distributors and retailers to absorb some of the exchange rate effects themselves, limiting what economists call the “pass through effect.” Canadian wine columnist Anthony Grismondi wrote about this in April in the Vancouver Sun.

I think European winemakers will be under a lot of pressure this year as container shipping costs continue to rise and the Euro’s strength persist. Not all of these higher costs can or will be passed along immediately in the form of higher dollar prices. The biggest effects will probably be felt on low cost wine, where the shipping cost effect is proportionately greater and price sensitivity is higher, too. Look for foreign wineries to go upmarket if they can and to absorb costs or adjust in other ways if they can’t.

But high end wines are not immune from exchange rate problems. Decanter reported in March that the strong Euro was expected to depress prices for Bordeaux en primeur sales.

Winners & Losers

The dollar hasn’t fallen uniformly relative to all currencies. A dollar buys 3.1 Argentine pesos today, for example, which is about the same as a year ago (Argentina’s compounding economic problems have caused a run on the currency in recent days). The Chilean Peso has not appreciated as much as the Euro and the South African rand is actually cheaper in dollar terms than a year ago.

One well known Australian brand, Lindemans, has been sourcing wine from Chile and South Africa to keep costs down as the Australian dollar has risen — a controversial but not uncommon practice in today’s small world of wine. Look for the Lindemans “Country of Origin” wine series.

This suggests that the Dollar Daze on the Wine Wall might feature some interesting shifts, from France and Italy (and Australia and New Zealand) to Argentina, Chile and South Africa. Is it my imagination or are the wine critics and magazines already riding this wave by featuring these New World regions more prominently in their publications?

The Future of Wine?

May 25, 2008 By in Australian wine, Berry Bros. & Rudd, China wine, Economic impact, New Zealand, Supply and Demand, wine price, wine taxes 2 Comments

What will the world of wine look like in 50 years? A look in the crystal ball.

What if the Chinese were French?

A journalist with a Brazilian newsweekly called me on Thursday to ask for help with a story on China. The magazine is doing a sort of “worst case scenario” report on the potential impact of China’s economic growth on world markets. What would happen to oil prices, for example, if the Chinese used as much fuel per capita as Americans do? Yikes, that would be a lot of drivers using a lot of gas and it would send oil prices through the roof. What would happen if Chinese consumers generated as much waste and pollution per person as people in the West? Once again, the global effects would be dramatic.

What would happen, the journalist asked me, if Chinese tastes changed and they drank as much wine per capita as the current world champtions, the French? Well, that is a very interesting question, even if it isn’t a very realistic one. Annual Chinese consumption of wine is about a half-liter per capita and rising, according to my copy of The Global Wine Statistical Compendium (and a lot of that wine isn’t grape wine, as I wrote in The China Wine Syndrome). Wine consumption in France, on the other hand, is 55 liters per person and falling (it was more than 120 liters per capita in the early 1960s). The figure is about 8.5 liters per capita for the U.S. and 20 liters per capita for Great Britain.

It is hard to imagine how Chinese wine consumption could rise to the current French level. Heck, it is unlikely that the French will sustain their current level for long. But isn’t entirely out of the question that Chinese consumpion could rise to the world average, which is about 3.5 liters per capita per year. That’s a lot smaller increase than the Brazillian reporter was concerned with, but it would still have a huge impact on global wine markets. Much of the increase would probably be met by higher Chinese production; China is already a major wine producer — smaller than Chile but larger than Portugal in total production. But the global effects would be substantial and prices would surely rise.

We can already see some indication of the potential “China Effect” in the market for fine wine. Everyone seems to think that at least some of the rise in Bordeaux prices in recent years is due to Asian and especially Chinese purchases. This trend seems likely to accelerate now that Hong Kong has eliminated its high tax on wine transactions so that it can become the auction hub of the Asian wine market. The latest Wine Advocate reports prices of 2005 Bordeaux that reach stratospheric levels — $500, $1500, $2500 per bottle! This is what happens when a global market focuses on an object of speculation — huge rents (excess returns) are created. As China (and India, too) become more completely integrated into global markets for products like fine wine, these rents will likely rise higher still.

The View from London

The Brazilians are not the only ones interested in the future of wine. Berry Bros. & Rudd (BBR), the London fine wine house, recently celebrated its 310th anniversary with the release of the Future of Wine Report written by four of their top wine buyers (Alun Griffiths MW, Jasper Morris MW, Simon Field MW and David Berry Green). It makes pretty interesting reading if you are interested in what wine markets might look like in 2058.

I say wine markets (plural) because BBR correctly recognizes that there is not one wine market but many interrelated ones. The fine wine market, BBR predicts, will see the rise of China and India as important factors in terms of both demand and supply. “I absolutely think China will be a fine wine player rivalling the best wines from France,” writes Jasper Morris. Britain will become an important producer of fine wines, too, perhaps especially Champagne-like sparkers.

Wine prices will soar even higher, according to the report. “If values increase by 15% per annumn, as they have been doing recently, a case of 2005 Ch. Lafite-Rothschild, currently available for £9,200. could be worth just shy of £10 mllion by 2050,” according to Simon Staples.

The forecast changes are more dramatic in the volume wine market. China will be the world’s largest wine producer. Global warming will shift wine production from France to Eastern Europe and from Napa Valley to Canada. Australia, the report speculates, could see a collapse of its volume wine industry if recent droughts persist. Goodbye Yellow Tail. Hello boutique producers in cooler, wetter areas like Tasmania.

Brands will become even more important in the volume business, BBR suggest. “In 50 years, consumers will ask for wine by the brand name or flavour and won’t know, or care, where it has come from. Grapes will be genetically modified to change a wine’s taste,” according to Jasper Morris, “and producers will add artificial flavourings to create a style wanted by consumers.” Wait — OMG I think I drank those wines back in the 1970s when I was in grad school!

Bottles and corks? They’re history. Corks will disappear because they are inefficient — the contamination rate is too high. Bottles are heavy and environmentally problematic. Tetra pak containers (like the ones used in today’s French Rabbit wines) and other sustainable packaging systems will prevail for volume wine.

The Future of Wine?

So what should we think of these visions of the future of wine? Economists like to say that prediction is difficult, especially about the future, so long range forecasts need to be taken for the educated guesses that they are.

Some forecasts, will be wrong because they are more or less simple straight line extrapolations (How much wine would the Chinese drink if they were French? How much will fine wine costs if its price compounds at the current rate?). It seems to me that simple projections are usually wrong because they are sensitive to initial conditions. Who is to say if long term trends will match those of the recent past?

Some predictions, like the £10 million case of wine, are extreme, but others are probably too conservative. The wine world has a way of surprising us — who in 1958 would have predicted the importance of Chile and Argentina today or the decline of consumption and production in France? People matter, too. People and their ideas are powerful forces that do not always respect historical trends, as refelction on the recent death of Robert Mondavi remind us.

Kenneth Boulding, the great 20th Century social scientist, once wrote a history of the future. He looked back to see what people in the past had said about the world just ahead. What he learned, he told me, was that when the future eventually rolled around, it never matched the predictions, it was always unexpected. The best way to prepare for the future, he concluded, was to prepare to be surprised. I expect this rather general advice applies as well to wine.