I’ve been catching up on my wine industry reading and one report that grabbed by attention is Rabobank’s May 2016 Industry Note, “The Premiumization Conundrum”.
The gist of the analysis is that the premiumization trend in the U.S. wine market isn’t simply a case of what Paul Krugman calls “up and down economics” — in this case demand for $10+ wine is up, demand for cheaper wines is down –but rather it needs to be understood in the context of a broader set of wine market changes.
Not Just Up and Down
The Rabobank report examines five important tensions that are part of the premiumization syndrome:
- Demand for premium vs. basic wine grapes
- Securing long-term premium grape supply vs. managing return on capital
- Wholesaler consolidation and retail “chainification” of wine vs. premiumization
- Traditional retail vs. DTC vs. NIMBY
- Domestic wine vs. imports
As I was reading the Rabobank report I began to wonder how these trends might unfold if continued at their present rates well into the future. In other words I was doing exactly what economists are trained not to do, which is engage in straight line projection. The future is out there somewhere, but it is almost never on a straight line that connects the last few dots on your time-series chart and then continues on out to infinity … and beyond.
But humor me with a little thought experiment. What might the future look like under the admittedly unlikely “straight-line trend projection” circumstances? Take today’s trends as Rabobank reports and fly them straight out to wherever they take you.
Pondering this thought, I unexpectedly found myself channeling a 1993 Sylvester Stallone, Wesley Snipes, and Sandra Bullock film called Demolition Man. Stallone plays a police officer named John Spartan who was put into suspended animation only to be awakened 36 years into the future in 2032 in order to catch Wesley Snipe’s bad guy character.
All Taco Bell Now
Stallone’s updated Rip Van Winkle encounters a lot that surprises or shocks him including, as in the film scene above, the inconvenient truth about retail consolidation run amuck. Invited to dinner and dancing at a Taco Bell, he can’t help but think, Taco Bell? Really?
But it really is, as Bullock’s character explains. Taco Bell was the only chain to survive the franchise wars and now all restaurants are Taco Bells. “No way!” Way!
Rabobank’s report notes a number of important trends that, if taken to a ridiculous Taco Bell kind of extreme, might produce something that Demolition Man would recognize. Here are three that I can’t help pondering.
All MoVin Now
The fictional John Spartan goes shopping for wine in 2032 San Angeles and the first place he sees is a big box MoVin store, bigger than the biggest wine-beer-spirits stores of the past, but recognizably the same concept. He continues on in search for a small, specialist shop, but soon runs across another MoVin. And then another and another and slowly it comes to him that just as all restaurants are Taco Bell, all wine is now retailed by MoVin.
How did this happen? Well, as the Rabobank report notes, all of the growth in off-premises retail sales of wine in the U.S. in the last couple of years has come through retail chains, not independent shops and stores. Take away BevMo, Total Wine, Costco and other multiple retailers (I assume Kroger fits here, too) and Rabobank’s data show off-premises wine sales would be flat.
Follow that trend to its illogical extreme, with the chains seizing market share each year, add logical pressure to consolidate and — hey, presto! — you have a retail wine monopoly.
How did MoVin win this fictional competition over other chains? Because, in this made-up universe, they drew upon the growing consolidation in distribution channels (another Rabobank finding).
Yes, all wine is sold by MoVin in 2032 because they are a wholly-owned subsidiary of NSEW (North-South-East-West), the only company to survive the vicious distributor wars of 2021.
All Kiwi White Now
There are lots of different super-premium brands on offer at the big box wine store of the future, but the vast array of colorful labels and fictional names actually disguises a certain sameness. Much of the wine comes from the same few large producers, the ones who were able to able to secure reliable quality grape supplies in the grape wars back before 2022, when the last independent North Coast vineyard was swallowed up.
The imperative to lock up vineyard resources is another of the trends that Rabobank spotlights and it is natural to wonder where it will all end. But that isn’t the only source of concern.
When John Spartan looks closely at the super-premium white wines that he favors (because they pair so well with his favorite Taco Bell fish tacos), he slowly realizes that they are all made by a few large multinational firms in New Zealand. Just as Taco Bell conquered food, the Kiwis were the victors of the white wine wars.
The one constant of U.S. wine import statistics in recent years has been that New Zealand Sauvignon Blanc imports will grow, often faster than any other import category. I keep waiting for the run to end (and I know Kiwi producers who hold their breath and cross their fingers because they are worried, too). But nothing has stopped or even seriously slowed down New Zealand wine imports so far. And you know where that can lead!
You Want Grapes with that Wine?
What about inexpensive wine? Glad you asked because that’s where John Spartan had his harshest shock — it made him want to give up wine altogether. It seems that as grape supply became less and less secure and falling prices pushed basic grape producers to other crops like almonds and pistachios, wineries were forced to weaken links to particular regions and then to grapes themselves.
Appellations and geographic designations generally are an expensive luxury if you’re not sure if you can buy the grapes you need to maintain a region-specific brand, so they had to go. And then wine companies gave up specific grape variety designations for the wines for essentially the same reason. All inexpensive wines in 2032 are now proprietary blends. No one knows what might be in the bottle, box or can or where it might have come from. Not many seem to care.
Absent place of origin and clearly-identified grape variety components, inexpensive wines evolved into branded alcoholic beverages and, once consumers accepted that, there wasn’t any reason why they had to be made out of grapes any more. The laws were re-written to allow inexpensive wine-like products to be made and marketed and people lapped them up. Wine for the masses endured, but in an ersatz Taco Bell kind of way.
Or at least that’s where bad economic analysis (and not enough sleep) takes you if you follow recent trends to ridiculous extremes, which I have done here just for fun, but the Rabobank report definitely avoids.
The future? Taco Bell? No Way! That’ll never happen. Don’t worry. Go back to sleep. G’night!
Thanks to New York Times columnist Thomas Friedman, who indirectly inspired this column. He told the story of the “Demolition Man” Taco Bell scene in his best-selling 2000 book about globalization, The Lexus and the Olive Tree.