The Bottleneck Bottleneck

May 30, 2010 By Mike Veseth in economic crisis, Fielding Hills, Gallo, Supply and Demand, wine awards, wine distibution, wine law, wine spectator 2 Comments

Bottlenecks are always problematic. It seems like they are always too narrow or not narrow enough.

We ran into an unusual bottleneck last week when were went to Wenatchee to help our friends Mike and Karen Wade bottle the 2008 vintage at the Fielding Hills Winery. FHW is award winning 800-case operation and the bottling is done by a volunteer crew of friends, family and wine club members. I wrote about it in one of my first blog posts, comparing the wine bottle assembly line to Adam Smith’s famous pin factory.

Bottleneck Bottleneck

The division of labor does improve efficiency, just as Smith said, but anyone who’s worked an assembly line knows about bottlenecks – the whole process only moves as fast as the slowest work station. If the corker is slow, for example, nothing else will go very fast. (The corker was no slacker on our shift – John Sosnowy of the Wine Peeps blog.)

Our crew worked very well, but there was still a bottleneck, albeit an invisible one. The capsules that fit over the bottle’s neck hadn’t arrive (a bottleneck bottleneck!) – they were held up somewhere in customs in a container that must contain hundreds of thousands of capsules for many wineries. We bottled the wine, but when the capsules finally arrive it will be necessary to open each of the 800 cases, pull out every bottle, affix the capsule, return and reseal. That’s about 10,000 bottles. What a headache! I hate bottlenecks.

The biggest bottleneck in the American wine business, of course, is distribution. With 51 different sets of state rules and regulations and the three-tier winery/distributor/retailer/consumer system, it sometimes seems like making wine is the easy part – getting it to customers is the bigger problem. Widening the distribution bottleneck seems to me to be a key to expanding the wine market and building a more robust American wine culture.

Tightening the Distribution Bottleneck

The Obama administration seems to want to build up the U.S. wine industry – that’s why he sent Commerce Secretary Gary Locke to Hong Kong to sign an agreement to ease the wine export process and open that bottleneck a bit.

But Congress is moving in the opposite direction. Wine Spectator reports that more than 100 members of Congress have announced support for H.R. 5034, a bill that would further restrict direct wine sales in American. It would make it (even) harder to ship wine across state lines. Wine Spectator reports that wine distributors (who benefit from their key position in the three tier bottleneck) actively support the bill.

The supporters of H.R. 5034 argue that direct shipping undercuts the power of states to regulate alcohol distribution and sales, and I understand this logic. But the winery owners I know actually go to extremes to satisfy state regulations because the penalties for making a mistake are often extremely onerous. (I know one winery that has stopped all interstate sales for now because of compliance concerns.)

Focus on Direct Sales

The slack economy has put direct sales in the spotlight. With wine sales down in many categories and price points still eroding, wineries are trying to boost the yield per bottle and increasing direct sales and reducing the flow that goes through distributors is one way to do that. Isenhower Cellars in Walla Walla has actually reorganized itself (and opened an off-site tasting room) so that it can rely entirely on direct sales. Their website announced that

Isenhower Cellars is no longer selling wine to restaurants, wine shops, or grocery outlets in Washington State. Our wines are now exclusively available from the winery in Walla Walla, Washington, our tasting room in Woodinville, Washington, or here on our web site. We treasure the past relationships with our Washington State distributors and friends in the wine trade. However a complete focus on quality limits production to 2,000 cases of wine and the success of our wine club and second tasting room leaves no extra Isenhower wines available for sale outside of our winery’s embrace.

Even E&J Gallo, which has done quite well thank you during the recession, is trying to increase direct sales. I’m on a couple of email lists for Gallo wine brands that I follow and they frequently offer nice discounts or low cost shipping to try to encourage orders from their online wine shop, The Barrel Room.

It seems inconsistent to send Gary Locke to China to expand wine exports and then discourage the equivalent interstate trade. As an economist, I am naturally biased toward more choice and freer trade. I hope the attempt to tighten the wine shipping bottleneck gets caught in some legislative bottleneck somewhere down the line and never reaches President Obama’s desk.

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Thanks to Karen, Mike and Robin Wade for their hospitality and great wine. Thanks to the members of the 2008 FHW Cabernet Franc bottling crew both a fun and productive afternoon.

Money, Music, War and Wine

May 16, 2010 By Mike Veseth in globalization, history, Supply and Demand, wine education, wine science 5 Comments

I’ve just finished reading final papers from The Idea of Wine class I teach at the University of Puget Sound. These essays remind me that wine really is a liberal art and a natural element of an enlightened education.

Jean-Robert Pitte is right (and the French government is wrong) — wine has a place in the college curriculum.

The Greeks realized this centuries ago. They defined a symposium as a discussion over wine! What could be better? Herewith thumbnail sketches of three student papers that suggest the many ways that wine and liberal arts education intersect.

Wine and the Hard Life

Since this is The Wine Economist I’ll start with a paper by an economics student. “The Postwar Decline of the Old World Consumer” addresses the question of why per capita wine consumption in “Old World” countries has fallen so rapidly over the last 50 years. This falling demand is a key factor in the continuing global wine glut and especially the EU’s notorious wine lake. David, the author, turned the question around: why, he wondered, was consumption so high in the first place?

The most intensive wine consumption in France, Spain and Italy in the early postwar years was among laborers and rural workers who expended great energy in their jobs and required high caloric intake. Rough local wine (of the sort that is in excess supply today) was a cheap source of this energy. As European economies modernized and living standards rose the demographics of wine consumption changed. Fewer people engaged in grueling hard physical labor. Life was easier, living standards higher and better nutritional options presented themselves.

Not surprisingly, as the need for wine’s cheap calories declined so did its consumption. Other factors were at work, too, but rising living standards explain an unexpectedly large proportion of the wine consumption decline.

Romantically, we Americans associate wine with the good life and wonder why Europeans would turn away from it. But for some Europeans, at least, wine was part of the hard life and they may be happy to have moved away from it. The wine world will just have to adjust.

Beethoven and Bordeaux?

Megan, a science major, wrote on “The Melody of Taste.” Her paper surveyed the literature on how your perception of wine may be affected by the music you listen to while tasting. I found this paper very interesting in the way that it embraced both science and philoisophy. There is reason to think that wine and music might have some connection, she wrote, because “wine is an aesthetic object and drinking wine is an aesthetic experience.” Wine and music evoke similar aesthetic responses and it is plausible that they would interact on that basis. So far so good.

Science suggests that the link between wine and music might go deeper than this, according to Megan. Brain scan data indicate that sensory experiences from taste, odor and music “target the same areas of the brain, initiating cross-modal processing.” One author argues that because different types of music affect the taste of wine in particular ways, a science (or art?) of music-wine matching (like pairing wine and cheese) might be a serious possibility.

If you want to experiment with wine and music yourself, Megan writes, try this. Buy a $5 bottle of Glenn Ellen Chardonnay. Taste it on its own and then while listening to the Beach Boys singing “California Girls.” I’ve provided the music here — you have to supply the wine. The Beach Boys tune apparently stimulates the right part of your brain to make this value-priced wine taste a lot better.

Megan also reports a study showing that polka-style music makes Sutter Home White Zin taste better, too. Well … of course. Anything would probably help and a polka seems just right to me.

Winemaker Clark Smith has developed a line of wines to be paired with specific musical pieces. Read more about this project at GrapeCraft Wines. I haven’t tried wine-music pairing, but I would be interested in comments from anyone who has.

Wine and War

Let me finish with politics student Hally’s paper on “The Real Story of Unknown Lebanese Wine: A Reason to Survive,” which was provoked by a puzzle. Lebanon has a very long winemaking history and some of its wines (Chateau Musar, for example) have attracted worldwide attention. Why aren’t these excellent wines better known and more popular, Hally wanted to know?

Yes, yes, Lebanon is a long way away and not well known, but that doesn’t seem to stop other wines from unlikely places (think about New Zealand!) from reaching local markets. The answer, Hally learned, is that sometimes wine is affected by war and peace even more than by soil and weather.

Making wine in war-torn Lebanon in recent years has presented far more than the unusual number of challenges. “For Lebanese wine makers, picking grapes and making wine is more an act of defiance against years of repressive wars and religious hatred than it is a business necessity,” Hally writes. “Wine is key to the survival of their spirit through seemingly endless years of conflict.”

Bitter Memories?

After finishing her paper, Hally reports, she was able to track down a bottle of Chateau Musar from a war-torn recent vintage when practically no wine was made or released due to the constraints of conflict. I’m sure Hally wanted it to have a glorious taste — the triumph of wine over war, but she says it was awful. Corked, I think, from her description. Not what she wanted at all.

What makes a wine memorable? People always imagine that the great flavors and aromas are what make wines special to us, but I have my doubts. Wine is too complicated to be just about its direct sensory effects. Hard times, upbeat music and the determination to struggle through conflict — wine can reinforce these associations, too, and burn them into our memories.

Wine stimulates all our physical senses (taste, smell, touch, sight — even sound if we touch glasses in a toast). But its real power comes from the fact that it also stimulates our minds, triggering memories and inspiring thoughts. Hmmm. I should organize a symposium on that theme!

Malbec Boom … and Bust?

April 18, 2010 By Mike Veseth in Argentina, Supply and Demand, wine markets 6 Comments

Malbec is hot and Argentinian producers are harvesting the benefits of a boom market. The Nielsen Scantrack multi-vector retail sales data reported in the April issue of Wine Business Monthly tell the story.

Total U.S. table market sales up 3.0 percent in dollar value over the last 12 months and up 3.5 percent in the quarter.

Argentinian wine sales (mainly but not entirely Malbec) are up 41.4 percent for the year and 36.6 percent in the last quarter. That’s a rate of growth unmatched in the current wine league table — much higher than other New World producers like Chile (5.2 percent growth for the year), South Africa and Australia (falling dollar volume sales).

Only New Zealand is remotely in the same sales growth ballpark with an 18 percent increase in the last quarter.

That’s Why They Call It the Dismal Science

Only an economist would look at this picture and wonder if Argentina’s Malbec boom might foreshadow a coming Malbec bust. Sorry to be so gloomly … can’t help it. That’s why they call it the dismal science. When economists see silver linings they start looking around for the dark clouds that come with them.

Personally, I hope the boom continues for a while at least. It has to come to an end some day, of course, since 30+ annual percent growth quickly compounds its way to All The Wine in the World. Only someone named Ponzi could sell that vision of Argentina’s future.

The idea that bust follows boom isn’t just my dismal side talking, it is a persistent feature of agricultural markets. High prices are great, but when everyone expands production the result is a collapse. Low prices convince producers to invest elsewhere, so supply fails to keep up with demand the prices rise again. Rinse and repeat.

World Wine Wheel

I learned about this cycle back in Econ 101 in the form of the cobweb model of market dynamics. The Turrentine Wine Business Wheel of Fortune (click here for the pdf version) applies this idea to the U.S. wine market in particular.

The 2007 version of the wheel shown above predicted that the U.S. wine industry would be deep into the Emerging Shortage zone in 2010. This obviously didn’t take into account the Great Recession, which has created substantial surpluses of wine today, but I think the general logic still holds.

Data suggests that vineyard plantings are down (at least one major grape vine nursery has shut its doors). My sense is that wine producers have scaled back supply to the level of current demand and that the persistent overall market surplus is mainly the overhang from previous years. Once that is dealt with (easier said than done!) and demand begins to come back, that “emerging shortage” situation could come to pass.

Having a Good Crisis

Meanwhile, Argentina is having a good crisis, at least in terms of wine, as their good value Malbecs have benefited from consumer trends to trade down and trade over. WineSur (a great source for Argentinian wine news) reports new vineyard plantings and winery expansions, calling it “a risky supply and demand game.” Risky and high stakes.

The Catena Family group exported 12 million liters of wine in 2009, according to the article, but has expanded its capacity so that it can produce 19 million liters this year to sell in 2012. “We are running a risk and investing according to our estimates,” chief winemakers Alejandro Vigil reports, “We also continuing buying vineyards … This year we’re planning to implant around 200 hectares … 75% of which will be implanted with Malbec.”

You’ve got to think five or six years ahead in Argentina’s dynamic Malbec market. New vineyards today, more grapes in three years or so when the vines have matured, market-ready wine a couple of years after that. I wonder what the wine market will look like then? No wonder they say that the only person crazier than a winery owner is his banker! Easy to get caught leaning the wrong way under these circumstances.

Will Argentina’s Malbec boom lead to bust? Possibly, but there is reason to think it might not. Nicolás Catena, head of one of the largest firms, is a recovering economics professor (he taught at UC/Berkeley at one point). He came back to wine and Argentina at his family’s request. If, as I think, skepticism is hardwired into the economist’s brain, then perhaps Catena’s big investment in the future is more cautious than it seems and will pay off handsomely.

Conventional Wisdom versus Mark Twain

The decision to expand output and exports forces a second risky choice: focus (on Malbec) or diversify? It is conventional wisdom not to put all your eggs in one basket. But Mark Twain once advised the opposite: Put all your eggs in one basket and watch that basket!

A new article on WineSur addresses this question and the majority viewpoint seems to be with Mr. Twain but this is perhaps understandable since it is Malbec that has put Argentina on the world wine map. Malbec has established Argentina’s identity and reputation and winemakers are understandably reluctant to bet against their own success.

But it must be said that rapid export expansion focused on a single varietal does magnify the risks. I would advise Argentinian wine industry leaders to watch that basket very carefully — invest in their markets so that Malbec becomes a durable phenomenon with good length and not a short sharp boom/bust fad.

Myth of the Level (Vineyard) Playing Field

April 11, 2010 By Mike Veseth in Economic impact, EU wine market reforms, speculation, Supply and Demand, trade policy, wine investment, wine markets 4 Comments

Terrain matters, both in wine and in markets. Many of the world’s best vineyards cling to hillsides or follow natural contours (like the famous Pewsey Vale vineyard shown here).

While wine people seem to appreciate the challenges and opportunities that complicated terrain presents, economists are drawn (at least metaphorically) to tabletops. We think of the world in competitive terms and seek out “level playing fields” where our favorite theories are most applicable.

The Difference Between Vineyards and Soccer Fields

As a wine economist, I can appreciate the flat and the steep of the wine world and I have come to upon a particular irony. Wine market reforms in the European Union are intended to create a level playing field and to encourage, induce and sometimes force winegrowers to compete. The days of big subsidies and routine “emergency” distillation are gone, or will be soon, we are told.

But wine markets are as complicated as the vineyard shown above and establishing a flat competitive arena is not a simple matter. Wine markets are more like vineyards than we like to think. Tariffs, quotas, subsidies and selling regulations can be brought into line, of course, but that is just the beginning. The uneven contours of the market run very deep.

Whither/Wither the Vines?

I was reminded of this by a recent post on the Tablas Creek Vineyard Blog titled “Whither inexpensive, artisanal California wine?” (Tablas Creek is a well regarded maker of Rhone-inspired wines in California’s Paso Robles area.)

The question that the article posed was whether it made economic sense for the winery to develop a new vineyard property to produce high quality reasonably priced wine (the $20 price point plus or minus a few bucks). The answer? Probably not, but with a rather thorough cost analysis provided so you can see how the various factors (land cost, debt service, planting cost, operating cost, even opportunity cost) factor in.

It’s a really good article for anyone who thinks that the decision to start of vineyard or a winery is an easy one. (The sommelier in the video above would do well to read it!)

At the end of the day, the single most important factor was the cost of the land. Even in a depressed market, land costs create a hurdle too high to overcome in Paso Robles.

(Note: I was also struck by planting and operative cost differences associated with dry farming the vines. Much lower cost, somewhat lower yields — worth serious consideration where feasible given the growing water shortage.)

Why are vineyard land prices so high that they make the vineyards themselves uneconomic? Well, the land has many uses aside from the obvious one of growing wine grapes. Speculators might want to buy it to hold and resell, not operate for the long run. Lifestyle investors push up the price because they consider the amenity value of a vineyard home more than the economic value of its grape crop. These alternative demands can push the price above the level growers can afford.

Tilting the Playing Field

This distorts the playing field on which international wine markets operate. Land costs are a big factor for many expanding New World wineries because those costs are so recent that it is difficult to ignore them.

Land costs are often ignored for Old World producers, I am told — especially the thousands of small winegrowers who have owned their land for several generations. Ignoring the cost of capital allows them to sell for less, depressing prices (and therefore, ironically, the value of their land, too). Poor economic choices in the Languedoc tilt the playing field against Paso Robles.

But the loudest cries I have heard in this regard are from Australia, not California, where vineyards that produce grapes for bulk wine find themselves more directly in competition with those economically untutored Languedoc vignerons. The low prices that result when French winegrowers ignore the cost of vineyard capital are not the only or even the biggest source of Australia’s current crisis, but they are certainly a contributing factor.

Chinese Wine: Challenges & Opportunities

March 21, 2010 By Mike Veseth in China wine, emerging wine regions, Supply and Demand, wine distibution, wine markets 2 Comments

Harvest time at Grace Vineyards.

Wine in China is getting a lot of attention just now. Jancis Robinson is back from Beijing and Shanghai, where she celebrated the release of a Chinese edition of her indispensable Oxford Companion to Wine with wine dinners and tastings. Recent issues of Decanter (April 2010) and the Wall Street Journal (March 20, 2010) feature big stories about Chinese wine. One of my senior thesis students is even doing research on the potential market for Washington State wine in China.

Coffee Grounds and Ashtray

I’ve written about China’s wine market on several occasions. I discussed the challenges facing their industry in “The China Syndrome” in January 2008 and the difficulties of penetrating the Chinese market in October 2009. I even reported a London wine merchant’s forecast that China would eventually overtake France as the world’s greatest wine nation.

Challenges and opportunities: those seem to be the recurring themes.

The challenge is easy to appreciate if you taste Chinese wine. At present this is difficult (unless you travel to China) because import supplies are very limited. The Morrisons supermarket chain apparently carries some Chinese wine in Great Britain. So far I haven’t seen Chinese wine for sale in the U.S., but I think it’s here somewhere so I’ll keep looking. There is obviously a large potential ethnic market (at Asian food stores like Uwajimaya and at the tens of thousands of Chinese restaurants that dot the country) in addition to curious wine enthusiasts like me.

I have tasted two Chinese wines, thanks to a former student who schlepped them back from Beijing for me. The first, tasted with a group of students a year ago, showed the murky past of Chinese wine. It was a 1999 Changyu Cabernet Sauvignon — a recent release mass market product by China’s oldest winemaker. Tasting notes I found on the internet warned about coffee grounds and ashtray with a hint of urinal cake. Right on the money, unfortunately. Drinkable (hard to believe, I know), and weirdly fascinating, but really only interesting as a novelty.

The Grape Vine Supply Chain

The basic problems, as I have pointed out in the past, are the undemanding domestic consumer base and the badly broken supply chain.

Wine is only as good as the grapes that go into it, or so growers tell me, and the grape supply situation in China is difficult. Most of the wine grapes are grown by families that lease about an acre of land from their local agricultural commune. That acre is typically divided into four or five small plots that are planted with different crops so as to minimize risk. One or perhaps two of the plots may be wine grapes in the vineyard regions. So vineyard scale is impossibly small — smaller even than in the south of France.

These small growers insist on calling the shots, which is natural since they are so dependent upon the success of their tiny farms. The wine producers have no control over what these hundreds of thousands of micro-vineyards produce, how they are cropped, and when the grapes are picked. Researchers suggest that the grapes are chosen and grown to maximize quantity not quality and that the grapes are picked as soon as possible to minimize risk of poor weather than could destroy the crop. So small crops of flavorful fully ripe grapes — the winemaker’s dream — that’s not going to happen in a typical Chinese vineyard. One study I found suggested that the grapes sell for as little as $80 a ton.

There is not much incentive for individual growers to sacrifice quantity for quality because their grapes are sold by weight to agents who lump together fruit from dozens or hundreds of individual growers. Good fruit would quickly get mixed with inferior fruit, so why pay more? The local agents often then resell the fruit to regional agents who sell again to the large winemakers. You can just imagine the condition of the fruit by the time it finally gets to the winemaking facility having passed through so many hands. This system is worse than the European cooperatives I have read about (and I didn’t think anything could be worse than that).

China’s Hopeful Future

Recently a group of us tasted the hopeful future of Chinese fine wine, a bottle of 2003 Grace Vineyards Tasya’s Reserve Cabernet Franc. Grace Vineyards is often cited as the most promising winemaker in China and the contrast between this bottle and the Changyu was night and day. The attention to detail in the winemaking was evident and the use of estate grapes (rather than the unreliable supply chain cited above) was apparent, too.

The contrast between the two wines was stunning, mainly because the Changyu was so very bad, of course. The Grace Vineyards Cab Franc was a solid effort but nothing special– a bit light compared to our Washington State Cab Franc wines, for example, with the distinctive “green” taste I associate with wine made from under-ripe Cab Franc grapes.

[Update 3/24/10: A reader suggests that the “green” flavor may be intentional — he has heard that this flavor is familiar to Chinese consumers and that some Chinese wineries may harvest grapes in a less than fully ripe state in order to achieve it. Interesting and understandable if true. Thanks to Bob Calvert for this insight.]

This points to another challenge and one that will be hard to overcome. China is a pretty difficult place to grow and properly ripen vinifera grapes. The combination of very cold winters and hot and humid summers in the principal grape growing regions makes winegrowing particularly tricky. (The Decanter article does a good job explaining this.) Some reports indicate that white varietals like Riesling can be grown with success, but wine’s first duty in China is to be red and ripening the preferred Bordeaux varietals is a significant long term problem.

Seventy-Two Buck Chuck

The Wall Street Journal article by Stan Sesser included tasting notes by a panel of local experts. The nonvintage Changyu Cabernet Sauvignon they sampled sold for the equivalent of $5.40 and reminded them of dirty sweat socks and cleaning fluid — possibly a step up from the one I tasted.

At the other extreme, a 1998 Cab from Great Wall was apparently really quite good — “deep colored, full bodied, tannic, but with a lot of fruit.” Price? The equivalent of $72. Yikes!

I have to think that Chinese wine will benefit in the long run from all the attention it is receiving at home and abroad. It will be interesting to see how the challenges and opportunities develop over the next few years.

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Note: Anyone interested in the Chinese wine market should read Grape Wall of China, a terrific blog.

Oregon Pinot Noir: Peaks & Valleys

March 15, 2010 By Mike Veseth in economic crisis, Jancis Robinson, Oregon wine, Supply and Demand, wine markets, wine price 5 Comments

A quick getaway to Portland provokes a post about Oregon wine’s highs and lows.

Cheers for All the [Peak] Years

I was browsing through the wine books at Powell’s, Portland’s famous bookstore, when I came across a used copy of Vintage Timelines, a 1989 book by Jancis Robinson. The idea of the book was to select a group of the world’s greatest wines and examine how different vintages have evolved (and would be expected to continue to evolve) over time. The research required Jancis to taste trough verticals of each great wine (research is such a drag!) and compare notes from previous years to create complex and quite fascinating graphical timelines.

It’s a great book for wine lovers (despite its 1989 date) and valuable to me because of the particular wines Jancis selected for the study. No New Zealand or South African wines, for example. The recent history of their great wines was too brief in 1989 to permit long-term analysis. Just five Australian wines made the cut (led by Penfolds Grange Hermitage, of course). Seven California wines are listed and just one from the rest of the U.S. — David Lett’s Eyrie Vineyards Pinot Noir Reserve, the wine that put Oregon on the world wine map.

JR's Vintage Timeline for the Eyrie Pinot Noir Reserve

There is an inscription in the book. “To Nick — Cheers for all the years — past & future. Dave Lett, Christmas 1989.” Needless to say, I bought the book as both a research tool and a personal souvenir. It’s a good reminder of Oregon Pinot Noir’s humble origins and the high peaks it has climbed. Oregon’s wine industry is just a little over 40 years old, yet is is often mentioned in the same breath with Burgundy because of the quality of its best Pinot Noir wines, like David Lett’s Eyrie Reserve.

Whole Foods Letdown

So I was feeling pretty good about the Oregon wine industry when I stopped off at Whole Foods, about a block away, to survey their selection of Oregon wines. As I entered the store, however, I ran smack into a display of Oregon Pinot Noir priced at … wait for it … $9.99. That’s about ten dollars less than the usual price for an entry level Oregon Pinot. The wine was produced by Underwood Cellars, a second label of Union Wine Company, which also makes King’s Ridge. The fruit was sourced mainly from Southern Oregon — the Umpqua and Rogue Valleys — not the Willamette Valley where Eyrie and most of the other famous Oregon Pinots are made. The bargain price was a real shocker.

Oregon is a high cost wine production area. Even higher than Burgundy, I think, because many of the vineyards there have been in family hands for years and land costs are often not explicitly considered in calculating cost (an economic mistake, of course, as any Econ 101 student will tell you). That’s not the case is Oregon, where it is hard to ignore the cost of capital.

A study using 1999 data put the average cost of Willamette Valley Pinot Noir at $12.79 per bottle (see Oregon Viticulture edited by Edward H. Hellman for the details) and more recent proprietary data I have seen puts cost in the same range or higher. $9.99 might or might not be a sustainable price for a wine made from Umpqua Valley fruit, but it certainly isn’t a sustainable price point for Willamette Valley wine. If the price of entry level Willamette Valley Pinot were to reset from $20-$30 down to $10-$15 … well I think the Willamette River would bleed red ink. Click here to read a recent article from Wines & Vines about the Oregon situation.

Boom and Bust

The quality of Oregon Pinot Noir is higher than ever, I believe, but the industry’s economic health may be falling. Oregon (and New Zealand) rode the Sideways Pinot boom for several years, expanding vineyard plantings repeatedly because it seemed like the demand for this wine would never be satisfied.

Now the recession is here, Malbec is hot, the new Pinot vineyards in Oregon, New Zealand, Chile and elsewhere are all coming into production at the same time and prices are tumbling. Bargain Pinot Noir is a fact of life for now. It will be interesting to see where the market resets when supply and demand eventually find their new balance.

In the meantime, I guess there’s only one thing to do. Drink more Pinot Noir!

Curse of the Blue Nun

February 21, 2010 By Mike Veseth in brands, popular culture, Supply and Demand, wine brands, wine markets 9 Comments

Writing about Riesling got me to thinking about great German Rieslings and, because I am a Dismal Scientist after all, I also started thinking about the not-so-great German wines that define that country for wine drinkers of a certain age. And so, inevitably, my thoughts strayed to memories of Blue Nun.

I haven’t thought of Blue Nun wine in years. I remember it from the 1970s as an unsophisticated Liebfraumilch wine in a tall thin blue bottle with a blue and white-clad nun on the label. She reminded me a bit of the “Flying Nun” television show (starring Sally Fields) that ran from 1967 to 1970. The wine was about as serious as the TV series, but apparently it sold hundreds of thousands of cases to aspiring wine drinkers like me.

I didn’t know that it was still around until I spotted it on a BBC television show about wine. It was a miniseries featuring Oz Clarke, notable British wine guru, and James May, co-host of the popular automobile series “Top Gear.” Oz and James were touring California with wine expert Oz trying to teach neophyte James a bit about wine. James resisted, put off by wine’s snobbish elitist ways.

Terrible. Disgusting. Must be European.

Blue Nun appeared in a sequence where James bet Oz $100 that he couldn’t identify an ordinary everyday wine in a blind tasting (from a plastic beer cup, as it turned out). Oz sniffed and swirled and made a bad face. Terrible, he said. Disgusting. So bad that it couldn’t be from America – market-savvy Americans would never make a wine this bad. This could only come from the Old World.

“Blue Nun!” he shouted, winning the bet, although I suspect that colored bottle gave him an unfair clue. Here is a taste of the show. The Blue Nun episode is not available online, but this will give you a good sense of what the show is like.

I’m not sure that Blue Nun is really that bad, but Oz Clarke’s revolting reaction is telling. Blue Nun and brands like it established Germany’s place on the lower tier of the World Wine Wall in the 1970s. The wines may not have been as cheap and nasty as memory suggests, but they were not expensive and sophisticated, either. They were the face of German wine abroad and that face, like the Blue Nun herself, was more or less a colorful cartoon version of the great wines of Germany.

The First Global Wine Brand

Blue Nun was by some accounts the first truly global mass market wine brand, an unexpected distinction for a German wine. Its story therefore has some bearing on the globalization of wine. Blue Nun’s roots go back to 1857 when Hermann Sichel started a wine business in Mainz. I know little about the early days of Sichel’s firm except that it managed to survive the political and economic chaos of the ensuing years, which in retrospect seems like a considerable achievement.

The real story begins with the 1921 vintage, said to be one of the best. Sichel sought to export these wines, especially to Great Britain, and the Blue Nun label was invented to facilitate sales abroad. One source holds that the nun on the label was originally clad in standard issue brown robes, but a printer’s error turned them blue and thus a brand was born.

The brand and the famous vintage it represented found a market in England, selling more than 1000 cases a year in the 1930s (quite a lot for a single brand of wine at that time) according to the official company history. The volumes increased after World War II, rising to 3.5 million bottles a year in the UK in the 1970s before sales collapse back to 800,000 in the 1980s. The quantity quality trade-off finally came back to haunt Blue Nun, it seems, and the fashion for red wine started by the famous French Paradox discovery did not help either.

Blue Nun, it seems was the original victim of the Curse of the Blue Nun: the simple, sweetish wines that make you will also break you. As tastes changed and wine drinkers sought to move up-market, Blue Nun wine petered out (although 800,000 bottles is hardly a trickle). Passé to some, a joke (as with Oz and James) to others, that was and to some extent is Blue Nun.

It is an over generalization to say that the whole of German wine suffered the Curse of the Blue Nun, but there is some truth in it. Great wines continued to be produced, of course, and snatched up by the educated wine elites (although not at the high prices they once earned), but Brand Germany was Blue Nun, Black Tower and their Liebfraumilch shelfmates. German wine hit its lowest point.

Blue Nun and the New Globalization

I am an optimist about globalization and wine (that’s why next book is called Grape Expectations) and this attitude extends to German wine. The bad news of the crisis of quality is matched by the good news that German wines have changed, even the big brands. Black Tower has moved upmarket into affordable quality wines, not just Liebfraumilch and not just white wines, either. It is the top German brand today.

Sichel sold the Blue Nun brand to Langguth, another German maker, who also upgraded the wines. Blue Nun is once again a major brand, selling 5 million bottles in Britain alone in 2005. It is a German brand but, significantly, reflecting the current wave of globalization, not just a German wine.

Popular wines from around the world are imported to Germany where they are bottled under the Blue Nun label. There are Languedoc Merlot and Cabernet Sauvignon, California Zinfandel, Australian Shiraz, Chardonnay from Chile, and a Rosé from Spain, for example. There’s even a Pinot Grigio from Germany, although its unlikely origin is not easy to learn from the front label.[i]

Blue Nun Light is low alcohol (0,5%), low calorie (27 calories per 100 ml glass). Tastes great, less filling.

My personal favorite (perhaps because I’ve never tried it) is Blue Nun Sparkling Gold Edition shown here. It’s a light fizzy wine infused with flakes of 22 carat gold leaf that glitter in the glass.

Young women seem to be Blue Nun’s target market according to both published sources and the look of the advertising copy. Women buy more wine than men, so this is not a crazy strategy, and young women are the market of the future, although the assumption that they are especially attracted to shiny floaty things like these gold flakes is sad if true. The idea that the attractive female image of the Blue Nun might particularly appeal to women never occurred to me … until now.

German wine is back, but it has changed. Quality has improved – even the mass market brands offer some good wines – but the reputation lingers, the legacy of the Curse of the Blue Nun.

[i] The ad copy says it is from the “sunny Palantine region,” which sounds Italian but isn’t. The geographical designation is Pfalz, Germany. I’m sure it is quite good as Pinot Grigio goes.

Riesling: How Sweet It Is?

February 16, 2010 By Mike Veseth in Chateau Ste. Michelle, Riesling, Supply and Demand, wine brands, wine markets 14 Comments

There is no doubt about it: Riesling is one of the world’s great wines. I think my students were slightly stunned by the eight Riesling wines (ranging from very dry to an ice wine) that they sampled at a recent tasting I organized for them.

Riesling drinkers know “how sweet it is!” (to borrow Jackie Gleason’s signature phrase). The wines are good and good value, too. Some of the best American Rieslings (wines like Poet’s Leap or Chateau Ste Michelle’s Eroica) sell for only about $20. What a deal!

But the reason these great wines are great bargains is that the demand for them, while on the rise, is really not so great. Consumers by and large are afraid to buy Riesling. They don’t know how sweet they will taste or if they will like them. The “how sweet is it?” question and the “how sweet it is” exclamation (of those who know the answer) are thus inextricably linked.

Asymmetric Information Strikes Back

Students of economics will recognize this as a problem of asymmetric information. The people who make wine know its flavor profile and the people who buy it presumably know what they like (although winemakers tell me that people tend to say they like dry Riesling, but end up buying sweeter products). But they don’t know what’s in the bottle and can only find out by trying it.

Experimentation typically leads to confusion and disappointment as bottles that say “Riesling” produce glasses with much different taste. At some point, for many buyers, the disappointment factor is just too big. Lots of other wines out there. Why beat your head against the wall? Riesling sits on the shelf.

One answer to the asymmetric information trap is signaling: tell the buyers what they need to know to make a purchase with confidence. It sounds pretty simple, but Riesling makers have until recently resisted it.

Of the seven Riesling table wines at my tasting, only two of them used the front label to signal something about the relative sweetness of the wine. The Pewsey Vale was labeled a “Dry Riesling” (and it was pretty dry, too) while the Pacific Rim bottling billed itself as a “Sweet Riesling” and was medium sweet and very tasty.

Some of the other wines offered descriptors on the back label, but I think it’s fair to say that a typical buyer would have been in the dark trying to figure out how sweet or dry most of them were. The Pacific Rim wine was interesting because it was the first one I’ve seen that uses the International Riesling Foundation‘s new Riesling Tasting Profile Scale. About a million cases of Riesling will be released this year by U.S. wineries that are participating in this program. Pacific Rim, a Washington Riesling specialist, has used the scale since 2008, according to a recent article on Decanter.com

How Dry Am I?

I first learned about this initiative at the 2008 Riesling Rendezvous conference, sponsored by Chateau Ste Michelle (Washington State) and Dr. Loosen (Mosel, Germany). An international group of Riesling producers decided to confront the asymmetric information problem head on by developing a simple way to communicate useful information about their wines.

Here is an example of the scale they have come up with taken from a limited edition Chateau Ste Michelle product. As you can see, it is pretty simple — just four descriptors ranging from Dry, Medium Dry, Medium Sweet to Sweet with +/- variation. This wine is “Dry +” — between Dry and Medium Dry.

This would seem like a very small step were it not for the fact that the current state of bottle information is so very limited and uneven. I suspect that this small step will help a lot of wine drinkers take a positive step towards enjoying Riesling.

Simplicity Is Complicated

As is often the case, getting something simple like this tasting scale is a very complicated process. As you may imagine, not all producers see the situation in the same light (there is much more to wine, even Riesling, than sweetness — a valid point). And tastes differ, of course, so what is medium dry to you might be medium sweet to me. (Some of my students thought the Pewsey Vale Riesling was quite sweet, for example.)

How do you define sweetness in wine? Well, of course, it is a matter of balance between sugar and acid — with the right balance even a dessert wine with a high residual sugar level can avoid having a sticky sweet taste. Translating the chemistry into a taste profile, however, is a complicated matter.

Here is how the IRF handled the problem. As you can see, the standard begins with a simple sugar to acid ratio test (a relative calculation of grams per liter of acid and sugar). It then takes into account the absolute pH, which can push the rating up or down one level of perceived sweetness. Click on the table to enlarge it and see a more detailed explanation of the methodology.

I am going to have to pull a few corks (or twist some ‘caps) to see if I agree with the scale and if there really is the desired consistency across makers. But I am optimistic that this is a step forward. If it works, how sweet it will be!

Note: I am looking forward to attending the 2010 Riesling Rendezvous and getting an update on progress on this and other Riesling industry issues.

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Update 2/17/2010

My friend David Rosenthal, a winemaker at Chateau Ste Michelle, provides this useful news:

I wanted to let you know that all of the 2009 Rieslings from CSM will have the IRF scale on the back. That includes:

Columbia Valley Riesling
Dry Riesling
Waussie Riesling
Harvest Select Riesling
Cold Creek Vineyard Riesling

We are jumping in with both feet on this one to try and educate people as much as possible at the point of sale.

Who Sells the Most Wine?

February 2, 2010 By Mike Veseth in Supply and Demand, Tesco, wine distibution, wine markets 6 Comments

Who is the #1 retailer in the wine world? The answer is Tesco, the British-based supermarket company.

Tesco sells more than 320 million bottles of wine each year in Britain alone (one of four bottles in this important market). It is a wine selling machine, using every available mechanism to market wine and build the brand.

Tesco stores feature attractive Wine Walls, for example, tailored according to the demographics of individual stores. Wine displays are strategically positioned near the fish, meat and cheese counters as you will appreciate from your own experience. Wine tastings and wine-related events are organized by the no-fee Tesco Wine Club, which boasts hundreds of thousands of members.

Wine, wine – everywhere.

Tesco takes the everywhere seriously, so their quest to sell wine doesn’t stop whey you leave the store. Internet wine sales are an important retail vector in Britain since nation-wide shipping and delivery is not a problem as it is in the United States, where jurisdictional issues complicate every aspect of interstate wine sales. The Tesco Wine by the Case website provides consumers with a rather stunning array of wine selections that range from a heavily discounted mixed case of “mellow reds” for £28 to a Vosne Romanee Domaine Hidelot Noellat 2006 Red Burgundy for about the same price, but for just one bottle. Tesco has captured about a quarter of all internet wine sales in Britain.

Buyers earn Tesco ClubCard points both online and in the stores. The loyalty card system carefully tracks the purchases of each customer (and notes non-purchases, too, I suppose), providing data to guide store strategy and the opportunity to produce individualized checkout coupons to encourage wine drinkers to buy more or better wines or perhaps to try something different. Tesco was an early pioneer in loyalty cards and is thought to use this data very effectively.

By Land, Sea and even Phone

Tesco has goes to great lengths to reach British consumers whenever and wherever the urge to buy wine might hit them. Tesco and its UK competitors have established substantial wine stores in Calais, France just minutes from Hovercraft ferry and Eurostar train stations. British consumers have long crossed the English Channel in search of duty-free bargains and British duties still make the trip an attractive excursion for some. Wine can cost about 25 percent less in Tesco’s Calais store and online ordering makes stocking up quick and easy.

Tesco’s latest (as of this writing) innovation is a smart phone app for wine lovers. Enjoying a nice bottle of Chianti at your favorite Italian restaurant? Want to know where to buy it? Well launch the app and use your phone to take a photo of the label on the bottle in front of you. High tech label recognition software will identify the wine, provide maker information and tasting notes and even search through the Tesco online inventory so that you can order a case right now for immediate delivery. Tesco and wine are with you anytime, anywhere.

Tesco and the other British supermarkets use wine to make money and to change the way at least some British shoppers think about grocery stores and even how they think about themselves. In the process, of course, these retailers have acquired a certain amount of power. Indeed, Decanter’s 2009 “Power List” of the most influential people in the world of wine ranks Tesco’s wine director Dan Jago at number six – a few places behind Robert Sands, head of the world’s largest wine company, Constellation Brands, and wine critic Robert Parker but ahead of French President Nicholas Sarkozy and E&J Gallo President Joseph Gallo. This power is put to a surprising number of uses.

That Tesco would use its market muscle to reduced wine costs in not unexpected. Volume purchasing has always been an excuse to press for lower prices. Tesco goes further, however. The New World wines in the Tesco lineup are shipped to Britain in bulk, is 20-foot shipping containers that contain giant plastic bladders holding thousands of liters of wine. The bulk wine is bottled once it reaches Britain, eliminating the cost of hauling fragile bottles half way around the world. Tesco has even started moving the bulk wine to its bottling plant using Britain’s historic system of canals, saving the expense of tanker truck shipment and lower the wine’s carbon footprint.

New Bottles for New Wine

Tesco is very focused on innovation and uses its power to achieve it. Tesco has pressed its suppliers to switch from cork closures to screw caps, for example, in order to eliminate the three to five percent loss that is commonly experienced due to TCA cork taint. Anyone who wants to get wines into the Tesco pipe had better not show up with a corkscrew (iconic brands excepted, of course).

Recently, Tesco has introduced the world’s lightest wine bottle in an attempt to further reduce production and shipping costs and reduce environmental impacts. The new 300g bottles are 30 percent lighter than Tesco’s previous lightweight bottle and much lighter, of course, than some of the heavyweight containers that one sometimes finds on the Wine Wall. Structural concerns require that the new bottle have a new shape – somewhere between the high shoulders of the classic Bordeaux and the soft silhouette of a Syrah or Burgundy. Tesco estimates that use of this special bottle will have 560 metric tons of glass that it uses to bottle the more than 10 million liters of wine that it imports each year and sells under its own label.

You don’t think of supermarkets as being especially innovative, but it is pretty clear that Tesco is using its market power to encourage innovation in the world of wine. Whether or not you shop at Tesco (or at its U.S. arm — the Fresh & Easy Neighborhood Markets in the American southwest) you are probably affected its activist wine policies.

Wine Spectator 100: North and South

December 2, 2009 By Mike Veseth in Argentina, Chateau Ste. Michelle, Paul Gregutt, Supply and Demand, Washington wine, wine awards, wine bargains, Wine Competitions, wine critics, wine markets, wine price, wine ratings, wine spectator 2 Comments

The lists of the Top 100 wines have started to appear — just in time for holiday buying. Wine Spectator released their Top 100 last week and now Wine Enthusiast has followed suit. Other lists are showing up, too, such as Paul Gregutt’s list of the 100 best Washington wines. Fun and informative, these lists provide wine lovers with endless opportunities to discuss, debate and of course pull corks. Gotta love ’em.

But you’ve gotta hate ’em, too. Top 100 lists are a mixed blessing on the supply side of the market. Although they do promote wine and wine drinking generally, they necessarily privilege some wines over others and this is always problematic given the thousands and thousands of good wines that are produced each year. Why this wine and not that one? It’s an inevitable question that matters because wines on the list get more attention than the wines that don’t for some reason make the cut.

Dancing in the Streets

Top 100 lists slice up the market in many ways and this year my email inbox has revealed a North-South divide. Here in Washington State we are very happy with the 2009 Wine Spectator league table. Nine Washington wines made the list — more than any previous year — including the #1 spot, which went to the 2005 Columbia Crest Reserve Cabernet Sauvignon (95 points, $27 dollars). Two Oregon wines were also listed, so altogether this was a banner year for the Pacific Northwest.

While they are dancing in the streets in Woodinville and Walla Walla, the mood is more sober down south in Mendoza. Two Argentinian wines appear on the WS100, which is welcome recognition of course, but that’s down from four last year. This is really Argentina’s year to shine in the U.S. wine market, with overall sales surging by more than 40% in dollar value according to Nielsen ScanTrack data. But only half as many WS100 wines! You can’t blame members of the Argentinian industry for kinda hoping to see their success more enthusiastically celebrated in the Top 100 lists. Hmmm. Maybe next year.

A Nobel Prize for Wine?

It seems to me that these top 100 wine lists are a little bit like the Nobel Peace Prize. Highly publicized awards like the Nobel and the Top 100 end up being both reflections of excellence and opportunities for the judges to send a message (political, economic or otherwise). There are many worthy nominees for each award so the final choice is always arbitrary — and the opportunity to send a message is irresistible. Or at least I wouldn’t be able to resist it.

There are obviously many factors that go into a Top 100 wine list and a wine’s objective quality is just one of them. This is easy to see if you take numerical ratings seriously. The WS100 #1 wine this year earned a 95 score, for example, but the #2 wine received a higher score (96) and the #8 wine’s score was even higher (99). A 100-point wine was placed in the 21st spot last year. This is a numbers game but not just a numbers game.

Don’t Cry for Argentina

Wine Spectator uses four criteria in making their list: quality (the score), value (the price), availability (the volume) and excitement (the X-factor). The Columbia Crest wines (both the Reserve that won this year and their other wines) generally do very well on the first three factors year in and year out. The X-factor this year, I believe, was the recession and the desire to inspire some excitement among American buyers by giving them a #1 wine they could find and afford. That $27 Columbia Crest wine says that American wine drinkers can enjoy truly excellent wines at relatively affordable prices. Time to start pulling those corks! A good message to send in this economic climate.

What about Argentina? Well, I understand their situation. No problem with quality, volume or availability. But I think the market excitement is already there and doesn’t need any help from the wine lists at this point (as much as the Argentinian makers would love to have it). The U.S. industry (like President Obama?) could use some encouragement right now, which may be a good enough reason to draw attention to its outstanding, good value wines like the Columbia Crest Reserve.

Note: Congratulations to Juan Manuel Muñoz Oca, the 34-year old Argentinian winemaker who made the #1 Columbia Crest Washington State wine. What a great North-South connection!