Got Wine vs Not Wine? Wine and the Generation Gap

February 14, 2023 By Mike Veseth in economic crisis, Unified Wine & Grape Symposium, wine, wine markets 7 Comments

We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress … is over; that … a decline is prosperity is more likely than an improvement.

The economist John Maynard Keynes wrote these words in a 1930 essay called “The Economic Possibilities of our Grandchildren” and I have been thinking about them quite a lot recently in the context of the wine industry. Keynes was writing in the depths of the Great Depression. Is wine in (or headed towards) a Great Depression of its own?

On the Other Hand …

Certainly the mood at last month’s Unified Wine and Grape Symposium was mixed. Obviously I didn’t talk to all the 10,000 people who attended the 3-day event, but I think I got a general sense of what wine industry people are thinking and feeling from those I encountered.

On one hand (a classic economist opening phrase), there was an upbeat mood because the meetings and trade show themselves felt back-to-normal after several years of covid-driven disruption. The house was packed for our State of the Industry session, for example, and there was a record number of exhibitors at the trade show (and a waiting list for next year). Glass at least half full, for sure.

One the other hand (you knew that was coming), it was impossible to ignore some of the discouraging news in the air (I reported on some of this in last week’s Wine economist column). Some people blamed this on the recently released Silicon Valley Bank report, but I think that is unfair. Like our State of the Industry session, the SVB report has an obligation to be objective — to report the straight facts without a lot of spin. And I think their report does that well. Facts are facts. The question is what you do with them and whether, like Keynes, you can see beyond the current crisis to the possibilities of the future?

The Generation Gap: Got vs Not

Keynes was thinking in generational terms when he wrote his famous essay and a lot of the analysis of wine’s current malaise is generational, too. The baby boom generation powered the golden age of American wine, the story goes, but the generations that followed haven’t embraced wine with the same warm hug. What can we do to make Gen Z consumers love wine as much as their grandparents do? How can we close the wine generation gap?

This is a good question (and I am glad so many people are asking it), but it by-passes part of the problem. Yes, boomers as a group drink a lot of wine, but in fact wine consumption is concentrated among just a small fraction of boomers. The baby boom generation is large — it contains multitudes. It is both Gen Got Wine and Gen Not Wine. Generalizing about generations like the boomers is a risky business.

This is true, I believe, for other generations, too. What makes the wine drinking boomers different from the boomers who don’t drink wine or don’t use alcohol at all? And what, if anything, does the boomer wine cohort have in common with wine-drinking members of other generations? Maybe generational differences aren’t the whole story (or even the most important part of the story)? Is the gap as much within generations as between them?

How Full is your Glass?

Should we be optimists or pessimists as we consider the future of wine? Well, our situation is nowhere near as dire as what Keynes faced back in Depression days. The wine market requires only relatively small adjustments by comparison to restore a balance and a bit more to kick-start growth. Not easy by any means, and it might not happen, but not at all hopeless.

Keynes was an optimist and he used this essay to look far into the future, peering past the short term problems necessarily on his readers’ minds. The prospects for our grandchildren are bright, he said, so long as we are able to avoid certain obstacles — over-population, violence and war, and the politicalization of science. Our current economic situation, since we are the future of Kaynes’s past, is indeed prosperous compared wtih 1930 if not quite so bright as he hoped.

A Half-Full Future?

Let me follow Keynes’s example in talking about the future of wine. Wine has endured for thousands of years and survived many dark periods, so it is not unreasonable to imagine a bright future for wine as both culture and industry. But there are obstacles to be avoided.

In my recent book Wine Wars II I propose that wine must deal with a triple crisis: environmental crisis, economic crisis, and identity crisis. The identity crisis is most relevant to today’s topic. Wine is an alcoholic beverage — the fermentation process doesn’t just add alcohol, it transforms the grape juice in miraculous ways. If, as I think is possible, wine becomes defined by its alcoholic content — grape juice alcohol the way that hard seltzer is fizzy water alcohol — then something very important is lost and wine’s future grows dark.

Another obstacle — and this allows me to circle back to the generational issue — is occasion. Opening a bottle of wine is an occasion (there is both an element of ceremony in the cork-pull and the more-than-single-serving quantity to deal with) and must align with occasions in consumer life.

Mind the Gap?

Dinner is an occasion sufficient to pull a cork at our house, but that’s not true for everyone. I wonder how much of the wine that is sold is consumed with meals versus other types of occasions and how this might differ for different demographics? The wine industry would be wise to try to adapt to the occassions that younger consumers (and older consumers, too) actually experience rather than the ones we imagine they should enjoy.

An article in yesterday’s Wall Street Journal suggests that at least one big beer company is rethinking its marketing plans in light of the threat of recession. Home consumption is rising at the expense of on-premise, for example, so marketing will work to put beer at the center of home and family occasions. Smart thinking!

A recent Financial Times column by Gillian Tett provides food for thought regarding Generation Z attitudes. The article doesn’t talk about wine, but maybe there are implications for wine. Tett cites studies that show that Gen Z workers demand more control over work environments than employers are used to. If they can’t customize the job, they prefer to quit, one expert suggests. Dangerous to generalize, of course, but it makes me think about how the wine experience compares with, say, cocktails in this context?

The generation gap is complex. Lots of food (and drink) for thought!

Margins? What Margins? The Big Squeeze in Winegrowing 2023

February 7, 2023 By Mike Veseth in economic crisis, South Africa, Unified Wine & Grape Symposium, wine markets 7 Comments

I was talking with a group of California winegrowers just before the Unified Wine & Grape Symposium‘s State of the Industry session a couple of weeks ago and the stories they told me made me understand that The Big Squeeze, which I wrote about around this time last year, is still going strong.

Margins? What Margins?

The Big Squeeze? Many winegrowers have for some time been caught in a squeeze between rising costs and stagnant or sometimes even falling wine grape prices. Your margins are getting squeezed, I asked? Margins? What margins? they replied. Margins got squeezed away some time ago.

The Big Squeeze is significant and not limited to the United States. When I travel the world speaking to wine industry groups I will ask quietly about how the growers are doing? Often the reply is a shrug, downward look, and slow shaking of the head. Not so good, they tell me.

South Africa is a good case in point. Every year Vinpro, the important South African winegrowers organization, reports its survey of vineyard profitability. Rico Basson, Vinpro’s executive director, released the results for 2022 at the annual Nedbank Vinpro Information Day last month and the chart above summaries the conclusions.

Unsustainable Operations

Only about 9% of the South African winegrowers were earning a sustainable level of income per hectare — a high enough return to support long-term investment. Fifty percent were caught in a low profit zone, with positive net income, but less than they might earn elsewhere. (If you remember your Econ 101 definitions, this would be positive accounting profit but zero or negative economic profit — it’s an opportunity cost thing.)

The actual level of income per vineyard hectare (the green line in the chart above) is far below the sustainable income level (black line). Fully 41% of the South African winegrowers in the survey were either at break-even (3%) or bleeding red ink (38%). The average return on investment in 2022 was minus 2.4% and the gap between costs and revenues was widening. That, my friends, is a really big squeeze.

Volume or Value?

Which is the better strategy to escape the squeeze: volume or value? Do you push to raise vineyard yields or try to raise price though lower yields but higher value?

I don’t know the answer for South Africa today, but when I spoke at the Vinpro event a few years ago the answer was clear. The higher the yields, the better the chance for success. Sacrificing quantity for quality didn’t consistently pay, I was told, because South African wine found it hard to break through the premium price-point ceiling on international markets. Most producers couldn’t manage to raise price enough to compensate for the higher unit costs. Ouch!

I told this South Africa story to my winegrower friends and they shook their heads. Pretty much the same here, they said. Given the limits on what buyers would pay for their grapes, the best way to profits was to increase yields to, say, 12 tons per acre or more depending on grape variety.

Limited Yields, Limited Opportunity

But there were two problems,, I was told. First, some buyers won’t go along — they were concerned about loss of quality at the higher yield, although modern viticulture practices make it possible to raise yields without loss of quality possible in certain circumstances. So in these situations raising yields is a non-starter.

And it isn’t always possible to get yields up to an economically sustainable level because many older vineyards just aren’t set up for that and have built-in limits that were OK when they were planted years ago, but make life difficult today.

So what are you supposed to do, one grower asked me, if you have an older vineyard that needs to be renewed at high cost? This is where the unsustainable profitability issue really hits. Do make a big bet that the Big Squeeze will loosen up in the future? My winegrower friend was less than optimistic.

Unsustainable?

Not all vineyards bleed red ink, of course. The situation is different in different winegrowing regions with different market conditions and vineyards of different ages and farming set-ups. But the problem remains. As I reported last year, wine prices have fallen in real terms recently and one result has been to make the already-serious vineyard squeeze even worse.

When you talk about sustainable vineyards, people naturally think about environmental sustainability. But economic stability is an issue, too.

Game Over for the Wine Game?

January 31, 2023 By Mike Veseth in Unified Wine & Grape Symposium, wine, wine markets 4 Comments

What’s ahead for the wine industry in 2023 and beyond? Speaking at the “State of the Industry” session at last week’s Unified Wine & Grape Symposium in Sacramento, I suggested that the challenges our bvindustry faces today are not unique to wine, so perhaps we can find clues by looking outside the wine box.

The particular case I examined in the short time available was the board game industry. Board games? Yes, you know, games like Risk, Life, and Clue. Once upon a time board games were so popular that they were part of the fabric of life. Then the board game industry was battered by forces that I think are analogous to some of the headwinds we in the wine industry have experienced.

Ready Player One

The story of the fall and rise of board games is interesting if we think about it in terms of similar patterns in the wine industry. Board games (and wine) suffered four big blows in recent years. First came in the form of demographic and socio-economic change. Generations shifted — the players got both older (aging Boomers) and younger (Gen X, Gen Z), too. The faces around the table were different and the opportunities to gather together were different. That vintage Life board game box shown above isn’t what life looks like today.

Then video games hit the scene. Video games were the “craft beer” of board game industry — a competitive product that was new and innovative. Innovation was the name of the game: there was always another video game to try. Board games (and wine) were not so innovative and suffered as players looked for the next big thing.

Next came smart phones, which were sort of the hard seltzer of the board game industry. You could play games on smart phones, of course, but the fact is that “gamification” became a general strategy, as app developers sought to keep users glued to their screens (and then to track their every move). Apps that had nothing to do with video games used “gamification” techniques. If you find yourself constantly checking smartphone apps, you may be playing a game without knowing it.

A lot of the time, if I’m honest, my smartphone is sort of like the TV series Seinfeld, “a show about nothing” that I watch again and again. That’s hard seltzer to me and products like hard seltzer had sort of the same impact on wine that the smart phone had on board games.

Finally the covid pandemic struck, which hit both board games and the wine industry hard. Gathering together for board game play or to share wine in social settings were both suddenly problematic. For wine, restaurant and tasting room sales channels dried up.

Game Over for Games?

The situation for board games looked particularly bad because, if you’ve followed the story so far, you can see that a whole generation has grown up in a different game environment than before. It was hard to believe that board games could ever stage a come back. Game over for them. But they did it! Board games are back! How?

A recent Washington Post article by Jacvlyn Peiser suggests that the board game renaissance is a combination of old and new. The old virtues of board games — the social and educational elements (which I talked about in more depth in my talk) — have not really changed, but are perhaps now a bit more precious to us because we had to live without them during the pandemic. And there is also a new side in that innovative game designers are finding new ways to connect with users and their interests and needs.

But it’s the classic appeal that is the foundation of the innovative surge. The Washington Post article concludes with a comment that board games endure because they get friends and family together to share experiences and make memories. What could be better?

Everything’s Better with Wine?

Well, of course, board games are better with wine (for those of legal drinking age). Wine and social gatherings are perfect parings. There are even board games for wine enthusiasts. Did you know that there is now a special Napa Valley Monopoly edition?

How realistic is the Napa Monopoly game, which is based on Napa Valley properties in the same way that the original game was modeled on Atlantic City, New Jersey? I checked on Amazon and the classic Monopoly was selling for $11 while the Napa version was around $44. A four-times Napa premium seems pretty realistic to me, don’t you think?

Today’s gamers haven’t given up their screens, but they have rediscovered the pleasures of in-person interactions and board game sales have benefited. That’s a good thing.

Since I used board games as a way to think about wine, this was an optimistic result. Perhaps the virtues and pleasures of wine, which have sustained it as culture and industry for thousands of years, have not suddenly lost their value, either. Perhaps, as the clouds lift, wine’s classic appeal with become even more apparent.

The Game Endures

It seems to me that the wine industry, following the board game analogy, needs to continue to innovate, to reach out to consumers with different interests and lower specific levels of commitment than before. But in doing that, it is important not to forget the values and virtues that have made wine an enduring part of life.

It is reported that Bernard Arnault, the head of LVMH and the current holder of the “World’s Richest Man” title, once met with Steve Jobs, the visionary creator of the Apple electronics phenomenon. Do you think people will still be buying your iPhones in 30 years, Arnault asked Jobs. Don’t know, Jobs said honestly.

Do you think people will will still drink your Dom Perignon Champagne in 30 years, Jobs asked in reply? Yes, Arnault said confidently. The wine will endure. There will be Dom Perignon for generations. Jobs agreed. So do I.

Wine Hits the Language Barrier

January 10, 2023 By Mike Veseth in Unified Wine & Grape Symposium, wine, wine critics, wine education, wine markets 7 Comments

What do we talk about when we talk about wine? How does the way we talk about wine affect the way we think about it? Does the language of wine create a barrier to entry for consumers?

Last week’s Wine Economist focused on what we say about wine in terms of the information revealed on the label. The European Union is implemented new regulations that will require wine to be more like other consumer products with respect to ingredient lists and nutritional analysis.

Should the U.S. follow suit, either through regulation or via voluntary initiative? That’s a controversial question, for sure. Some worry that people will be less interested in wine if they know what’s really in the bottle. Others think it might work the other way.

Wine’s Language Barrier

But there is another concern that is in some ways even more basic — and might help account for the wine market malaise we all worry about. How does the way we talk about wine affect the way that we (and potential customers) think about it? This is the topic of a seminar that will take place in two weeks at the Unified Wine & Grape Symposium in Sacramento. Meg Maker will moderate a panel that includes Miguel de Leon, Erica Duecy, and Alicia Towns Franken on the topic of A New Lexicon for Wine. Here’s an excerpt from the description of the panel on the Unified’s program.

The best way to get to know a wine is to taste it. Another way is to talk about it. The wine industry relies on the ability of wine communicators to persuade consumers to taste, but today’s wine lexicon falls far short of its objectives.

What’s the problem with the way we talk about wine? The panel prompt outlines the problem.

For starters the vocabulary is heavily Eurocentric, reliant on metaphor and analogy unfamiliar to swaths of global wine lovers and curious newcomers. It also tends toward absolute pronouncements: “this wine is this” versus “this wine feels like this.” Formal wine education reinforces these protocols, perpetuating them for new generations of wine pros. The ever-popular numeric score says precisely zero about a wine’s aesthetic impact—even though that’s sometimes all you see. The net effect is both intimidating and gatekeeping to new wine drinkers, alienating them at a time when the industry tries to address its shrinking footprint.

Mastering the Dialect

There are of course several language of wine, not just one, as there are in most industries. There is the “inside” language we use when talking with on- and off-premise accounts about price points and marketability. Then there is the “outside” voice we use when speaking to consumers directly along with the different dialects necessary to connect with different types of consumers such as investors, collectors, or relative beginners. One size does not fit all when it comes to the language of wine.

Language can be a plus or a minus when it comes to opening doors to wine. Ironically, wine is not a very transparent product from the consumer point of view. It is difficult to know if what’s inside the bottle will make you happy until you taste it. But the idea of buying and opening that opaque multi-serving bottle can be intimidating, especially when prices are high relative to income and to other options.

Economists call wine an “experience good” — you won’t know if you’ll like it until you try it — hence the importance of tastings and the focus on tasting notes to simulate the tasting experience. This is why it is important to think clearly about how and what tasting notes say. Many wine consumers, I believe, are really interested in how the wine will make them feel. There are both intellectual and emotional responses, to be sure, but feeling trumps thinking for some of the people all of the time and for all of the people some of the time, don’t you think?

Tasting vs Feeling

If you ask people why they like Champagne, for example, they almost always talk about the way it makes them feel, not the details of the way it tastes. I did a tasting with some university students a few years ago and it taught me a lot. Champagne (or sparkling wine generally) was something they all were familiar with from various family celebrations. They knew it, liked it, and had good memories associated with it. But when they followed the usual protocols of formal tasting, they were surprised. It didn’t necessarily taste the way it had made them feel. Do you know what I mean?

Tasting notes that list a dozen or sometimes more flavors and aromas, many of them quite esoteric and requiring practice or training to detect, are only really useful to a few specialized consumers, but they are the lingua franca of wine. For a lot of people the lingo-equivalent of an emoji — expressing an emotion or feeling — would be more useful. Subjective descriptions of personality may communicate better than lists of seemingly objective properties.

Wine experts are expected to master all the details (as this very clever video from Richard Hemming illustrates). Many wine consumers are more interested the harmonious melody than the many notes.

The Humpty Dumpty Problem

Deconstructing wine into its components (flavors and aromas in most cases) reflects a more general trend of thinking of products in terms of their parts rather than the whole. Hence the focus on lists of ingredients and nutritional elements rather than the qualities of the food or beverage itself. I call it the Humpty Dumpty problem. If we insist on breaking product experience into pieces, we can’t be sure that customers Ieven with help from the King’s horses and men) can put them together again.

For wine, as for many other products, it is actually the balance of forces and they way the whole comes together that is the key feature. In Humpty Dumpty terms, consumers are interested in the egg and we keep talking about the pieces as if they are what matters.

Given wine’s intimidating language, it is perhaps no surprise that retailers have adopted a sort of least-common denominator approach to talking about wine. I’m thinking about the “shelf talkers” that hang below wines on store shelves. Shelf talkers come in many forms, but the most common are the simplest. Many supply an expert’s numerical score (JamesSuckling.com 93, for example) while others simply announce a discounted price.

Shelf-talker language may or may not be better than nothing, but its wide use perhaps reflects the inability to speak to consumers in other ways with any consistent success.

And the Solution Is …

Wine, by its very nature, can get lost in translation and there is no simple solution to this problem. But there are steps to take to lower the barriers for current and potential wine enthusiasts. The Unified Wine & Grape Symposium’s session mentioned at the top of this column is a worthwhile beginning. We in the industry need to think critically about the languages of wine and resolve to be more effective.

And I think it is useful to consider the challenge of talking about the emotional impact of wine. In this regard I am inspired by the haiku tasting notes written by W. Blake Gray. I find that they make me stop, think, and try to imagine the wine.

>>><<<

Can it be true that the Unified Wine & Grape Symposium is only two weeks away? Hope to see you all there. I will be moderating the annual “State of the Industry” panel on the morning of Wednesday, January 25.

Has U.S. Wine Industry Consolidation Gone Too Far?

February 8, 2022 By Mike Veseth in Unified Wine & Grape Symposium, wine, wine brands, wine markets 4 Comments

Is the U.S. wine industry becoming too concentrated, with just a few big firms dominating the marketplace? That, more or less, was one of the questions we were asked at the press conference that followed the annual “State of the Industry” session at last month’s Unified Wine & Grape Symposium in Sacramento, California. How would you answer this question?

The query was prompted in part by Mario Zepponi’s excellent presentation about merger and acquisition activity in the wine industry in 2021. Mario is principal at Zepponi & Company, a firm that advises winery and vineyard M&A clients and was very busy indeed last year, when a number of large (for the wine industry) deals were concluded.

How concentrated has the U.S. wine industry become? How competitive is the wine marketplace? The answer you get depends in part on how you look at the data. Wine Business Monthly (which sponsored the State of the Industry session again this year) publishes a report on the U.S. wine industry early in each new year which is required reading. This year’s report appears in the current March 2022 edition, which can be accessed online.

U.S. Wine By the Numbers

Judging by the number of firms competing for retail shelf and restaurant wine list space, the U.S. market is very competitive indeed. For perspective, consider that the WBM report for 2014 found 8,287 U.S. wine producers in total, 3913 in California, 734 in Washington State, 632 in Oregon and the rest distributed across the country. Mississippi was at the bottom of the league table with just two wineries.

Zoom ahead to the just-published WBM report for 2021 and the numbers have jumped. The U.S. winery count rose by 36% in the intervening years, with 11,300 wine producers in total. California again leads the way with 4804 wineries, Oregon comes second with 877, followed by Washington with 875. Mississippi’s winery count increased to six. The Other Washington — Washington DC — is last with two wine producers.

Looking at the data this way, the U.S. wine industry is very competitive, with amazing growth in number of wine producers for such a brief period of time. The increase in winery count in 2021 was slower than in 2020, WBM reports, but that’s not a surprise given the covid and economic conditions we have experienced.

The U.S. market is actually more competitive than these numbers suggest because imports account for about a third of U.S. wine sales, so thousands of international brands are also vying for buyer attention.

Top of the Table Concentration

But number of competitors is not the only factor to consider when assessing industry competition. Market power matters a great deal and the U.S. wine industry features a number of very large players. WBM reported on the top 30 companies in 2014 and the top 50 companies in 2021 along with the lineup from the first report in 2003 and the lists make interesting reading.

The top five producers, ranked by volume of sales, in the very first WBM report in 2003 were as follows: E&J Gallo Winery, Constellation Brands, The Wine Group, Beringer-Blass Wine Estates (now Treasury Wine Estates), and Bronco Wine Company (followed by Mondavi — now part of Constellation — and Trinchero Family Estates).

The 2014 report produced this list: E&J Gallo Winery, The Wine Group, Constellation Brands, Bronco Wine Company, and Trinchero (followed by Treasury and Ste Michelle Wine Estates). The current (2021) line-up is: E&J Gallo, The Wine Group, Trinchero, Delicato Family Wines, and Constellation Brands (followed by Treasury and Bronco).

I think you would have to conclude that the top of the U.S. wine table has been very stable, with a good deal of the movement due to transactions within the industry such as Constellation’s acquisition of Mondavi and more recently its sale of many brands to Gallo and The Wine Group. The steady rise of Trinchero (think Sutter Home, Menage a Trois among other brands) and Delicato (Bota Box, of course, and now also the Francis Ford Coppola Winery) is noteworthy.

The 50 largest wine companies (out of the 11,000 total) account the vast majority of sales volume for domestic wines (not counting the imports) and it is easy to see why because firm size is very large. JUSTIN Vineyards and Winery is #50 in the 2021 table but still produces a very substantial 339,000 cases of wine each year. Gallo is at the top of table with a WBM-estimated 100 million case annual wine output. That’s 1.2 billion bottles. Incredible!

It is interesting to look at how production measured by volume of the top three largest wineries has evolved over the years reported here. In 2014, for example, the big 3 totaled over 187 million cases (not bottles) of wine (Gallo 80 million, The Wine Group 57.5 million, Constellation 50 million). The Big 3 total for 2021 is actually bit less: Gallo 100 million + The Wine Group 51 million + Trinchero 20 million = 171 million total. That is less than in 2014, which could be due to a number of factors including, as I have heard some insider’s comment, a lack of investment in some of the brands involved in the Constellation-Gallo transaction during the long regulatory approval process.

If we assume that the total U.S. wine market was about 450 million cases in 2021, then the Big 3 accounted for about 38% of sales by volume. If imports accounted for a third of total sales, then the Big 3 alone were responsible for 57% of domestic-produced wine sales by volume.

The biggest wine companies are really, really big, but some of the market power has shifted down the line. The 30th largest wine company in 2014 (out of the 30 listed), for example, was Purple Wine Company, which produced 415,000 cases. Number 30 in 2021 is Firstleaf at 700,000 cases. Firstleaf is a direct-to-consumer operation founded in 2016 with more than 75 brands in its portfolio.

What’s Driving Consolidation?

Big is in for U.S. wine and a lot of the bulking-up is taking place in the tiers below the Big 3. What’s driving it? Mario Zepponi presented an interesting perspective in our State of the Industry session. He argued that you have to put wine production in the context of its linkages in the product chain.

A lot of wine is sold in grocery stores, for example, and the top 5 U.S. grocery companies account for about half of total revenues in that sector. Big store chains, with their thousands of assorted SKUs, tend to prefer to work with a small number of distributors in each product segment if possible. So maybe it is no surprise that the top 3 wine distributors account for about 65% of revenues according to Zepponi’s data. Connect the dots here and it is easy to see why distributors might favor large wine companies with broad portfolios.

Big favors big, which favors big. Evolutionary forces point towards increased concentration, even in an industry as fragmented in some ways as wine.

To a certain extent, then, wine consolidation is the result of a process (accelerated by the covid channel shifts) that is affecting retail more generally. Consolidation, in this view, starts at the retail level and works its way backwards.

So has U.S. wine industry consolidation gone too far? It depends upon how you look at it and where you are positioned within the industry — in the Big 3 tier, the broader top 50, or further down the pyramid. And maybe the question should start higher up the food chain with consolidation at the retail and distributor levels. The market sure is competitive even if market power is concentrated at several points.

It is, I am afraid, one of those annoying “on the one hand …” situations that provoked President Harry Truman to ask for someone to send him a one-handed economist.

>>><<<

Thanks to Cyril Penn and his Wine Business Monthly team for the 2022 edition of their wine industry report. A very valuable resource for anyone interested in U.S. wine market dynamics.

Unified Symposium: Wine and the New Now

January 18, 2022 By Mike Veseth in Unified Wine & Grape Symposium, wine, wine markets 4 Comments

These are fast times. I used to think about “getting back to normal” and then I started talking about what the “new normal” would look like. Now I don’t really know what normal is — it’s a “new now” every day.

Crossing the River, Feeling the Stones

Planning for the future in the “new now” era reminds me of the Chinese saying about crossing a river by feeling the stones with your feet. Know where you are going but be sure to take each step one at a time.

I am struck by the degree that the program for the Unified Symposium this year reflects the “new now” of the global economy. The environment has long been a concern, for example, but now there is a timely immediacy that spans the global to the local. The Unified examines the issues starting with Dr. Steven Ostoja’s Tuesday luncheon presentation on “Changing Climate, Extreme Weather and Water Scarcity: What It All Means for the Future of Farming” and extending into sessions on vineyard adaptation, living with climate change, and wild fire smoke issues.

Labor has long been a critical issue in the wine industry, but we often focused on vineyard labor and sometimes, as in Napa, the problem of attracting and retaining cellar staff in a region with sky-high living costs. The labor problem in the “new now,” however, extends throughout the organization, so human resource issues are front and center.

These are just two of the important “new now” issues the Unified will examine this year. Check out the complete program to see what else is on tap. And don’t miss the trade show, which is where new ideas are put into practice.

State of the Industry Now

I will be hosting the State of the Industry session on Wednesday morning and I think you can expect a lot of “new now” thinking from the all-star speaker lineup: Jeff Bitter (Allied Grape Browers), Danny Brager (Brager Beverage Alcohol Consulting), Steve Fredricks (Turrentine Brokerage), and Mario Zepponi (Zepponi & Company). Their collective expertise spans the issues — demand, supply, markets, and investment.

The State of the Industry session looks back at 2021 and ahead to 2022 and beyond but a “new now” problem is understanding exactly where we are at today given the big swings in wine demand, sales channels, and grape harvests that we have seen. It can be hard see through the thicket of short-term events to pick out the real longer-term trends. Prediction is difficult, they say — especially about the future when the present in unclear. But I guarantee that the team will have revealing insights to share.

New Now Sacramento

If you want to get a sense of “new now” maybe the best example of change and adaptation is the Unified itself. It starts with the newly remodeled SAFE Credit Union Convention Center. I haven’t seen it yet but I am told it is state of the art — bigger and better — and safer — than before. I am really looking forward to the new trade show and session spaces.

And then there is the health and safety element of the “new now.” Bringing together thousands of wine industry people during this pandemic and doing so responsibly requires organization, cooperation, and critical analysis.

As Cyril Penn reported recently on WineBusiness.com, the organizers have retained a health data analytics firm to model the Unified from a covid safety standpoint.

Epistemix develops simulations that approximate risk based on venue, audience and anticipated virus levels with proprietary software developed by a team from the University of Pittsburg School of Public Health. The firm partnered with the Exhibitions and Conferences Alliance a year ago and has worked on risk assessments for conferences and conventions in twenty cities. Reiser said Epistemix has been 95 percent accurate in making event projections thus far.

The models take into account the number of attendees and their vaccine and testing status, the prevalence of the covid variants, the mitigation protocols, the varieties of activities that the convention entails, and the various ways that the groups are likely to mix.

The modeling indicates Unified’s masking and vaccination/testing policy at the newly-remodeled Sacramento Convention Center will create a controlled environment with an expected case rate of one in ten-thousand, according to Lindsey Solden Reiser, PhD, Managing Director of Professional Services for Epistemix, Inc. That modeling assumes 12,000 people attend Unified.

If the projections are correct, the convention will have a much lower expected case rate than Sacramento itself, which has a projected rate of eight cases per ten-thousand persons.

Wine and the New Now

The point is that the new now of trade shows and conventions is very different from the old normal, where people like me mainly worried about mundane things like whether the slide-advance “clicker” would work for the PowerPoint presentation. I am sure I never gave a moment’s thought to the idea that data modeling of pandemic spread would be needed or desired. But here we are now.

And I think the wine business is in the same situation. We need to analyze the new now and to try to understand it, but without assuming that it will somehow revert to the old normal or remain fixed in place as the new normal, either.

Better take off your shoes and socks. Time to get your feet wet.

Frogs, Tides, and Wine: the Adventure Capitalism Boom

December 14, 2021 By Mike Veseth in economic crisis, Unified Wine & Grape Symposium, wine, wine investment, wine markets 4 Comments

How is the changing investment landscape affecting the wine industry? Some thoughts on adventure capitalism and wine (and frogs and tides at the very end).

>>><<<

The cover story on the November 27 issue of the Economist newspaper was “Adventure capitalism: startup finance goes global.” It wasn’t, as this illustration might suggest, a story about Bezos and Branson and how their billions were powering rocket adventure tourism in near space. That’s interesting, but it’s another story.

VC become Ad-Venture Capital

The article traces how venture capital (VC) has gone from a niche investment space to something that seems to be much broader and more pervasive. VC is usually thought of as early-stage private investment in privately-held tech and science firms. The old world of VC was mainly focused on the US and just a few sectors — think Silicon Valley start-ups. The idea was to invest early on in what in the best-case scenario might turn out to be a unicorn firm — one that would achieve a billion-dollar valuation while still in private hands and then go public in a big way. Ka-Ching!

High risk is one reason the Economist calls this Adventure (rather than Venture) capitalism. VC is inherently risky. The investments are by their nature illiquid and you need to hit the target with some very successful investments to offset the inevitable disappointments. I suppose it is a little bit like the old joke about the wine business — the best way to make a small fortune is to start with a big one. But of course some investors do very well indeed.

The Economist argues that VC is changing — being disrupted just as it has disrupted in the past. The VC world has broadened beyond the narrow set of sectors of the past and beyond the US. It has also changed as huge amounts of money have poured into VC firms. The fact that there are more investors taking risks doesn’t make the system less risky.

The Problem of Return-Free Risk

There are a number of factors powering the rise of adventure capitalism, but perhaps the most important is the scarcity of positive real returns in some traditional sectors and the consequent logic of assuming higher risk to achieve higher return. Necessity as much as entrepreneurship drives the trend.

It used to be said that US Treasury bonds were “risk-free return,” for example, and so good foundational investments for a variety of individuals and institutions. Now, an investment advisor I know says, Treasuries are “return-free risk.” The interest return is negative in real terms (below the prevailing rate of inflation) and prices are volatile. This fact forces investors to explore all the nooks and crannies of the financial world to meet their needs.

The VC boom isn’t the only example of their trend. You might not have heard of SPACs (special purpose acquisition companies) before this year, but they are now a big enough market niche to be going through their own boom-bust cycles. Some call them “blank check funds,” which suggests something about the times when high net-worth investors decide it is a good idea to hand a financial advisor (sometimes paired with a sports star or celebrity of some sort) a blank check to buy a private company.

There are also NFTs (non-fungible tokens) that sometimes trade for high amounts. I suppose there could be a SPAC that invests in funds that acquire NFTs — what could be better? And I understand there are active markets in virtual assets on metaverse platforms.

This Changes Everything?

If you want to consider how far investors will go to get a return, consider that huge amounts that some recording artists have received for their back catalogues of songs. A steady flow of fees from music streaming services apparently looks really good when the alternative is something like return-free risk.

The list of investors who are plunging into the world of adventure capitalism investing is amazing, including billionaires and speculators, of course, but also what we might usually think of as very conservative institutions such as university endowment funds and public sector pension funds. (I recently reviewed the endowment report of a major mid-west university that had 22% of its assets invested in private equity and venture capital.)

These institutional investors, who once focused on blue-chip investments, now find themselves pulled into higher risk illiquid investments by the gravity created by their need to achieve certain rate of return targets. Most institutions that I monitor aim to increase their private equity and VC profile in the future.

One important question is this: what happens to all of these investments when the economic environment changes, as it looks like it is doing now, with higher inflation pushing interest returns up and the big quantitative easing flows tapering off at least here in the United States?

Wine Investment Booms

So how is this a wine story? The Economist is right that investments in risky and illiquid assets is no longer limited to traditional venture capital firms and Silicon Valley sectors. It is hard to follow the wine business in 2021 without noting all of the investment activity. Acquisitions (Sycamore’s purchase of Ste Michelle Wine Estates, for example), SPACs, and big moves by some institutional investors, too. Lots of money searching for returns in winery and vineyard investments.

Everyone seems to want to get on the NFT bandwagon, for example. Even Penfolds, the iconic Australian brand owned by Treasury Wine Estates is piling in. According to one report,

Australia’s most celebrated wine-maker is going digital with the announcement that Penfolds is teaming up with non-fungible token (NFT) marketplace BlockBar for an innovative new project. The partnership will see a limited edition NFT tied to the impossibly rare Penfolds Magill Cellar 3 barrel made from vintage 2021. According to the iconic Australian brand, only 300 will be made available, for the cool sum of USD$130,000 (AUD$180,00).

And Penfolds isn’t the only producer to exploit interest in NFTs. Barossa winemaker Dave Powell is offering the entire 2021 vintage of his wine through sale of NFTs. Is the wine’s value greater when linked to a NFT? Many apparently think so in the same way that some firms are trying to raise their profile by linking to blockchain (Square, the payments company, is now Block).

Better than Birkin?

Fine wine has done very well as an “alternative” investment in this environment and I have received several emails promoting funds to invest in fine wine assets. According to a recent article in Forbes, fine wines topped the list of alternative investments over the last decade, a list that includes blue chip art and furniture, classic autos, and colored diamonds. Wine’s rise to the top of the pile was noteworthy because it has now outperformed the previous leader … handbags! Gosh those Hermès Birkin bags did really well — I assume you have a bunch of them in your retirement portfolio, yes? Nah — me neither.

I think it is clear that wine is part of the adventure capitalism story — how could it escape such a broad, powerful trend? So the questions I asked above apply to wine, too. What happens when the economic environment changes, as it seems to be doing now? Which of these investment strategies will endure and which will fade away?

Frogs and Tides

Many, including the Economist, seem to be enthusiastic about the adventure capitalism trend and all that goes with it, but it makes me nervous. It seems to me that this is a process that normalizes risk without actually reducing it. Having taught university classes on financial crises and written a couple of books on this topic, I take risk very seriously (and I don’t think I am alone).

The current investment environment in wine and more generally reminds me of the parable of the frog in the pot on the stove. The water heats up slowly, so you kind of get used to it. Once you realize that things have started to boil up it is too late.

I will therefore be watching closely as the monetary life-support system tapers off and interest rates rise. As Warren Buffet is supposed to have said, you never know who is swimming naked until the tide goes out!

Gearing Up for the 2022 Unified Wine & Grape Symposium

December 7, 2021 By Mike Veseth in economic crisis, Economic impact, Unified Wine & Grape Symposium, wine, wine markets Leave a comment

The Unified Wine & Grape Symposium is North America’s largest wine industry gathering — a vast trade show and ambitious collection of seminars and presentations with something new and useful for every wine professional.

The 2020 Unified was the last in-person wine conference that Sue and I attended before the pandemic closures and protocols hit. So we are looking forward with more than the usual amount of excitement to the 2022 Unified, which is scheduled for January 25-27 in Sacramento.

Trade Show by the Numbers

Last year’s Unified was a virtual event and a very good one, but wine is a people business and nothing can fully replace the in-person experience. The two-day trade show will take place in the newly renovated SAFE Credit Union Convention Center on January 26 and 27. Covid protocols will be followed, of course.

You will find 760 booths and 40 large vineyard and winery machinery areas filled with just about everything anyone might need to grow grapes and make and sell wine. If you want to know what’s new, this is the place to find out.

If you haven’t been to the Unified before, you might enjoy reading New York Times wine expert Eric Asimov’s report on his visit to the trade show in 2017. It is interesting to see the event through Asimov’s critical eyes.

Problems and Opportunities

The 2022 conference program features an expanded three full days of meetings January 25-27. The typically ambitious agenda is organized around wine industry problems and opportunities as the Daily Schedule makes clear. There is a strong emphasis on positive take-aways — practical approaches to dealing with wine industry issues and information to help us all make sense of our changing world.

The wine world has changed dramatically in just a short period of time and the themes of this year’s program take this into account, with sessions on environmental shifts, smoke taint problems, new marketing directions, and attracting and retaining essential talent. Two sessions are in Spanish.

State of the Wine Industry

Once again this year I will be fronting the Wednesday morning “State of the Industry” session. I’ll set the stage by analyzing the changing wine market from a global perspective then the all-star line-up takes over: Danny Brager (changing consumer trends), Steve Fredricks (the supply side of the wine market), Mario Zepponi (investment trends, M&A activity), and Jeff Bitter (grower trends and issues).

Danny Brager returns to the podium at the session’s end to recognize wineries that were particularly successful navigating the wine dark seas in 2021. Lots of information and analysis packed into a 2-1/2 hour session.

I don’t have to tell you that 2021 has not been the easiest year for those of us in the wine industry, so look forward to honest, straightforward analysis with a focus on practical strategies as we move ahead into the uncertain future.

The Unified is back. See you there!

Three Things I Learned at the Unified Symposium’s “State of the Industry”

February 2, 2021 By Mike Veseth in coronavirus, economic crisis, Unified Wine & Grape Symposium, wine, wine markets 9 Comments

I’m the luckiest person I know and one aspect of my good fortune is that I have had the opportunity to moderate and/or speak at the Unified Wine & Grape Symposium‘s “State of the Industry” session each year since 2012. Last week’s program was therefore my tenth appearance on the “State of the Industry” panel. How time flies!

Each year’s session brings together leading wine industry experts to talk about key trends and opportunities, recognize unresolved problems, and celebrate success. No wonder the big room (see photo above from a few years ago) is packed with industry leaders from around the world each year — until 2021, of course, when the pandemic moved us on-line.

I get a ringside seat for both the formal presentations and the backstage banter and discussions. I always come away with fresh ideas and a better understanding of the wine industry. Herewith a few observations from the 2021 program.

#1 Elusive Market Balance

A year ago one of the biggest concerns in California and Washington state was the structural surplus of wine grapes and bulk wine. With new vineyard acreage coming on-line,= a couple of big harvests already in the tank, and demand hitting a plateau, growers were encouraged to take a realistic look at their options and proactively manage supply until demand had time to catch up.

The market is much closer to balance as we enter 2021 and the big bulk wine hang-over seems to have receded. The 2020 harvest was short in California and Washington, too. The market hasn’t flipped, but things have tightened up constructively.

But that structural surplus is still there. The short term balance is more about a short crop and smoke taint issues more than long term strategies. And price is a factor, too, with coastal fruit selling for California appellation prices in many cases. That’s supply and demand, of course, but it only works in the long term if costs adjust to the new price realities.

#2 The Mandela Rule

“They say that time changes things, but sometimes you have to change them yourself.”

I first encountered this saying when I was on a speaking tour in South Africa. I heard it attributed to Nelson Mandela, which pleased me, although the interweb thinks that Andy Warhol said it first. Either way, it seems to apply to today’s wine industry.

Jeff Bitter of Allied Grape Growers advocates a proactive approach to the supply side of the market, for example. Last year he called for growers to take a hard look at their vineyards and pull out marginal vines sooner rather than later. Better to turn the page than to leave fruit unpicked when prices drop too low or demand dries up.

Cost can be addressed, too, at least in some market segments. Higher yields don’t necessarily mean lower quality any more. The same is true for machine harvesting, which addresses both cost and labor availability issues.

There is still a lot of work to do, but it has been inspiring to see the industry rise to the occasion of all the challenges that we face in these “perfect storm” times of pandemic and recession.

#3 Pathways to Success

The “State of the Industry” panel concludes with a brief presentation by market guru Danny Brager where he spotlights “best of the best” wine firms that have been especially successful in the previous year. The awards are modeled on the Olympic games awards, with bronze, silver and gold medals. It is always fun to try to guess who will get the prize.

The specific criteria for the gold medal means that it generally goes to big firms that have achieve high levels of both absolute and relative sales growth. This years winners were Riboli Family, Delicato Family, Deutsch Family wineries. If you are familiar with these firms you know that they are very different in terms of their product lines and marketing strategies. Their success proves what Jon Fredrikson always told us when he was on the State of the Industry panel: there are no one-liners in wine.

This point is even clearer if you look at the wineries that received silver medal recognition this year. Regional, national, and international wineries. Iconic brands alongside firms that fill private label needs.

What do they all have in common? Wine, of course, but it is obviously more than just fermented grape juice that connects this diverse list of successful wineries. Let me make this a discussion question. Give this some thought and leave a comment below with your ideas.

I don’t want to discount the hardships that many wine businesses have faced. I know a number of wineries, distributors, and sellers that have been forced to close their doors or dramatically reduce operations. I wish there was more support available for these businesses and that counter-productive policies like the U.S. wine tariffs could be reversed quickly. But Danny Brager’s lists of most successful wineries suggests there are still good opportunities for growth if you are in the right place and the right time with the right products and strategy.

#4 Bonus insights

Bait-and-switch alert: there were a lot more than three key points presented at the State of the Industry session last week. Herewith a few of them in quick-fire bullet format.

Cab Bubble Deflates? One of my concerns in recent years is that Cabernet Sauvignon has been over-planted and that the bubble would eventually pop. Well, it looks like the Cab bubble is losing pressure, at least in California (I’m not sure about Washington state) as some vines are being replaced with other grape varieties. But …
Pinot Noir Over-Inflated? All the attention to Cabernet may have hidden irrational exuberance in Pinot Noir plantings. Is this a bubble ready to burst?
Sauvignon Blanc the Next Big Thing? Sauvignon Blanc sales have been growing steadily for many years. Initially this phenomenon was associated with New Zealand wine imports, but now it seems to be a broader trend. Will growers move out of over-supplied Cab and Pinot and away from Pinot Grigio to Sauvignon Blanc?
It’s a War Out There. Both Danny Brager and Jon Moramarco made an important point about the nature of competition strategy. Wine, beer, and spirits are all segments within the broader beverage alcohol category. It is typical to think about competition within each segment: wine vs wine, beer vs beer, etc. It makes sense that you would target customers of close substitutes for incremental sales. But really the bigger war is between and among the segments: wine vs beer (wine does well here) and wine vs spirits (a tougher battleground). Overall beverage alcohol sales have been and likely will be flat, it is a battle for market share.
And the Winner is … Hard seltzer! Hard seltzer sales have boomed in recent years and continued to rise during the pandemic, the fastest-growing slice of the beverage alcohol category. What’s the appeal? Single serving size. Low calorie, low alcohol. Maybe even a healthy image (because they have low alcohol, hard seltzers feature nutritional labels that most wine brands don’t have). The low alcohol sweetish wine segment has done very well — Stella Rosa sales have boomed, for example, and Indiana-based Oliver wines have thrived here as well.

That’s all for now. Looking forward to 2022 when (fingers crossed) we will be able to meet in person in Sacramento in the new and improved convention center.

Wine Future 2021, Idaho Wine, The Unified: Wine Economist World Tour

January 5, 2021 By Mike Veseth in climate change, coronavirus, economic crisis, globalization, recession, Shameless Self-Promotion, Unified Wine & Grape Symposium, wine, wine markets Leave a comment

The Wine Economist World Tour is back on the virtual road in 2021. We hope for the return of in-person events before too long, but until that’s possible virtual events will do very well. Here are the first three stops for the new year.

The Unified: State of the Industry

The Unified Wine & Grape Symposium (January 26-29, 2021) is going virtual this year, including both the seminars and the amazing trade show. It will be quite an experience.

The program addresses a host of important issues, with special attention to wildfire threats and diversity and inclusion initiatives. Several sessions analyze changing wine market conditions including the State of the Industry session on Wednesday, January 27. Danny Brager, Glenn Proctor, Jeff Bitter, and Jon Moramarco join me on the virtual panel.

Idaho Wine Commission: State of the Industry

The Idaho Wine Commission’s annual meeting goes virtual this year, too, with half-day sessions on February 22-23, 2021. This is the third time I’ve spoken at this event and I am sad that I won’t be able to visit Boise in person to refresh friendships, exchange insights, sample great Idaho wine, and enjoy Boise’s amazing Basque food scene.

I will anchor the first day’s program with a special take on the State of the Industry. Greg Jones, the world’s foremost viticultural climatologist, will speak the following day. Economic change, climate change. Food for thought for Idaho’s dynamic wine industry.

Wine Future 2021: Challenges & Solutions

WineFuture 2021, an incredibly ambitious international event, will happen on February 23-26, 2021. This big international conference boasts an all-star cast. I will lead a panel on the economics of the crisis on February 23.

The folks behind Wine Future 2021 think big. The theme of the first day is the four crisis challenges facing wine (and the world): climate, economy, pandemic, and inequality. Day 2 focuses on solutions and sources of inspiration. The final two days look to the future from many different points of view.

Wine Future 2021 has been hosting a pre-conference webinar series since November to get ideas in the air and discussion flowing. You can view previous webinars (including one I did with Rabobank’s Stephen Rannekleiv) and register for upcoming broadcasts on the Wine Future 2021 Webinar home page.