Category Archives: wine distibution

Big Apple Report: Where’s Washington [Wine]?

March 27, 2012 By in Wall Street Journal, Washington wine, wine distibution, wine markets 8 Comments

Waldo is easier to find than Washington wine in NYC.

Lettie Teague wrote a Wall Street Journal column back in 2010 called “Stalking the Wines of Washington.” In it she complained about her difficulty finding Washington wines in the New York City area. There’s just no demand, she was told, so wine shops don’t bother with Washington wines.

The Incredible Story

That’s incredible, I thought as I read Lettie’s story, since so many Washington wines are both very good (served at White House dinners, we are told) and very good values, too. Hard to believe that smart New Yorkers aren’t interested in these wines! So I decided to do a little fieldwork on the question during my recent East Coast speaking tour to see if the situation has changed.

OK, am I the only one who thinks visiting out-of-town wine shops is a fun way to spend the day? In this case I headed for the Morrell & Co store in Rockefeller Center and the Sherry Lehmann shop a few blocks away. Two wine shops is a very small sample size, so this study isn’t statistically significant, but these are the flagships of the region’s wine fleet, so surely they reveal something. Here’s what I found.

Both stores were smaller than I expected given their fame  — I guess I didn’t factor in Manhattan retail floor space costs when I imagined what they would look like. But the number of bottles isn’t as important as the quality of the selection (that’s the key to Costco’s wine selling success).

New York State of Wine

My attempt to find Washington red wines in these stores was not very successful. I managed to locate a wine from Betz Family Winery at Morrell and a modestly priced red blend from Claar Cellars at Sherry Lehmann. And that was it for Washington reds. I might have missed a bottle or two (I blame my bifocals), but even if I did the selection was pretty limited. I didn’t check the white wines — maybe there were more over there.

There were plenty of French and Italian wines. Sherry Lehmann’s Burgundy selection made my mouth water and my credit card cry. Lots of great wines from Bordeaux, too. But where was the Washington wine section? Nowhere. No California wine territory, either. They were all grouped together as “American wines,” suggesting that Sherry Lehmann’s customers might be more interested in the fine points of French geography than domestic wine terroir.  And apparently almost completely uninterested in Washington. Why?

Supply Side Theory

I talked a bit with a friend who knows New York wine business pretty well and we came up with a couple of theories. Maybe it is a supply-side problem — distribution?

Yes, I suppose that could be the case. Distribution inefficiencies usually affect the “middle market” the most. Iconic wines (and I’d put the Betz wine in this category) get distribution and so do larger volume wines (Chateau Ste Michelle, Columbia Crest, etc), but in-between producers (like Claar Cellars) get squeezed out.

As you can see, my “small n” obversations aren’t completely consistent with a supply-side explanation, although you cannot rule it out, either. So what about demand?

Demand Side Theory

Maybe the demand just isn’t there as the shop owners told Lettie Teague. So why not? Well, here’s where a second set of observations is useful. While I was looking for Washington wines I also kept an eye out for Oregon Pinot Noir. And, while the Washington wines were all but invisible, I discovered a handful of interesting Oregon Pinots in each store.

So now the question gets more interesting. Why is Oregon part of the New York state of wine but not Washington? Here my NYC friend (who is a Washington wine fan) offered another theory: Oregon stands for something concrete in the crowded New York market, but Washington doesn’t.

When you think of Oregon wine you think of Pinot Noir because that’s its signature wine variety and demand-side market focus. But what do you think of when you think of Washington? Well, that’s the problem because Washington makes so many great wines but lacks a signature variety or style. I’ve written about this situation before and I don’t want to beat a dead horse here, but you can see how it can be a demand side problem.

Every NYC customer who asks for Oregon wine is probably thinking Pinot, but if ten customers ask for Washington wine they are unlikely to request the same wines or types of wines or grape varieties. It’s easy to see how a critical customer mass for Oregon Pinot Noir might appear but not for any particular Washington wine.

The Gravity Theory

A final theory comes from the economics literature — you might call it the “home court advantage” theory but technically it is based on the “gravity model” that is used to analyze international trade patterns. The gravity model holds that geographical proximity is a strong predictor of trade patterns — the closer countries are to one another the stronger the force of  “economic gravity” that pulls their economies together.

I see the home court advantage at work here within Washington State and it is widely observed that while the wine industry is global, wine consumption has a strong local bias. If this theory applies to the New York case, then it suggest that Europe is New York’s home court and that the pull of French gravity is especially strong. Given the many different languages that fill conversations on cosmopolitan New York City streets, this doesn’t seem like a crazy theory at all.

Convergence Zone

A quick analysis of the Morrell and Sherry-Lehmann websites reinforces my on-the-scene observations and adds more data since the warehouse selection is so much bigger than the Manhattan stores.

I found more Washington wines in the online stores, but I was still surprised by the relatively  limited selection. And I was surprised as well that Washington and Oregon had about the same number of wines on the sales lists despite Washington’s vastly greater number of wineries and total production. Burgundy (1122 wines on the Sherry-Lehmann site) has many more wines than California (612), Oregon (31) or Washington (30).

The particular wines listed on the Sherry Lehmann site suggest that the distribution theory is part of the explanation. More high volume Chateau Ste Michelle and Columbia Crest wines and some famous name icons, but a thinner middle market selection. It looks to me like all three forces are at work here, making this a particularly complex and difficult situation.

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Readers: use the comments section below to provide your own observations and theories.

Sizing Up Supermarket Wine

May 9, 2011 By in wine distibution, wine markets 4 Comments

I have seen the future of wine. It’s on display right now at your local supermarket — unless of course you live in New York or one of the several other areas where misguided state law forbids the sale of wine and food in the same establishment. Your day will come for supermarket wine, my friends, but not quite yet.

I don’t mean to suggest that supermarket wine is the only direction that wine is heading, but it is a very powerful force. As the world of wine broadens and American wine drinking culture becomes more firmly established in the socio-economic mainstream, wine sales seem likely to become even more concentrated in the vectors where everyday consumer purchases are made. Supermarkets aren’t the only important wine selling space, but they are one of the most dynamic.

The Rise (and Rise) of Supermarket Wine

It just makes sense. The U.S. did not achieve its current status as the world’s #1 wine market (ranked by total not per capita sales) because more people are spending time at specialist wine shops or liquor stores, although I am sure that is happening (note the success of businesses like BevMo and Total Wine). The increased availability of wine at supermarkets, Costco and Sam’s Club and now also drug store chains (all included in my broad definition of “supermarket wine”) is driving the market.

A recent article on Shanken News Daily notes that Yellow Tail wines have been able to keep their U.S. sales high despite wine market problems generally and Australian wine problems in particular by increasing drug store sales to offset declining purchases in other retail segments. Drug stores? Wine next to lipstick, baby wipes and band-aids? Walgreens wine? Yes! Walgreens has even launched a house brand called Colby Red, a California red blend supplied by Treasury Wine Estates.

The British led the way in supermarket wine and for good or bad the world has followed their path. Wine is attractive to grocery store owners because of its relatively high retail margins and its ability to sell other goods at the same time.  The British pioneered house brand supermarket  wines and that trend is continuing, too. Here is the U.S., most major retailers have their own wine brands (generally made for them by large scale producers such as The Wine Group) – even Walmart and 7-Eleven.

In Britain, the venerable Oddbins chain has closed its last store, a  victim in part of pressure from Tesco and other supermarket chains. (Tesco is now the world’s largest retailer of wine.)  Supermarket sales are seen as the key to rising consumption in China, too, although they are not the only growth area in this rapidly maturing market. Torres is expanding its Everwines store chain, for example, an indication that specialty shop sales are rising as well.

Half and Half

Supermarket wine is one of those “is the glass half full or half empty” issues. It is hard not to appreciate how much supermarkets have done to promote wine (where they are allowed to do so), especially compared with the dismal selection and service of just a few years ago, but it is also easy to dismiss them as being part of a trend towards simplified wine from corporate makers.  I think both trends exist: supermarket wine is a business and so for the most part it follows established business practices. But wine consumers are complicated people who appreciate diverse offerings, so consumer interests are strong, too.

I wanted to take the measure of a “typical” supermarket wine department and I was fortunate to get some help. Our local business district partnered with my university a few weeks ago to organize a “Spring Zing” festival designed to get students and their visiting families to connect with local retailers.  Our neighborhood Safeway hosted a book signing by my favorite cookbook author Cynthia Nims and invited me to give a talk in their wine aisle.  This was my first supermarket gig (but I hope not my last), so I felt a little like Roger Miller’s “King of Kansas City” – a  #1 supermarket attraction (see video at the end of this post).

About a dozen students, parents and random curious Safeway shoppers met me for the talk.  I briefed them about supermarket wine then turned them loose to do some fieldwork. I had questions for them to answer — a treasure hunt! How big is the wine section (how many different wines are sold)? How many different countries are represented? How many different U.S. states? And what are the cheapest and most expensive wines on sale? How, in short, does supermarket wine measure up?

Big and Small

They found the answers pretty quickly. Total number of wines? About 750 according to two economics majors (economists are good with numbers!). Is that a big number? No — and yes. No in the sense that it is a small number of SKUs compared with the tens of thousands of wines that are available. This is a tiny slice of the pie in that regard. But it is a big number compared with, say, Costco, which stocks fewer than 150 different wines at any one time. And of course it is a big number compared to any other part of the store. Where else in a modern supermarket can you choose from among this many different options?

A lot of the wine sold here comes from a few large producer portfolios — Gallo, Constellation Brands, The Wine Group, Ste Michelle Wine Estates and so on. So in one sense the diversity is less than it might initially appear and that’s why some enthusiasts, who want to see more small producer labels, are disappointed in supermarket selections. But there are also many wines from high quality medium sized wineries (Hedges, for example, and Frog’s Leap at this store) so it would be wrong to say that supermarket wine is only limited to big players. And some of the big dogs offer real diversity, too — the wines don’t all come out of one big vat in Lodi!

Where in the world does the wine come from? This Safeway store had a strong regional bias in favor of Washington and California wines with smaller  selections from other areas. The usual suspects showed up. Twelve foreign countries (Australia, New Zealand, France, Germany, Italy, Spain, Portugal, Chile, Argentina, South Africa, Greece and Japan — if you count plum wine) —  and four U.S. states: Washington, Oregon, California and New Mexico (Gruet sparkling wine).

High and Low

It didn’t take very long for my crew to sniff out the highest and lowest priced wines and the difference was amazing.

Initially they focused on Quail Oak, Safeway’s house brand wine (made by The Wine Group, I believe) that was in Two Buck Chuck range at $2.99. But then they got out their calculators and discovered that they could purchase 5-liter bag-in-boxed Franzia wine for even less — about $2 per bottle equivalent.  That’s the low tide price point at this Safeway.

The high price? A bottle of vintage Champagne was priced at more than $300 (but only about $220 with your Safeway Club Card discount). It is even cheaper if you buy a six-pack and take the extra 10 percent discount. Very expensive for supermarket wine! But it makes the bottle of Dom Perignon sitting next to it in the display case seem relatively affordable.

The most expensive wine is 100 times the price of the cheapest one! What a tremendous range of price points! I think it is probably impossible to find an equivalent gap between low and high price for products in the same overall category anywhere else in the store.

The supermarket wine phenomenon is very interesting to me because it provides clues as to how the American wine scene is changing. While it is obviously wrong to draw general conclusions from a single specific case, I do think this one store is very interesting in terms of the questions that it raises about price, selection … and the future of wine.

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Reading over this post it occurs to me that a valid criticism would be that I am not demanding enough of supermarket wine. I seem to accept supermarkets for what they are and not press them to offer even more choice and diversity. I think this is half true — I do accept that supermarkets are subject to economic constraints that define their business model. I acknowledge that, as key wine sales vectors, they have power to shape the wine culture if they want to. I am optimistic that they will do so in response to changing consumer preferences. The typical Safeway wine department profiled here is enormously different from what I would have found ten or fifteen years ago. Who knows what I will find ten years hence?

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Thanks to Safeway for inviting me to talk about wine in their store. Thanks to everyone who showed up and participated in my wine treasure hunt game.

Economic Effects of Washington Liquor Initiatives

October 12, 2010 By in alcohol, Costco, Economic impact, Family Wineries, washington wines, wine distibution, wine law 10 Comments

This is the third in a series on initiatives to liberalize Washington’s alcoholic beverage laws  (click here to read the first and second segments). How would Washington Initiatives I-1100 and I-1105 affect wine makers and wine consumers? Let’s look at wine makers first.

Wine producers in Washington are not united either in support of or opposition to the initiatives. One industry group, The Washington Wine Institute, publicly opposes both initiatives, for example, while the Family Wineries of Washington State supports I-1100 but opposes I-1105.

Winners & Losers

Both initiatives would create more avenues of competition for wineries by removing state restrictions that prevented discounted prices, negotiated payment schedules and so forth. Based on my conversations it seems that some wineries would welcome the opportunity to compete  using a fuller range of business strategies. They would like to be able to go after the business they want and to reward retailers and restaurants that carry the full range of their products or who make long term commitments.

Other wine makers are concerned that they may be disadvantaged in this new environment because they lack the resources or expertise to compete effectively. Interestingly, it is not just small wineries who want to avoid competition and not just large ones who embrace it. Obviously it is a complicated matter.

One wine maker candidly told me that it is hard to know if the gains will outweigh the losses.  This person saw obvious areas for new business expansion but realized there would be negative effects on margins and the need for more capital to accommodate extended payments. I sensed a very pragmatic attitude:  wine is a business and business people have to cope with whatever is thrown at them whether it is Mother Nature (a late harvest) or a change in state liquor laws.

My conversations reminded me of Olivier Torres’ discussion of the difference between French and American business strategy in his book The Wine Wars. American entrepreneurs, Torres says, look for new opportunities, taking risks, while the French business strategy is more about fending off threats. This is an oversimplified stereotype, of course, but it does seem to capture a bit of the wine war raging today in Washington state, where those with “French” attitudes are not necessarily from France.

Will Small Wineries Get Squeezed?

Television ads like the one I have inserted above suggest that small wineries would be especially hard hit by the new laws. A local news analysis of this ad raises some doubts about this claim (see  this King5 report). Will small local wineries get crowded off the shelf? Here’s my brief analysis.

I do think that large wine companies will have an advantage if the law is changed, but they have obvious economic advantages now, so this is nothing new. I would not be surprised to see big companies (Constellation Brands, Gallo, etc) increase their relative share of retail shelf space since they have the resources to offer discounts and incentives.

It is also possible that spirits companies and distributors will bring associated wine brands with them as they rush to fill their newly opened retail market niche if the initiatives pass, adding to the “crowding out” effect.  Retailers are trying to streamline their operations and reduced the number of suppliers they deal with, giving “drinks” companies that can supply wine, beer and spirits an advantage.

This effect will differ by type of retail account, of course, and be different for fine dining versus casual dining restaurant sales. In the supermarket segment, for example, you can already see differences in the relative incidence of the big producer portfolios in Fred Meyer (Kroger) and Safeway stores compared with regional chains like Metropolitan Market.

Although small wineries might get somewhat less shelf space, they certainly will not disappear from wine shelves and restaurant lists. Wine enthusiasts value diversity and smart sellers fill their shelves accordingly. That’s why a typical upscale supermarket offers 1500-2500 wine choices, at least ten times the number of options in any other product category. Retail wine margins are high and sellers profit by catering to their customers’ desire for a wide range of choices.

I think the competition among smaller winemakers will be more of a factor than between the big corporations and the small family wineries. There are hundreds of small wineries in Washington state all seeking a place at the retail table. Right now it is pretty difficult for the maker of a $40 Walla Walla Syrah to get shelf space (or distributor representation) and many producers are sensibly reconfiguring their business plans to focus more on direct sales. This will remain a good strategy if the initiatives pass, but makers who want to compete for shelf space will have more tools at their disposal.

And That’s A Good Thing?

Bottom line: small wineries will get squeezed by the big boys, but other small wineries are the real competition (hence the lack of a consensus among wine makers) and the initiatives will make this competition much more intense.

Is this a good thing? Well, it will probably be good for many consumers who will benefit from lower wine prices. They will likely have more (but different) wines to choose from too. Whether the new choices will be better is bound to be a matter of taste. If, as some have suggested, big box drinks retailers Bevmo and Total Wine open outlets in Washington it will change in significant ways the market terrain.

At the Ballot Box

How am I going to vote? The issue is complicated enough that I honestly haven’t decided yet. I am unlikely to vote for I-1105, however, since it seems like a stumbling half-step towards market liberalization.

I find the wine market aspects of I-1100 appealing and, as an economist, I am programmed to believe in the benefits of competition, but I am still concerned about the liquor law changes. I don’t know how making spirits cheaper and more readily  available will help solve the public health and safety problems associated with liquor consumption. Many will disagree with this view and I respect their opinions.

I guess I’m going to have to weigh the pros and cons before I cast my ballot just like everyone else.

Anatomy of the Costco Initiative

October 6, 2010 By in alcohol, Costco, Washington wine, wine distibution, wine law 3 Comments

Second in a series on initiatives to liberalize Washington’s alcoholic beverage laws (click here to read the first segment).

A recent article on the Wine Spectator website does an excellent job of detailing the specific elements of Initiative 1100 (which I call The Costco Initiative) and I-1105 (a.k.a. The Distributor Initiative) as they pertain to wine. It is required reading for anyone interested in this issue.

For my part, let me approach the question in a different way: how would the initiatives affect Costco (and other wine retailers), wine distributors, wine consumers and wine makers in Washington state?  This post looks at retailers and distributors. I’ll address consumers and winemakers next time.

Costco’s [Big] Dog in the Fight

Let’s start with Costco, which is appropriate since it is a major backer of I-1100.  How would I-1100 affect Costco? Well, the most important factor is that it would allow Costco and other retailers to sell hard liquor, which is currently a state monopoly in Washington.  Other changes are important, but that’s the big one in terms of economic impact in my view.

What about wine? Not surprisingly, Initiative 1100 would allow Costco to be a much more efficient wine retailer.

First, Costco would be able to purchase wine directly from producers and could take advantage of more efficient central warehousing of alcoholic beverages. Costco would be able to negotiate volume discounts from producers and could benefit from other promotions (wholesalers must maintain uniform prices under the current law and are forbidden from providing retailer incentives). Costco could also negotiate payment schedules — current law requires that retailers pay for wine and beer at the time of purchase.

These changes would make the process of selling wine pretty much the same as other products by removing current restrictions. Costco would also be permitted to sell space on its wine shelves to producers (much as supermarkets routinely sell shelf space for grocery items), although it is unlikely this would actually happen. Costco does not sell space now in states where this is legal. Rather, like Wal-Mart I think, it simply asks for a lower wholesale price.

Taken together these market reforms would lower the cost that Costco pays for wine, savings that would be passed on to consumers. Costco’s normal mark-up on wine is 15% (17% for own-brand Kirkland Signature bottlings), so Costco’s existing absolute price advantage for the wines it carries would likely grow.

Don’t expect Costco to use these advantages to monopolize state wine sales, however. Costco has great wine prices, but it carries a surprisingly small number of wines at any time — about 100-150 different wine SKUs compared to the 1500-2500 that you can find at an upscale supermarket.

So while Costco wine sales will rise, there will be lots of room for other retailers, too. In fact, there is speculation that the market reforms will draw big box wine/beer/liquor retailers Bevmo and Total Wine into the Washington state market.

It is easy to see why retailers are backing I-1100. Their costs will fall and they should be able to sell more wine, which is a high margin item compared to most other supermarket categories.

 

The three-tier distribution system for beer (and wine).

 

The Impact on Distributors

It is also easy to see why distributors oppose I-1100 and why they back I-1105. Initiative 1100 privatizes liquor sales, liberalizes the alcoholic beverages market and allows retailers to cut out middlemen and purchase directly from wine, beer and spirits manufacturers. I-1105 is similar to I-1100 in most respects, but requires that the distribution step in the three-tier process be retained.

Distributors recognize that the ability of large retailers to bypass them and buy directly from producers and to demand discounts and other incentives is a threat to their business and it is understandable that they would oppose this.

Don’t expect distributors to disappear if I-1100 passes, however. Distributors play a vital role in connecting producers and retailers and, although they might lose some “rents” from their previous legal status, I can see where their role will change and might even expand in some specific areas as the overall wine market grows.

Larger distributors, who already have some economic advantages, might get an added edge if they are better able to offer retailers payment terms. Competition in general will increase, so there may be a shake out in this sector if I-1100 passes.

Fundamentally, I-1100 shifts market from distributors to retailers and will redistribute profits within each group, too. What about the people who make wine and those who drink it? Check back in a couple of days for analysis.

This Changes Everything? The Washington Costco Initiative

October 1, 2010 By in Costco, Washington wine, wine distibution, wine law 9 Comments

Everyone knows that the wine business is highly regulated. In France, for example, very restrictive appellation regulations govern how wine can be made and even more restrictive laws limit how it can be advertised and promoted.

French winemakers sometimes must feel they are fighting a battle with one arm tied behind their backs.

America’s Long Hangover

But they have an advantage over many American producers, who could be excused for thinking that both their arms are immobilized. The American appellation system is not as restrictive as Europe’s, but the complicated web of federal, state and local regulations makes selling wine, especially across state borders, costly and cumbersome. (HR 5034, which would impose additional barriers to interstate wine shipments, would make this problem even worse.)

In my forthcoming book I call this mess the American Hangover. The U.S. wine market has a hangover, but it isn’t from too much wine. It is still recovering from Prohibition. Most of today’s regulations can be traced back to the repeal of Prohibition, when the federal government retained some regulatory powers, but turned others over the states (and in some cases, to local jurisdictions, too) thus creating a mess that is difficult to untangle.

The Swedish Solution

Here in Washington state, the end of Prohibition coincided with two important initiatives. First, the state government seized control of liquor sales under a modified version of the Swedish system.

Sweden instituted a state liquor monopoly in the 19th century (which lives on today in the form of Systembologet) based on the logic that people want alcoholic beverages (and will find a way to get them if they are banned outright), so Prohibition isn’t really feasible. But if liquor sale is in private hands it will be actively promoted because of the money it spins off, leading to increased alcoholism and public health and safety concerns.

A state alcohol monopoly can provide wine, beer and spirits as a sort of public utility – people get the product at a high price  and at some inconvenient to simultaneously discourage but facilitate consumption. No profit incentive encourages marketing and promotion of alcohol. The state has a monopoly on off-premises spirit sales in Washington; beer and wine are sold both in state stores and by private retailers.

At the same time the Washington state spirits monopoly was put in place, so were laws meant to protect state wine producers from out-of-state (read “California”) competition.  Incredibly, the number of wineries in the protected market actually fell as the industry collapsed. Without outside competition to discipline local producers, Washington wine became a least-common denominator product. The typical wine was sweet and fortified (Thunderbird-class wine, if you know what I mean) and early attempts to produce quality wines were hampered by the lack of an active fine wine culture.

This Changes Everything

The bad old days of Washington wine.

Much changed in 1969 with the passage of House Bill 100, otherwise known as the California Wine Bill. This law allowed out-of-state wines more or less equal access to the local market. Cheaper California wines flooded in and people naturally bought them.  Unable to compete in the low end wine market because of their higher production costs, Washington wine makers were forced to turn up market.

The California Wine Bill didn’t destroy Washington’s wine industry, as many expected it would. It redefined it. The result (to skip a few steps) is the industry you see today, where even large scale wine producers (think Columbia Crest) make wines to a high standard and the best wines compete successfully with the finest wines in the world.

The California Wine Bill changed everything … or nearly everything. This market liberalization remade the competitive landscape in Washington and set up the growth we have seen in recent years.

Now Washington voters are being asked to consider another set of potential market changes in the form of two initiatives on the November ballot. You might call them The Costco Initiative (I-1100) and The Distributor Initiative (I-1105). Costco is the largest backer of I- 1100 ($1 million according to a Seattle Times article). Liquor distributors Young’s Market and Odom Southern Holdings are reported to have contributed $2.2 million to back I-1105 (and oppose I-1100).

Pros and Cons

Are these proposed laws a step in the right direction in terms of the wine industry in Washington state? Will they “change everything” like the California Wine Bill and in a positive way? Since so many people have asked me this question I thought I would devote some space here to considering the issues.

Both proposals would eliminate the state monopoly on spirit sales. State liquor stores would close and private retailers would be permitted to sell spirits along with beer and wine. Costco has an obvious interest in this as do Safeway (which has contributed $325,000 to support the initiative campaign) and even Wal-Mart (a $40,000 contribution).

The move from public liquor utility to private market is a big change, since it substitutes American capitalism for Swedish socialism. Many people will understandably decide how to vote based on this factor alone. There really are public health and safety concerns associated with potential increased consumption of spirits and it is a fair question to ask if more active promotion of these products and more convenient access to them is in the public interest.

Even wine enthusiasts like me who consume alcoholic beverages every day may oppose these reforms, since we often claim somewhat self-righteously that wine is a temperance beverage – different from hard liquor. I’ll admit it: if this was just about letting Safeway and Costco sell vodka and tequila, I would vote against both the initiatives.

But there is more to the proposals than privatizing liquor sales.  How would they change the wine (as opposed to spirits) market? Who would win and lose? Look for answers to these questions in the next Wine Economist post.

The Democratization of Wine

August 23, 2010 By in decanter, popular culture, wine awards, wine distibution, wine education, wine markets 1 Comment

As a known “Wagnerian” sympathizer,  I am naturally in favor of the “democratization” of wine. Power to the People is good, Wine to the People is even better (and sometimes equally difficult to manage). Recently I’ve run into a couple of stories that suggest that good wine may be trickling down to the masses in interesting ways.

Le Froglet Wine

The first story comes from Britain, where “wine by the glass” now has a new meaning. I’m talking about Le Froglet wine, which comes in ready-to-drink stemmed plastic cups. The special “glass” is sealed by a patent-applied-for process that replaces oxygen with inert gas before a peel-away airtight foil seal is applied, thus keeping the wine fresh (in the short term) in its unlikely container

The 187 ml serving of French Shiraz (really?), Chardonnay or Rose wine sells for £2.25 at Marks & Spencer stores.  This is wine that you can take anywhere and consume as you please, even if you only want a single glass. It is sort of a wine juice box in functional terms, if you know what I mean, but classier, with a stemmed plastic glass in place of the cardboard box and sippy-straw. I have seen Le Froglet here in the U.S. selling in the $3.50-$4 range.

Expert Opinion?

Le Froglet is noteworthy for several reasons, First, it seems to be very popular in Britain, where it has created a new market category. That doesn’t happen very often.

It has succeeded despite highly publicized expert opinion that the idea of takeaway “cuppa wine” is totally lame. James Nash, the inventor of the packaging and process, appeared on the popular BBC television show Dragons’ Den where supersmart investors took his product and business plan apart brick by brick, leaving him standing in a pile of rubble. Fuggetaboutit, they told him in no uncertain terms.

Interestingly, the people at retailer Marks & Spencer saw the same idea and came to a different conclusion.  They viewed the single-serving glass as a perfect place to put their line of Le Froglet French wines. I suppose with a name like Le Froglet they weren’t taking themselves too seriously. Why not wine by the glass to go? Why not indeed? And so they gave it a try. They seem to be pleased with the results.

An M&S spokesman said: ‘The glasses are merchandised in our ‘Food on the Move’ section, which is obviously the aisle people on the go head to – particularly office workers. ‘We think that they are proving popular with people who want to perhaps enjoy the summer with a glass of wine in the park as part of an impromptu picnic – either after work or for a relaxing lunch.

‘They are also popular with commuters who want to enjoy a drink on the train home from work to wind down. We have found that they are very popular in locations popular with tourists.’  The M&S winemaker, Belinda Kleinig, said:  ‘This is a really exciting step for M&S – our research has shown that our customers really like the greater convenience of lighter weight bottles so we thought we’d take it one step further with great quality wine ready to drink from a glass.’

The Benefit of Low Expectations

I think one key to Le Froglet’s success is that it exceeds everyone’s expectations (except perhaps the grumpy Dragons’ Den gurus). You don’t really expect the packaging to work, for example. You expect the seal to leak or the plastic glass to break. But apparently it works pretty well. Surprise!

And then there’s the wine itself. You logically expect it to be crap since it comes in such a goofy container. Who’d put good wine in something like this? But apparently the wine is surprisingly good. In fact, Decanter magazine recently announced that Le Froglet Shiraz has won a hard-to-get  Gold Medal in its 2010 global wine competition.  The award is actually for the bottled version of the wine, which sells for £5.49.   Decanter’s editor reported that

‘The bottle is a great value find. It’s fragrant and complex, with lots of dark fruit and savoury chocolate. The plastic glass version is a great idea, but given that the bottled version has a screwcap, won a gold medal and works out cheaper per serve, I’d probably buy a bottle and find my own glasses.’

One element of the democratization of wine is making it more convenient and Le Froglet certainly does that. Of course this convenience comes at a price. One £5.49 bottle of Le Froglet holds four £2.25 single-serving glasses, making the bottled product the  better buy. But that glass-bottle price ratio is about what you find in most restaurants, where the rule of thumb is that the retail price of a glass of wine is equal to the wholesale cost of the whole bottle.

Good, cheap and convenient seem to form a trilemma with wine — difficult to get all three at once.  Cheers to Le Froglet for making decent wine more convenient, even if it isn’t really cheap.

Burger, Fries and Syrah?

What could be more democratic than fast food wine? Sounds perfect, but it is hard to imagine a fast food restaurant that could find a way to serve wine here in the U.S. with our Byzantine regulatory system.

So you can appreciate my pleasant surprise when I was able to order wine with my dine-in meal at the Burgerville fast food outlet near Vancouver, Washington. Burgerville is a popular Oregon-based fast food chain that specializes in fresh, local and sustainable products.

Burgerville is designed to exceed your expectations about what a fast food meal can be and if you pay a bit more for the food you probably get more, too. The restaurants have always been very busy when I have visited, so people must think they are a good value. I certainly do.

Here is the sales receipt from our meal at the Salmon Creek Burgerville (the only store in the chain to offer wine by the glass so far). I passed on the upscale burger / fries / shake part of the menu this time to take advantage of seasonal offerings: a mound of Walla Walla Sweet Onion Rings (yum!) and two Full Sail Amber Ale Battered Albacore fillets with a side of Oregon cranberry-studded summer slaw. My beverage of choice, a $5.95 glass of flavorful and refreshing A to Z Wine Works Oregon Pinot Gris. Heaven! Fast food taken to a new level.

Burgerville offers three red wines and three white wines by the glass at this location priced at $5.95 and $6.95. I think I’ll have a glass of the Syrah with a bacon cheeseburger on my next visit!

Small Steps [in the Right Direction]

The wines sell pretty well, I was told, which is of course what I hoped to hear. The Salmon Creek store is testing the concept of what you might call premium fast food wine. This store was apparently chosen because it has a large and well organized dine-in area that made it possible to meet regulatory requirements.  (Don’t look for wine at the drive through window just yet, although with Le Froglet I suppose it isn’t completely out of the question!).

The democratization of wine?  We’re not there yet — wine is still more difficult to buy, sell and consume than it needs to be — but Le Froglet and Burgerville show what we are headed in the right direction. Wagnerians, rejoice!

Vinonomics: The Mouton Cadet Index

August 10, 2010 By in Economic impact, exchange rates, Supply and Demand, wine distibution, wine price 6 Comments

Richard Hemming, whose writing appears on the  Jancis Robinson website, has invented the Mouton Cadet index to measure international differentials in wine prices. It is an interesting project that is worth following.

Hemming’s price index, which he is calling Vinonomics (in homage to the Freakonomics craze), works like this. First he selected a high-volume wine that is in very wide international circulation to serve as the one-item “market basket” for his international comparisons. Mouton Cadet, the ubiquitous Bordeaux wine, is a great choice since it is so widely distributed (a “15-million-bottle, 150-country brand distributed from Andorra to Zimbabwe,” according to Hemming).

Mouton Cadet may not be the wine sold in the most different countries — Moët & Chandon Champagne would be my pick for that honor — but using Mouton Cadet keeps the Big Mac spirit of tracking the price of an everyday product, not a luxury good.

Sky High in Seoul

Hemming then searched the internet and other sources for prices of Mouton Cadet in as many countries as he could. He converted these prices to Euro, USD and GBP at market exchange rates and published them on the website. (He is hoping that readers will send in additional price data to help complete the table.)

The price differentials that Hemming finds are quite large.  The French ‘home country” price for Mouton Cadet is given as EUR 9.55, which is incredibly more than the reported price of the same wine in the United States (USD 7.99 or about EUR 6). Within the Eurozone, where trade is allegedly free, Cadet’s price runs as high as EUR 19 in Austria and EUR 21 in Italy. So much for the “Law of One Price!”

What’s the cheapest place in the world to purchase Mouton Cadet? So far Hemming’s low price leader is the U.S., where French wines struggle to sell in a crowded and very competitive market, followed by Hong Kong (EUR 8.56).

The most expensive? South Korea (EUR 26), Brazil (EUR 21.5) and Italy (EUR 21). The difference between the high and low price is stunning. It is easy to explain South Korea’s high price in terms of transportation costs, regulatory expenses and multiple middleman markups, but the high price given for Italy is difficult to understand. Hard to know who would pay so much for Cadet in Italy.

Bordeaux with your Big Mac?

Hemming’s research project is based on  the Economist’s famous Big Mac Index (BMI), which tries to measure the relative purchasing power of different currencies by comparing the local prices of McDonald’s ubiquitous hamburger.  Here is a table showing the index as of July 2010.

The table shows that Japan and Australia are very close to Purchasing Power Parity — the condition where a U.S. dollar has the same purchasing power abroad (when exchanged at market rates) as at home.  The dollar cost of a Big Mac is approximately the same in all three countries.

Norway’s currency is very over-valued according to the BMI.  A Big Mac that sells for USD 3.73 in the U.S. costs a whopping USD 7.20 (converting at market exchange rates) in Oslo. The high cost of buying a Norwegian Krone contributes to the hamburger’s high dollar price there.  The Swiss Franc is almost as over-valued — a Big Mac costs the equivalent of USD 6.19 in Geneva.

Hong Kong and China have undervalued currencies by this measure. A Big Mac costs less than the equivalent of USD 2.00 there. The harburger is cheap in part because the currency is so cheap in these countries.

Wine vs Burgers

The Big Mac index is far from a perfect measure of relative purchasing power, but it is not a bad guestimate because Big Macs are standard products with easily discoverable prices and most of the cost of producing a Big Mac takes place within the country in question. I’ve found that if the BMI says a country’s currency is over-valued then it probably is, although not necessarily by as much or little as the index suggests.

The Mouton Cadet index is very interesting for what it tells us about wine prices, but it is probably less useful as a measure of PPP. The wine, of course, comes from France unlike the locally-produced burger ingredients and the local price in South Korea, for example, is influenced by that cost basis (adjusted for exchange rate effects) plus transportation costs. The biggest “local content” factors are the local taxes and  wholesale and retail markups within South Korea, which are probably quite high.

Mind the Gap

At this point the Mouton Cadet index is most interesting to me for the questions it inspires (I’ve always said that questions are more interesting than answers). Who’s buying that EUR 21 Cadet in Rome (and are they interested in buying a bridge I happen to have for sale?)

What accounts for the high price in South Korea? The exchange rate is certainly  part of it. The South Korea Won is undervalued relative to the EUR according to the BMI. A Big Mac costs USD 2.82 in Seoul and USD 4.33 in Paris — a 50% price differential. The exchange rate therefore might explain 50% of the price gap between the Mouton Cadet price in France and South Korea. What accounts for the rest? (And does that fact that South Korea has no substantial domestic wine industry that I am aware of affect the mark ups on foreign wines?)

And what about Brazil? The Euro is actually  undervalued relative to the Brazilian Real according to the Big Mac index, and so the exchange rate is not necessarily a factor in Mouton Cadet’s high price in Rio. What other factors account for the big price gap?

I hope Richard Hemming continues with this project. It would be interesting to have data for additional countries (Japan? Russia? India?) and to see how the rankings change over time and relative to Big Macs.

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I’d like to encourage interested readers around the world to send Hemming local store prices for Mouton Cadet so that he has better data both for international comparisons and to get a sense of intra-country price dispersion.