Digital [Wine] Dreams

February 12, 2010 By Mike Veseth in technology, Tesco, wine distibution, wine markets 5 Comments

It is probably no surprise that the wine industry has become very interested in figuring out how to use electronic media to draw consumers into the wine market and intensify the relationship. Much of the focus so far has been on social media vectors such as Facebook and Twitter, which connect consumers and producers and facilitate conversations of various sorts.

For what it’s worth, insiders believe that CellarTracker, the online wine community and cellar management program, has had the biggest impact so far. Click here to read Jancis Robinson’s analysis from today’s Financial Times.

Wine’s digital dreams go beyond social media, however. I’m impressed with Tesco’s smart phone wine app, which I have written about before. My college class was awed when I showed them this video of the wine app in action.

Now Microsoft has developed its own touchscreen tabletop wine program for restaurants and bars to help consumers get more involved in their wine-by-the-glass choices (and to keep them entertained until their wine arrives, I suspect).

(I remember when tables like this held quarter-eating video games like PacMan. Back to the future!)

Leave it to the French, however, to really think outside the bottle and box. Here is their vision of the digital [wine] dream.

(I wonder what Sarkozy thinks of this! He seems to want to make wine less — not more — accessible.)

I think we are in the early stages of understanding which of these digital wine ideas will catch on as a way to educate and inform consumers and create a more personally satisfying and commercially successful wine experience. My guess is that we will have to explore many blind alleys before we find the right approach.

So keep your eyes open for new ideas — and pass me that little USB spigot. I want to download some Brunello.

Who Sells the Most Wine?

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

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

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

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

Wine, wine – everywhere.

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

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

By Land, Sea and even Phone

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

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

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

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

New Bottles for New Wine

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

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

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

Extreme Value Wine Goes Mainstream

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

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

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

Searching for Extreme Values

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

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

How can they charge such low prices?

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

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

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

Mystery Wine

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

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

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

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

Unexplained Tales from Down Under

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

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

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

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

Prestige Wine at Extreme Value Prices

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

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

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

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

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

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

Cracking the Coffee-Wine Paradox

October 19, 2009 By Mike Veseth in coffee, decanter, Supply and Demand, wine distibution, wine markets, wine price 3 Comments

My last post, Starbucks and and Coffee-Wine Paradox, raised questions about the relative price of wine. We think of coffee as being expensive, especially coffee drinks at Starbucks and other gourmet espresso bars. But compared to wine they seem like a bargain.

You can get an excellent coffee drink for less than the cheapest glass of on-premises wine. And the price difference between generic coffee and the best (a factor of 16 according to a Decanter article) looks great compared to wine, where the cheapest bottle costs a couple of bucks and there’s almost no upside limit.

Coffee and wine are both simple quotidian pleasures (or should be). Why are their relative prices so different? Several readers and colleagues offered answers to this question.

Cost Plus Wine

Suggestions (click on the article link above and scroll down to the comments section) focused on cost differences . Coffee is cheaper to ship and store, for example, and as Rob Boyd pointed out coffee isn’t typically aged for years like red wine, which increases cost.

Wine is typically bottled at the source, so to speak, which also contributes to the cost difference. Weight gets added relatively early in the wine supply chain whereas coffee gains weight at the point where it is combined with water, brewed and served — a real advantage. “If coffee was brewed in Colombia and then shipped to Starbucks around the world,” Steve DeLong wrote, “the price would be astronomical.” (See note below.)

Steve also had the insight that, while Starbucks-style coffee products are pretty labor intensive to make, this cost also comes at the final stage of production, whereas wine’s high labor costs come much earlier and are magnified by multiple mark-ups in the distribution system. An additional dollar of labor in the cellar translates to maybe $2 higher retail price for wine here in the US with our three-tier distribution system. An extra dollar of barista wage cost at the end of the coffee product chain has less of an impact on price.

Cost and Price

The comments I’ve received go a long way toward unraveling the paradox. As I expected, however, most people try to solve the puzzle on the cost side — focusing on why wine costs are relatively higher than coffee costs. These are good answers, but it is important to consider the demand side, too. Everyone knows that some prices are determined by production cost, but others are dictated by what people are willing to pay.

Cost rules in highly competitive markets, where products are undifferentiated and good information is readily available. Willingness to pay is more important in imperfectly competitive markets with highly differentiated products and asymmetric information. The markets for generic coffee and wine fall into the first category, fine wines and specialty coffees into the other.

What Will You Pay?

Why do highly-rated wines cost so much to buy? Production cost is a factor, particularly for generic coffee and wine, but it alone doesn’t explain the big price gap between the bottom shelf and the top. Fine wine and gourmet coffee cost so much because people are willing to pay these prices — and they lack the confidence to pay less in some cases because they associate lower price with lower quality (or maybe lower status).

So I think Steve Kirchner is on to something when he points to differences in marketing between coffee and wine. Gourmet coffee, Steve argues, is a relatively new phenomenon and it is certainly true that the range of choices is still limited compared to wine.

Closing the Coffee-Wine Gap

How many different coffees does your grocery store sell? Probably a few dozen at two or three price points. How many wines? Probably one or two thousand at many more price points!

Fine wine is more complicated than fine coffee and there is more uncertainty surrounding it. This makes the market more “imperfect” in the jargon of economics, and price and cost are more likely to deviate.

Will coffee producers ever catch up to their wine-making cousins? Not soon, I suspect, but I think they will close the gap!

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Note: Steve’s comment about brewing coffee and then shipping it reminds me of a story I picked up back when I did tax policy economics.

When coffee was first introduced in Great Britain, it was subject to high excise taxes intended for luxury goods. Coffee shops reacted by adding non-coffee ingredients to the brew to stretch their precious grounds. Adulterated coffee. Ugh.

The tax authorities, seeing a revenue shortfall, responded by ordering all coffee to be brewed in designated central canteens, then transported full-strength to the shops and reheated there. Twice cooked coffee. Ugh again! More expensive, of course, and adulteration was still possible, but at least the tax was paid.

Thus did high taxation ruin Britain’s taste for coffee, which has only recently recovered thanks in part to market entry by quality sellers like Starbucks.

Restaurant Wines: Good, Bad and Ugly

September 21, 2009 By Mike Veseth in brands, Constellation Brands, economic crisis, French Rabbit, Gallo, restaurant wine, Supply and Demand, The Wine Group, wine distibution, wine price, wine research, Yellow Tail 1 Comment

Many people have written to me over the years expressing their dismay at the sorry state of restaurant wine. Usually they complain about high restaurant prices and ask how they can possibly be justified. They are seldom satisfied with my answer — restaurants charge high prices because people will pay them. Now, however, the critique has shifted to the wines themselves and what they reveal about wine in America.

What Does American Really Drink?

My recent post on “Olive Garden and the Future of American Wine” (see previous post) seemed to catch many wine enthusiasts by surprise. It reported data from Restaurant Wine magazine for the best-selling wines in American restaurants as determined by distributor “on-premises” shipments. This data, based on volumes shipped to all “on-premises” establishments in 2008, reveals that when America goes out it drinks a lot of White Zinfandel, Pinot Grigio and (gasp!) “Chablis.” Only one red wine made the top 20 list: Yellow Tail Shiraz.

The list changes only a little if we look at the data for wine brands (as opposed to specific wines):

Kendall-Jackson
Sutter Home
Beringer Vineyards
Franzia Winetaps
Inglenook
Yellow Tail
Copper Ridge
Cavit
Woodbridge
Salmon Creek (Bronco)

The complete list of the top 20 brands is dominated by America’s three largest wine companies with three brands each from Constellation Brands (Woodbridge, Taylor California Cellars and La Terre), Gallo (Copper Ridge, Barefoot Cellars and Ecco Domani) and The Wine Group (Franzia, Inglenook and Almaden). These three giants have large brand portfolios and strong distribution machines. They get their wines into every nook and cranny, both retail and on-premises sales. You can see the results virtually everywhere.

Only 4 of top 20 are international brands (Yellow Tail, Cavit, Ecco Domani and Mezzacorona). I think the fact that three of these four are Italian wine brands says something about the importance of Italian restaurants, including especially Olive Garden, in the American wine market.

Another Picture: The Wine & Spirit Rankings

The Restaurant Wine data give us one picture of the market, Wine & Spirits magazine’s annual restaurant report (April 2009 issue) provides a different (and perhaps more comforting) image. W&S asks a group of wine-focused restaurants to report which wines are on their lists — now how much they sell, but which ones are on offer. Since wines don’t stay on lists long if they don’t sell, this is an indirect measure of availability and popularity, although it isn’t the same as as volume rankings. Here is the W&S top 10 for 2008.

Sonoma-Cutrer Vineyards
Cakebread Cellars
Jordan Vineyard & Winery
Silver Oak Wine Cellars
Ferrari-Carano Winery
Robert Mondavi Winery
Veuve Cliquot
Chateau Ste. Michelle
Rombauer Vineyards
Kendall-Jackson Vineyards

Sonoma-Cutrer is #1 on this list, yet it appeared on only about 14% of the surveyed wine lists (and, as noted above, there is no indication of how much was sold). Only one winery appears in both top 10 lists – Kendall-Jackson. Only two other wineries appears in both top 20s – Beringer and Chateau Ste. Michelle. Gallo and The Wine Group are missing from the W&S top 20, although Constellation Brands makes the list through Robert Mondavi.

Looking over the data, I find myself especially impressed by the performance of Kendall-Jackson and Chateau Ste. Michelle. Both makers seem to combine wide distribution with a range of wines at attractive price points. It isn’t surprising that they rank high on both lists. Perhaps other producers will try to emulate K-J and CSM, especially given this tough economic climate.

Good, Bad or Ugly?

If the first list of restaurant wine brands depresses you, then ignore it and focus on the second list, where White Zin is much harder to find, but don’t get too smug. Remember that there are many markets for wine and that the US is no different from other countries in this regard. Compared to Germany, in fact, much more fine wine is sold here and proportionately less of the bulk product.

For myself, I see a glass half full. My experience working with college students who study wine is that the inexpensive wines serve a really useful function of introducing students to wine and diverting them from beverages that are more closely associated with binge drinking.

Although some White Zin drinkers suffer from arrested development and never move beyond it, I am persuaded that many do. Every staircase, no matter how high it reaches, needs a bottom step. We have a broad first step in America — no surprise there — but I think it is a step up.

Olive Garden and the Future of American Wine

September 13, 2009 By Mike Veseth in brands, Costco, economic crisis, Italian wine, Olive Garden, popular culture, Trader Joe's, wine distibution, wine markets, wine price 5 Comments

How an investigation into trends in restaurant wine sales leads to an unexpected discovery.

Reading Down the Wine List

Everyone knows that restaurant wine sales are down as the recession has reduced both the number of diners and their willingness to spend a lot of money on wine. One of the best sources of news on restaurant wine sales is the Wine & Spirits magazine annual restaurant issue, which surveys selected wine-friendly restaurants and reports sales trends.

The W&S data give only part of the picture, however, since they tend to survey restaurants with more sophisticated wine-enthusiast customers. What’s happen to wine sales a bit further down the food chain?

Two studies by Ronn Wiegand (publisher and Master of Wine) in the current issue of Restaurant Wine report that US restaurant wine sales were off by 5.5 percent by volume in 2008 while sales of the Top 100 wines fell by just 3.5 percent. This suggests some consolidation in this sector, which will make sense once I tell you what the best selling wines are.

The drop in restaurant wine sales overall is less than the numbers I’ve seen for upscale restaurants. One reason for this discrepancy as I understand it is that Wiegand’s figures come from distributors, who report sales to all restaurants and on-premises establishments, not just purchases by select restaurants. So this gives us a picture of the broader market.

America’s Best Selling Restaurant Wines

Upscale restaurants of the sort that receive Wine Spectator awards get the most attention in the press, but casual dining restaurants are where the volume of wine sales is greatest. The top ten individual wines (by volume not value of sales) in 2008 were (drum roll) …

Kendall-Jackson Vintner’s Reserve Chardonnay
Cavit Pinot Grigio
Beringer White Zinfandel
Sutter Home White Zin
Inglenook Chablis
Ecco Domani Pinot Grigio
Mezzacorona Pinot Grigio
Copper Ridge Chardonnay
Yellow Tail Chardonnay
Franzia White Zin

None of these is an expensive wine and the #1 K-J is probably the costliest of the lot. The best selling restaurant (“on-premises”) wines are high-volume, widely-distributed inexpensive wines – just the sort that recession-ravaged consumers who want to trade down (in terms of price) and switch over (to a more relaxed view of wine) might find appealing.

Using the rule of thumb that a glass of restaurant wine sells for about the wholesale price of the bottle, these wines would sell from about $5 (for the Sutter Home) to maybe $8 (for the K-J Chard) per glass — and I suspect that a lot of this wine is sold by the glass. An affordable luxury, as they say.

Who Sells the Most Restaurant Wine (and How)?

If you are someone who dines mainly at three star restaurants where the wine list is really a leather-bound book that is handled with biblical reverence (and White Zinfandel must be a typographical error), the facts I’ve just stated about what America drinks when it dines out are probably pretty discouraging. But don’t give up hope just yet.

If you want to see the state of the art in American restaurant wine programs, follow your nose in the direction of the local shopping mall and get in line for a table at Olive Garden. Olive Garden’s 691 restaurants sell more wine than any other restaurant chain in the United States and its sales and education programs are a positive part of the transformation of American wine culture. Olive Garden is the optimistic future of American restaurant wine.

How does Olive Garden, a chain best known for its bottomless salad bowl and endless supply of tasty bread-sticks, sell so much wine (half a million cases in 2006, according to one source, probably much more than that today)? The short answer is education. Americans like wine and enjoy having it with food, but they are intimidated by everything about wine and need education before they are comfortable embracing wine. You’ve gotta learn ’em before you can turn ’em (into mainstream wine consumers).

The educational process at Olive Garden starts with staff, the people who are best placed to influence customer choice. Early on, Olive Garden established a relationship with the family that owns Rocca delle Macie winery in Tuscany. Specially selected staff travel to Italy each year to live, shop, eat, drink, cook and in general soak up knowledge and experience that can be used and shared back home — a nice employee incentive that pays off in higher wine sales.

Back home, in partnership with several California wineries, Olive Garden has established a similar institute in Napa Valley. Many restaurants expect that their wait-staff will pick up wine knowledge – Olive Garden really works at it by providing literally hundreds of thousands of hours of training. Of course, it has the chain-wide scale to make this investment pay off.

Selling Wine By Giving It Away

So Olive Garden staff are likely to know their wine list (37 wines from Italy, California, Washington and Australia, 35 of which are available by the glass) and which wines match well with different dishes, but how to you get patrons to try them – and especially to move out of their comfort zone and try something new?

The answer is … wait for it … to give away free samples! Patrons at many Olive Garden restaurants (this is America — local regulations vary) are offered small samples of different wines along with advice on menu pairing. The Italian house wines are the Pincipato brand made by Cavit that sells for $5.35 a glass and $32 for a 1.5 liter bottle meant to be shared family-style. Bottle prices of other wines range from $21 for the Sutter Home White Zin on up to $110 for Bertani Amarone. Most choices are in the $24-$34 range.

Olive Garden takes the free sample idea seriously, giving away 30,000 cases of wine in 2006 and presumably more today. That’s about 3-4 million tastes, according to my back-of-the envelope calculation. And it’s worth it, both in terms of wine sales and customer satisfaction. Customers like the wine, once they’d had a chance to try it, Olive Garden says, and it helps them enjoy the whole family dining experience more. No argument here — I can see how having one of those 1.5 liter bottles on the table would help a family relax and enjoy their meals.

The Olive Garden website continues the education process for customers who develop an interest, with basic Wine 101 information along with an interactive guide to pairing specific wines with particular menu items.

Confidence Game: Olive Garden, Costco and Trader Joe’s

The Olive Garden system sells wine, obviously, and it sells the idea of wine in a very healthy way. Olive Garden customers are more likely to try new wines and have fun with wine, I think, because they trust the Olive Garden brand.

Olive Garden has obviously invested a lot in its wine program and in research about what will appeal to its customers. There is less perceived risk in trying something new at Olive Garden. This is perhaps especially important in selling some of the Italian wines, where both the producer (Mandra Rossa, for example, or Arancio) and wine name (Fiano or Nero d”Avola) would be unfamiliar to most diners.

In a way, Olive Garden has the same advantage when it comes to selling wine as Trader Joe’s and Costco. The seller’s trusted brand gives buyers confidence in making an otherwise uncertain purchase.

Olive Garden is big enough and smart enough to make the investment required to pursue this wine strategy. It’s a good thing in terms of the development of a healthy American wine culture, but it does contribute to the consolidation of the industry noted at the start of this post. Olive Garden needs large, reliable supplies of each wines to make its system work (minimum quantity 7500 cases, I think), which rules out smaller producers.

But Olive Garden doesn’t have to be everything to everyone and there is plenty of room in the marketplace for other types of restaurants and wine programs. If Olive Garden helps introduce middle America to a healthy idea of wine, it will have done a great service. And I think that’s exactly what’s happening.

American Wine Laws: Time for a Change?

August 13, 2009 By Mike Veseth in alcohol, Economic impact, Trader Joe's, wine distibution, wine markets, wine taxes 1 Comment

No food for sale in this NYC Trader Joes. No wine for sale at the Trader Joes next door.

Only in America? You can't buy food at this NYC Trader Joe's wine store. And you can't buy wine at the Trader Joe's next door.

A European visitor pulled me aside recently to complain about American wine laws, which considerably restrict the what, where and how of wine sales and consumption compared to more relaxed European practices.

“I thought there was separation of Church and State in America,” he said, showing that he hadn’t forgotten what he learned in Civics class years ago as a high school exchange student in Cleveland. He put the blame for America’s wine parochialism squarely on the influence of conservative religious groups.

Church and State vs. Special Interests

Religious groups are political powerful, I told him, and they no doubt have had some influence on the development of America’s wine laws. But that’s not the reason the laws don’t change, I said. It is the interests of those who gain from the current set up. He wasn’t convinced. He seemed to think that a moral explanation was inherently more persuasive (or more American?) than an economic one. But I still think I’m right.

My explanation — that economic forces organize around any set of regulations, become entrenched and use their political and economic clout to prevent change — has a good economic pedigree. It is the theory of structural rigidities developed by Mancur Olson in his two classic books, The Logic of Collective Action and The Rise and Decline of Nations.

Olson’s theory is elegantly simply. Restrictive economic arrangements benefit a small number of actors a great deal, so they have a strong incentive to organize and fight change. Eliminating the restrictions benefits a larger but widely diffused set of actors who have correspondingly smaller individual incentive to take action.

Even though the collective gain from liberalizing arrangements is likely to exceed the collective loss, the concentrated established interests have more of an incentive to influence legislators and regulators than the general public. This is why regulations, once enacted, are difficult to change. Public gain cannot seem to trump concentrated private interests.

Olson developed this theory in The Logic of Collective Action and used it in The Rise and Decline to explain why rich, stable economies sometimes experience slower growth rates. Stability allows interests to become entrenched and structural rigidities to solidify. Change becomes more and more difficult and potential collective gains from innovation are systematically sacrificed on the altar of vested interest.

Every once in a while, Olson argued, advanced nations need something that will shake things up and weaken the grip of special interests. Then all sorts of change becomes possible.

A Loaf of Bread But No Jug of Wine

An article by Graham Rayman in the August 11, 2009 Village Voice provides evidence to support this theory. New York is one of 15 US states where it is illegal to purchase wine or beer in a supermarket (and you can’t buy bread or cheese in a NY wine shop, either). It isn’t so much separation of Church and State as the division of Wine and Cheese. Supermarkets can sell wine, beer and spirits as provided by the law, and some do this, but they must have separate stores with separate entrances, checkout stands and so forth.

Two doors, two lines, two sets of store staff. Greater legal control alcohol sales is possible, I suppose, but at a considerable sacrifice in convenience. It is probably not a surprise that wineries and wine enthusiasts would want to change this, but it isn’t an easy thing to do.

The Village Voice article explains how liquor store interests organized and lobbied the NY legislature to kill a recent bill that would have permitted supermarket sales. The main force behind the proposal was the state government’s need for revenue — the state projected that increased sales though supermarkets would have added to state tax coffers. The story focuses on the anti-reform lobby — it would be interesting to know more about than the author reports here about how supermarket chain and corporate wine producer interests reacted to the bill. But the point about the blocking power of small but concentrated interests is well made.

Shake It Up, Baby

Supermarkets are just one distribution vector for wine, of course, and New Yorkers have many competitive specialist stores to keep prices down and service up, so we don’t need to feel too sorry for them. But it does seem that the increased convenience of grocery store sales would help expand the wine market and promote wine as a lifestyle choice. It’s too bad the reform effort failed.

The inconvenience of wine buyers in the 15 supermarket-ban states is important, but the grip of special interests on wine regulations extends to other areas.The cumbersome three-tier distribution system and restrictions on inter-state wine shipments are two other areas where entrenched interests have successfully fought off liberalization efforts.The result is the restrictive system my European friend finds so difficult to understand.

If Mancur Olson is right, restrictive regulations will be difficult to change unless something happens to shake things up. Maybe the economic crisis, which has put every link in the wine value chain under stress, will ultimately provide just such an opportunity. Consumers, wine producers and even state tax departments all have something to gain from changing the system now.

We Will Sell No Wine [Reform] Before Its Time

I told my European friend not to hold his breath waiting for wine reforms to trickle up from grassroots wine enthusiasts. The real hope is that the big players will push for liberal reforms.

Personally, I pin my hopes on Costco, the largest single wine retailer. And I wonder if Wal-Mart will get involved now that it is selling wine in many stores (it even has its own version of a Two Buck wine called Oak Leaf). OK, Wal-Mart is a long shot, given its Arkansas roots, but these are unusual times — almost anything is possible.

The New York defeat is a definite setback (and the California plan to increase wine taxes is a step in the wrong direction) but maybe European-style wine market regulations are an idea whose time has finally come.

8/27/2009 Update

Interesting article in the New York Times about Whole Foods’ failed attempt to open a wine shop in New York City.

Whole Foods learned the hard way that opening a wine store in New York is not easy. The wine shop at its market in the Time Warner Center was closed by the state liquor authority because the shop was deemed part of the supermarket; state law bans selling wine in food stores. Then Whole Foods’s license request for a wine shop near its store in the Bowery was denied because of community opposition. But the company succeeded in starting a wine store in the same building as its newest store on the Upper West Side: it opened on Aug. 24, and the supermarket will open on Aug. 27.

Read the whole story at

http://www.nytimes.com/2009/08/26/dining/26whole.html?_r=1

Prime Time for Fine Wine?

July 17, 2009 By Mike Veseth in economic crisis, Economic impact, robert parker, Supply and Demand, Wall Street Journal, wine distibution, wine markets, wine price 1 Comment

The Wall Street Journal reports that USDA Prime beef is now available in your supermarket meat case. Bad news for your cholesterol count, perhaps, but maybe good news for supermarket wine sales. Do you think it will last?

Steak-Out at Ruth’s Chris

USDA Prime beef is usually almost impossible to get outside of restaurants. Prime is the grade reserved for the top 1-3% of all beef — it is sort of like beef with a 93+ rating from Robert Parker. Fine dining establishments, including steak houses like Ruth’s Chris (which advertises itself as “The Best Prime Steakhouse Restaurant”), pay a premium for the limited supplies of this top quality beef. It is unusual, therefore, to find much Prime beef in the regular retail food distribution chain (USDA Choice is usually the top grade you will find at your store). It is especially rare to discover choice cuts like Filet Mignon in a supermarket meat case.

So then why did some shoppers recently find USDA Prime ribeye steaks at Costco for $9.99 per pound? The answer, according to the WSJ article, is the slump in high end restaurant sales. (I don’t know how Ruth’s Chris in particular is doing, but the fine dining industry overall is taking a beating. due to the economic crisis.)

The recession is bad news for restaurants and for the businesses that supply them. I have already written about the effect on wine. Some hard-to-get, winery-list and restaurant-only wines are now relatively easy to find — a few have even shown up at Costco — because distributors are diverting the wine that restaurants won’t buy to their other selling channels. The same thing, apparently, has happened to Prime beef.

Prime Time on the Wine Wall

Some of the folks who used to splurge on expensive restaurant meals are now sometimes treating themselves to fancy home-cooked meals, which can be less expensive even when they use similar ingredients because high restaurant labor costs are supplied in house for free (or lower cost, anyway, if you have to pay your children to be waiters, prep-cooks or dishwashers). Prime beef and excellent wines are now more readily available to these home chefs, as the WSJ article indicates and, while they may be expensive in an absolute sense (compared to Kraft Macaroni Dinner, for example) they are still cheap relative to the restaurant experience. Good food and wine at home can cushion the recession’s hard knocks.

My friend Patrick, wine manager at a local upscale supermarket, has a front row seat as these shoppers assemble ingredients for a special meal. His Wine Wall is located strategically at the corner of Meat, Fish and Produce, so aspiring gourmet chefs inevitably pass through his territory once or twice and he is happy to help them select a nice wine to complement their home creations.

Patrick thinks that this fine-dining shift from restaurants to residences may not be a temporary phenomenon. People are educating themselves about food, ingredients, cooking methods — and wine of course — and they may find themselves drawn more deeply into the home dining experience. As they become more skilled and knowledgeable they may begin to identify themselves as “foodies” who enjoy planning menus, shopping for and preparing food, not just eating it, and change their fine dining behavior for good.

I’m sure this won’t happen to everyone everywhere, but I think I agree with Patrick that a noticeable structural shift could occur. If sustained, this trend could have important implications for several industries, including wine. A major shift in sales from restaurants to supermarkets, specialty stores and big box retailers would force some winemakers to reevaluate their business plans and perhaps shake up the whole wine market.

Now, where are my car keys? I feel an urge to go to Costco …

Decanter’s Wine Power List

July 14, 2009 By Mike Veseth in British wine market, Constellation Brands, cork vs screwcap, Costco, critics, decanter, Economic impact, EU wine reforms, globalization, Tesco, wine brands, wine critics, wine distibution, wine magazines, wine markets, wine ratings Leave a comment

Decanter, the self-proclaimed “World’s Best Wine Magazine,” takes its rankings very seriously. Wine rankings, of course, and, in the July 2009 issue, Power rankings. Who are the most powerful people in the world of wine and what does the power list tell us? Let’s see if we can find the message in this bottle.

The Power List

The names on the power list are very interesting but the story that they tell about wine today is perhaps more important. Here are the first ten (top ten) people on the list.

Richard Sands, USA, Chairman, Constellation Brands
Robert Parker, USA, wine critic
Mariann Fischer Boel, Denmark, EU Commissioner for Agriculture
Mel Dick, USA, Southern Wine & Spirits (wine distributor)
Annette Alvarez-Peters, USA, Costco wine director
Dan Jago, UK, Tesco wine director
Jean-Christophe Deslarzes, Canada, President of Alcan Packaging
Jancis Robinson, UK, wine critic, author and journalist
Nicolas Sarkozy, France, President of France
Pierre Pringuet, France, Pernod Ricard

Since Decanter is a British magazine with very small US distribution you might be surprised that three of the top ten positions (and both of the top spots) are held my Americans, but don’t be. Constellation Brands is the largest wine company in the world and accounts for one out of eight bottles of wine sold in the UK. And Robert Parker is best known for his ratings of French wine, not Napa bottlings, which is important to British buyers and merchants. The presence of Sands and Parker at the top of the list does not reflect any sort of US-centrism, just the realities of the global marketplace. It really is a global list. Or at least, like those famous New Yorker cover illustrations, the globe as seen from London.

I won’t list the second ten names (out of 50 in total), but the I think they illustrate the global reach of the wine market today: America, China, Chile, Australia, Spain and so on. Even India, an emerging wine market, makes the top 50 ranking.

The list is complete and up-to-date (Gary Vaynerchuck, the US internet wine guru, shows up at number #40), but there are some interesting gaps. Fred Franzia, the godfather of Two Buck Chuck, is nowhere to be found, for example, despite his obvious influence on the US market, while Judy Leissner of Grace Vineyard in China, who perhaps represents the future of Chinese fine wine, makes the “Ones to Watch” list.

No wine economists make the list, alas. Greg Jones, the respected Southern Oregon University wine climatologist, is the only professor (#33). Maybe next year …

The Story

It is fun to see who makes the list and who doesn’t (why Jancis and not Oz?), but the ranking is more interesting if you strip out the personalities and consider what market forces they represent. Herewith my version of this story.

The world of wine is very unsettled. Although wine is one of the most fragmented global industries (much less concentrated than beer or spirits, for example), size matters more and more as consolidation continues. [Hence the power of Constellation Brands, Pernod Ricard and Southern Wine & Spirits.] Reputation matters, of course [Parker and Robinson], but the world is changing and everything is up for grabs from how and where wine is sold [Costco and Tesco] to how the bottle is sealed [Alcan].

Although change is generally associated with New World wine, this is no longer the case. The biggest threats to “business as usual” for Old World wine come from inside the European Union itself. On one hand, the new EU wine regime [Mariann Fischer Boel] will pressure Old World wine to compete with the New World head-on and without continuing EU support. On the other hand we have an unexpected prohibitionist movement [symbolized by Sarkozy] that seeks to regulate wine like the Americans do (even as some parts of America are changing) — as a dangerous controlled substance. It is thus imperative for Old World wine to master the tricks of the New World industry — tricks that Constellation and Southern and Costco symbolize.

These changes take place, of course within the context of the expanding global market, global climate change and a continuing global economic crisis (that’s where a wine economist would have been a useful inclusion).

I won’t pretend that the Decanter Power List is a scientific ranking (Decanter doesn’t claim this in any case), but it is an interesting peek into how wine insiders view their industry. I’ll be curious to see how the names and the story lines change when the next Power List appears.

Wine Distribution Bottleneck

May 5, 2009 By Mike Veseth in Charles Shaw, Constellation Brands, Economic impact, Rabobank, Supply and Demand, Trader Joe's, Two Buck Chuck, wine distibution, wine markets, wine spectator 10 Comments

I have often argued that to really understand an industry you first need to understand where the bottlenecks are in the value chain. Bottlenecks disrupt the efficient flow of resources and so industries tend to evolve around them. I believe that this observation holds especially true for wine. Herewith a brief update on the current situation.

Do the Math

Silicon Valley Bank released their annual State of the Wine Industry Report yesterday. SVB is a major lender to US wine producers and thus has a strong interest in producing clear, relevant wine economics research. (I also admire the wine economics research produced by the Dutch agricultural lender Rabobank.)

The report provides some good news along with many worrisome observations (click on the link above to download the study) and fresh data on the biggest single bottleneck in the U.S. wine industry — distribution.

Here’s the basic math. SVB estimate that there are 6000 wineries actuve in the US market producing about 7000 wine brands. All these brands need to squeeze through the U.S. three tier distribution system bottleneck. This means they need to go from maker (first tier) to state-licensed distributor (second tier) to local retailer (third tier). That’s the law here in the United States, where we still think of wine as a controlled substance.

There are only limited opportunities for producers to skip a step. I understand that Bronco Wines, for example, can sell its Charles Shaw brand directly to Trader Joe’s in California because of a legal loophole there, but has to use an independent distributor in other states. That’s why Two Buck Chuck costs $1.99 in L.A. but $2.99 here in Washington State. That extra buck is the cost of the extra distribution layer.

The Big Squeeze

Now we get to the big squeeze. These 7000 brands get funneled through about 550 major distributors according to SVB (obviously this does not count many smaller Mom-and-Pop and specialized distributors that I am familiar with), which is about half as many as a few years back. Hopefully you can appreciate the bottleneck — 7000 brands worth $30 billion in retail sales have to squeeze through 550 distributors in 50 states on their way to 76 million wine consumers. Any blockage in the distributor tier backs up the whole industry.

And the problem gets worse because the distributors are obviously getting squeezed themselves by the economy — falling sales, trading down, shrinking margins, credit limits and counter-party risk. Expect distributors to consolidate in some cases and pull back to reduce cost and risk in others.

The net effect is clear — distributors are reducing their SKUs (stock keeping units to non-economists) and focusing a smaller number of reliably profitable products lines. This means that it is harder and harder for new and niche wineries to get on the warehouse pallet.

The Missing Middle

I’m not sure exactly how this all will shake out, but I suspect the problem will be worse in the middle market. Very small wineries can often successful self-distribute. Very large ones will probably get distribution because of the volumes they can generate. The middle falls awkwardly in between — too big to sell it all yourself, too small to be worth a major distributor’s time. The fact that the distribution system is fragmented into 50 (plus DC) pieces just makes the situation worse.

In the same way, SVB data suggest that lower priced fine wines ($35 and less on their scale — remember that a lot of SVB’s customers are in Napa Valley) are still selling pretty well and very expensive icon wines apparently are doing OK, too. The mid-range is in trouble. SVB calls $35-$50 a “gray area” and $50-$125 a “dead zone.” Ouch.

I would hate to be a new 3000-5000 case winery trying to sell wine made to be priced in the dead zone. Unfortunately, I think there may be a lot of new wineries coming on line now who planned to do just that back when economic conditions were sunnier. It will take exceptional effort (or truly exceptional wine) to make this business model work in the current economic environment. I recently talked with one middle-sized premium winemaker who has already figured this out and pulled back — lower output, lower prices — to get clear of the dead zone.

This is the “missing middle” effect that economists are familiar with in other contexts (small family operations and huge corporate businesses survive, the middle simply disappears). The distribution bottleneck isn’t necessarily the cause of the coming missing middle effect in the wine industry, but it will certainly make it worse.

The Wine Economist

Category Archives: wine distibution