How Will Brexit Impact World Wine Markets? A Dismal New Forecast

brexitMy remarks at the Unified Wine and Grape Symposium‘s “State of the Industry” session earlier this year focused on the uncertainty surrounding Brexit (Britain’s choice to exit the European Union) and the great potential it has to damage wine markets in both the UK and other countries.

I called Brexit a “known unknown” because we know (or should realize) that we really don’t know what Brexit will look like when the two-year exit process concludes or what its impact will be when the dust finally clears.

The exit negotiations will begin in earnest after the June 8 elections in the UK, which Prime Minister Theresa May and her Tory party are expected to win although perhaps not by as big a margin as originally conceived.

An Inconvenient Truth

One particular problem for the wine industry is that wine isn’t very important to the overall British economy (so don’t expect it to get much special attention in the trade negotiations), but the British market is extremely important to the global wine industry, both as a major importer and a bottling and distribution center.  The UK market is a top target for many wine exporters, including Australia, New Zealand, Chile, and even the United States.

Kym Anderson (University of Adelaide) and Glyn Wittwer (Victoria University, Melbourne) have taken a first stab at understanding what is at stake in a study that they released earlier this month titled “Will Brexit Harm UK and Global Wine Markets? (pdf). Anderson and Wittwer ran three Brexit scenarios through their econometric model of the global wine market and reported the results.  I encourage you to take the time to study their research.

Major Impact on Wine

Anderson and Wittwer’s conclusion, to cut to the chase, are that there would be substantial Brexit impact on UK wine imports:

In our ‘large’ Brexit scenario, as compared with the initial baseline scenario, the consumer price of wine in 2025 would be 22% higher in the UK in local currency terms (20% because of real depreciation of the pound, 4% because of the new tariffs on EU, Chilean and South African wines, and -2% because of slower UK income growth). The volume of UK wine consumption would be 28% lower (16% because of slower UK economic growth, 7% because of real depreciation of the pound, and 5% because of the new tariffs). Super-premium still wine sales would be the most affected, dropping by two-fifths, while sparkling and commercial wines would drop by a little less than a quarter.

The authors examine three Brexit scenarios, judging that the most likely general outcome (the “large” Brexit model) is that the UK would adopt the same tariff barriers as the EU27 in the short run and then work eventually to restore free trade arrangements with Chile and South Africa. This makes sense to me if for no other reason than that Britain lacks the time and staff necessary to negotiate Brexit and to work out its own detailed tariff regime and also to negotiate detailed free trade agreements to replace those that will be lost.

Losers and Winners?

Brexit will obviously have high costs for UK wine consumers and retailers and for the bottling and distribution industries as well. Who will suffer the most among countries that export wine to the UK?

Australia, New Zealand, and the US will have to deal with the negative income growth rate effects of Brexit and the exchange rate impacts, too, but won’t see an increase in tariff rates under the “large” Brexit scenario, since their exports to the UK are already subject to EU rates. They will gain a little form a more level playing field with respect to European wine producers in the UK market.

Chile and South Africa are more vulnerable to Brexit woes because they currently have preferential access to the EU (and thus British) market. Their wine exports to the UK will be subject to tariff at least until they can reach new free trade agreements.

European wine exports (France, Italy, Spain and others) previously had tariff-free access to the UK market and so will face new barriers to trade. But, as Anderson and Wittwer note, the likely tariff rate of 13 pence per liter is dwarfed by Britain’s domestic excise tax of nearly £3 per liter and 20% VAT.

No Rising Tide

Does anyone win in this analysis of Brexit? Well you would think that the small but growing UK wine industry would gain from the various hurdles that imported wine faces — and they will. But Brexit is also likely to make imported winemaking and vineyard equipment and supplies more expensive and restrict or increase the cost of migrant seasonal labor, so it is unclear if Brexit will be truly beneficial.

And of course the declining overall wine market is bad news — the opposite of the idea that a rising tide raises all ships, if you see what I mean.

The devil is in the details of scenario forecasts like this and we won’t really know what to expect until the May government announces its intentions (and even then we might not know because the government has developed a recent habit of reversing itself on economic policies and, of course, the final outcome depends on the EU negotiating stance, too). Until then, however, this forecast is a very good place to start your thinking.

This column is just a summary of the new research with a few thoughts of my own. I encourage you to read the Anderson-Wittwer paper and note your own thoughts and reactions in the Comments section below.

What’s the Big Deal about Supermarket Wine Sales in British Columbia?

vqa-surrey-save-on-foodsWhat’s the big deal about British Columbia supermarket wine sales? It is a very big deal in some circles because the stakes are higher than they might seem. Here’s my analysis of the situation.

>>><<<

Supermarkets are an important wine sales vector in the United Kingdom and most but not all U.S. states, so many consumers take it for granted that they can walk into their  local Safeway, Kroger-affiliate, Whole Foods or Trader Joe’s store and be greeted by a world of wine choices.

Oh, Canada!

Things are a bit different in Canada. Provincial alcoholic beverage control regimes  apply somewhat in the spirit of Sweden’s Systembolaget monopoly, which was at one time the world’s largest wine retailer — a title that I think passed to the Ontario Liquor Control Board store system before being taken up by Tesco, the British supermarket giant.

British Columbia is moving towards expanded supermarket wine sales after some preliminary trials. The process is a bit awkward because there are many stakeholders with vested interests in the old control system of wine sales. Moving to supermarket sales may increase total wine sales, but the “trade creation” will be accompanied by a certain amount of  “trade diversion” from other retailers, who are understandably unhappy. There is lots of push back as you would expect.

The political economy of B.C. supermarket wine sales is both domestic (more supermarket sales at the expense of existing wine sales license holders) and also international. Incredibly, the B.C. regulations exclude non-B.C. wines from regular supermarket shelves (imported wine may theoretically be sold in a separate and costly and somewhat inconvenient “store within a store”). This has produced an international dust up as the United States has brought charges at the World Trade Organization over the discriminatory practice, an action that the European Union and New Zealand have also supported. The list of wine exporting countries lined up against the B.C. supermarket regime continues to grow. Argentina recently joined the US in this action and Australia quickly followed suit..

The Weak and the Strong

What is the problem? Can’t British Columbia to what it wants regarding wine retail regulations? Maybe not, because Canada (along with most of the world’s nations) is a member of the World Trade Organization (WTO) and is bound by its rules.

The World Trade Organization is actually a fairly weak international institution. It has spent the last couple of decades trying and failing to reach a global agreement on trade liberalization. But the WTO (through its predecessor, the General Agreement on Tariffs and Trade or GATT) was founded on two very strong principles: Most-favored-nation (MFN) treatment and non-discrimination.

Most-favored nation treatment prohibits a country from discriminating at the border against the goods of one WTO-member trading partner relative to others in terms of tariffs and so forth. Every country gets the deal that the most-favored country gets. You cannot single out one country for better treatment or — the real fear — impose sanctions against another except in well-defined circumstances. This was one reason why China worked so hard to get into the WTO — to limit the threat of a trade war against its products.

The MFN rule has been diluted somewhat in recent years as bi-lateral and multi-lateral preferential trade agreements like NAFTA have become more important. (The rise of preferential agreements is often seen as a reaction to the inability of the WTO to produce agreements on broader, global trade regimes) These agreements allow a certain amount of systematic positive discrimination in favor of fellow trade block members. The MFN rule still controls negative “trade war” discrimination.

The second rule, the non-discrimination principle, holds that once a product enters a country, paying whatever legal tariffs are levied at the border, it cannot suffer internal discrimination because of its import status. It must be treated from a regulatory standpoint just as domestic products are treated. That’s a powerful principle.

I am an economist, not a lawyer, but it seems to be that allowing domestic B.C. wines to be sold in supermarkets while prevented equal access to legally-imported California, France, New Zealand or Australia wines would seem to be a violation of the non-discrimination principle and actionable under WTO rules.

Principle and Interest

I was aware of some discussion of possible US action through the WTO as the BC supermarket protocols were being developed, but the US threat was taken lightly by some north of the border. The BC market is relatively small (we are not talking Ontario here) and there are substantial costs to initiating a WTO action, which can take years to resolve and burn up a lot of attorney fees in the process. Not worth the trouble! So some people in BC were surprised when the US finally acted.

But I was not surprised. While BC market losses might be relatively small for international wines, they establish a precedent that could be important if the local-product-only supermarket sales idea spreads — to Ontario, for example. And there might be other discriminatory practices that apply in Canada and its provinces that need to be studied — the supermarket rule might have been the tipping point to take action.

Finally, there is a more global concern. We seem to be living through a period when protectionist rhetoric is in the air and actions that challenge or violate the rules of fair trade are seriously proposed.

In this environment, it is in the interest of global industries like wine to resist the protectionist tide wherever possible on the grounds of both principle and interest (self-interest, that is).

Second Thoughts on Wine Strategies for Georgia, the Cradle of Wine

127895The Republic of Georgia is a wine economy in transition from its former status as a main supplier of wine to Russia and the former Soviet countries to an emerging position with sales in these markets plus Western Europe, North America and Asia.

Conventional Wisdom?

Last week’s column reported on the main sectors of the Georgian wine industry and presented a working hypothesis I developed before our recent trip there. Home production of wine for family use is very important in Georgia and crowds out the commercial product to a great extent, so the focus is on exports. But what strategic focus is best: which wines and which markets?

The traditional markets in Russia and the former Soviet nations represent the past, I hypothesized. The future? The most distinctive element of Georgian wine today are the high quality natural qvevri wines that have been much in the news recently, but is that too small a niche to support the industry? And production of these wines is very limited in any case.

So by process of elimination, I said,  Georgia needs to focus on what’s left — distinctive indigenous grape variety wines made in a clean international style that can compete in global export markets like the U.K., U.S. and Canada.

That is a conventional idea, I noted at the end of last week’s column, and I am generally suspicious of conventional wisdom. Georgia is an unconventional wine country, so I needed to learn more. I’m still trying to make up my mind, but I think my hypothesis was both right and wrong, too. Here is my report.

Orovela Saperavi: Export Onlyimage_2408901_full

If you want to see what the future of Georgian export wines in the international style might look like consider Orovela. But don’t look for these wines in Georgia — they are strictly for export and are essentially unknown in their country of origin. You can, however, find them in the United Kingdom at Waitrose stores and Whole Foods and in restaurants, too, where they are possibly the most successful Georgian wine in the market.

Current exports to the U.K., the U.S. and other markets are fairly small at 40,000 bottles, but there are plans to ramp up quickly to 200,000 bottles and then a million bottles in a few years. That’s big by Georgian standards.

The name, Orovela comes from a traditional plowing song, but the project is as contemporary as can be. Brothers Giorgi and Vasili Sulkhanishvili saw an opportunity for Georgian wine exports, began investment in 2000, and rolled out the brand in 2004. There is one red wine, a Orovela Saperavi,  and Oro chacha, which is Georgia’s signature grape spirit (think grappa). oro5-160x284

Quality was a key factor right from the start and this has paid off. Jancis Robinson declared the 2004 Orovela the best Georgian wine she ever tasted, for example. A search of the Waitrose website reveals that the Saperavi is a “buyer’s choice” selling for £16.79. Vasili told us that the wine is available in selected East Coast markets in the U.S. and sells for $30-$35 in shops and perhaps $100 in restaurants.

The packaging of both the wine and the chacha is beautiful and effective in communicating the wine’s origin and story. Orovela is a completely professional project, carefully designed and tightly focused, reflecting, I believe, the brothers’ international drinks industry experience.

Orovela isn’t the only example of an international-style wine made with Georgian grapes for export markets. We visited both Chateau Mukhrani and Telavi Wine Cellar and were impressed with the substantial investment and obvious commitment to quality.

The idea that Georgia could be successful in global markets with wines like these is certainly valid.But is it the best strategy for the industry? These markets are insanely competitive and effective product differentiation is critical. Are these wines different enough (there is little room for “me too” products) and can that difference and the quality be communicated effectively as Orovela has done?

Back to the Future?p1110808

I wasn’t prepared for what I discovered when we started tasting natural qvevri wines and meeting the winemakers. The wines varied a good deal, of course, but many of them were simply stunning and not at all the rustic products that I imagined. Wines from Gotsa Family Wines, Pheastant’s Tears, Iago’s Wine Cellar and the Alaverdi Monatstery especially stood out. The wines had real tension — they were alive in the glass. No funk, nothing mousy, just great wine. I was really impressed.

I admit that visiting the wineries and meeting the people made a difference, as it always does. I was moved by Iago Bitarishvili’s hard work and humility, for example, and excited by Beka Gotsadzes’ energy and ingenuity. The fact that these people can make natural wines like this using traditional Georgian methods is something to celebrate. The wines and the stories that come with them are the product differentiation I was looking for.

Maybe these are the wines that Georgia should highlight, I thought. Certainly they tell an authentic story of Georgia and its wines. But there are problems. The domestic market for such wine is limited, as I explained last week, and natural wines are a niche (albeit a growing one) in the global market. In any case, production of these natural qvevri wines is small and the best makers routinely sell out now. Market expp1110789ansion requires new investment and new players.

The natural qvevri wines are a great symbol for Georgia and its wines, but can they open doors for other Georgian wines? Not sure.

Past is Prologue?

My confusion reached a peak when we visited Teliani Valley winery, which is a large diversified producer. Production is about 3 million bottles divided 30% domestic, 70% exports, 30% semi-sweet wines for the traditional markets, 70% dry wines, and 90% conventional wines with 10% made in qvevri.

After a brief tour of the big factory-style facility, we were asked to choose wines to taste. Could we try three red wines, I asked? An international-style wine, a qvevri product and one of the semi-sweet wines popular in Russia and other traditional markets.

The wines were produced and the results were interesting. The oak-aged international Saperavi and the qvevri  wines were fine, but not especially memorable. No electricity here. Well made, but not distinctive.2014042019

The semi-sweet wine was different, which caught me by surprise.  100% Saperavi from the Kindzmarauli vineyard, it was fruity and, well, delicious. To paraphrase my favorite philosopher, Charles Barkley, it tasted like itself — it was good because it wasn’t trying to be something else. It was the surprise hit of the tasting. It was the wine that we would want to taste again.

Sweetish red wines enjoy a growing market in the U.S. (although their sweetness isn’t always advertised). High quality wines like this might have a bright future, not the dim past that I had imagined.

One Wine to Rule Them All?

My working hypothesis was based on the conventional idea that Georgia needed to choose a clear, simple strategy to move forward in the global markets — to decide which of its wines to take the lead.

But Georgian wine isn’t one thing, it is many things. And I think any attempt to over-simplify — to choose the one wine style to rule them all — is bound to fail.

International style, natural qvevri wines, and the semi-sweets, too. These are all Georgia wines and Georgia is all of them and more, too. My hypothesis was off base, but the journey of discovery it provoked has taught me a lot.

>>><<<

Thanks to all the wine producers who met with us during our Georgia expedition and to the Georgian National Tourism Association for all their help and encouragement.

Republic of Georgia: First Impressions of a Wine Industry in Transition

qvevri1Sue and I were fortunate to be able to extend our visit to the Republic of Georgia at the conclusion the  of United Nations World Tourism Organization’s (UNWTO) first Global Conference on Wine Tourism. The conference’s focus was on wine tourism, but we wanted to learn more about the Georgian wine industry itself.

Georgia’s DNA

As I explained in an earlier column, I came to Georgia full of questions about the wine industry here and with a preliminary hypothesis to help me shape the inquiry. Here’s what I was thinking.

Georgian wine is very old and the wine culture is strong. I have never been anywhere where wine was so central to the culture. Wine and vine were everywhere we looked. Wine grapes were a central element, for example, of a Soviet-era war memorial we saw in Sighnaghi. And grape vines are at the heart of the image of Georgia as a Christian nation. Saint Nino fashioned the first cross using her own hair to bind two lengths of grape vine. Wine is Georgia’s DNA.

A great deal of the wine that is consumed is produced by families for their own use and to give to friends and neighbors. The fact of such large family production necessarily shapes the market. Not much imported wine enters Georgia, for example. And a great deal of the commercially produced wine must be exported.

The Russia Factor

Russia was for many  years the largest export market for Georgian wine and because of this the focus was on semi-sweet red wines made in state-owned factories and often sold in bulk. Quantity was a priority over quality. But then came the Russian embargo of Georgian and Moldovan wines in 2006 and in an instant the most important market, accounting for perhaps 80 percent of sales, was gone and did not return until 2013.vino1mo

The Russian embargo was the worst thing that could have happened to the Georgian wine industry in the short term and the best thing in the long run. In retrospect it is easy to see that such complete reliance upon a single foreign market for wine sales was not a healthy situation.

The sudden loss of that market forced Georgian producers to develop new markets, improve quality to be competitive in those markets, and find strategies for product differentiation to raise margins and secure market niches.

Silk Road to China

A recent report lists Georgia’s five largest export markets as Russia, Ukraine, China, Kazakhstan and Poland although there have been substantial sales increases (albeit from a low base) to Germany, the UK, and Canada.

The recent  rise in the Chinese market has been particularly noteworthy and follows on investments in Georgia wine shops and culinary centers that were established in China. There are ambitious plans to open 100 Georgian wine houses there.

One wine executive we talked with noted a “Silk Road” connection that works in Georgia’s favor. Georgia has negotiated a preferential trade agreement with China and Chinese traders and investors who visit the country taste and enjoy the Georgian wines, learn about the country’s 8000 year wine history and its Silk Road connection. Nothing could make more sense than to buy Georgian wine with its long history and connection to China. Very smart of Georgian producers to leverage this cultural advantage!p1110666

Natural Wine Buzz

Here in the United States much of the buzz about Georgian wines concerns natural wines made using the traditional qvevri clay containers to ferment and sometimes age the wine wines. Alice Feiring is a leading advocate of these wines and her recent book For the Love of Wine gives a highly personal account of her passion for them.

No one we talked with is sure how much Georgian natural wine is made by families for their own consumption, but commercial production is relatively limited. One producer estimated total output of perhaps 120,000 bottles more or less with several wineries in the 3000 to 6000 bottle capacity range. Little of this wine is sold domestically in Georgia because of its relatively high cost and the existence of family-produced alternatives.

So the focus is clearly on export to markets where natural wines have a strong presence including Italy, France and Denmark, and developing natural wine markets such as UK, Canada and the United States.

Given all of this my working hypothesis when we left for Georgia was this. The Russian market is the past, now they need to look to the future. But which future? The natural qvevri wines are Georgia’s key to differentiation in the new markets, but high quality natural wine is too narrow a category to carry the ambitions of a great wine producing nation.

Process of Elimination

My hypothesis, based on the process of elimination, was that the way forward is for Georgia to focus on increasing the quality of their conventional wines, making them in a clean international style and differentiating by stressing a small number of exciting indigenous grape varieties (perhaps red Saperavi and white Rkatsiteli and various blends) from among the dozens of native Georgia wine grapes.

In other words, I saw Georgia in a very conventional way, much as I view Turkey or Portugal, for example. That was then. What do I think now? Come back next week to find out.

>>><<<

Thanks to the Georgia National Tourism Administration for inviting us to extend our visit to Georgia and generously providing  us with help in visiitng the wine regions and meeting wine producers.

Alentejo Wine in Transition: History and Changing Times in Portugal’s “Lodi”

seloSue and I recently returned from historic Évora, Portugal where I am spoke at the 10th Alentejo Vine and Wine Symposium. We spent about a week in the Alentejo wine region and learned a lot. This is the first of a short series of columns loosely organized around the theme of the disruptive intersection of old and new which I have found in many corners of the wine world, but none more clearly than Alentejo.

Portugal’s Lodi

The map gives you an idea of Alentejo’s location. Évora is about an hour east of Lisbon and give hours south of the Douro Valley. Portuguese leaders once thought that this region would be Europe’s grainery (more Kansas than Lodi, I suppose), but the landscape we saw was more pastures dotted with cork trees and vineyards, some of which are quite large by Portuguese standards.lisboa-alentejo

I think of Alentejo as the Portugal’s Lodi for several reasons. The first is the summer heat, which reaches up to 40 or 45 degrees Centigrade (100 to 110 Fahrenheit) or even higher in July. Difficult to grow high quality wine grapes in such baking heat. But, as markets shift, both regions feel the need to increase quality and so producers are pushing hard. And both regions are implementing important sustainability initiatives that are part of their new identities.

They both produce quite a lot of wine, too. Alentejo accounts for more than 40 percent of the wine consumed in Portugal. But the market is changing and the region must adjust and evolve. The domestic market has not fully recovered from the global financial crisis and price pressure is extreme, especially in the lower price tiers. At the same time, the traditional export markets — especially former Portuguese colonies Angola (#1 on the export list) and Brazil — are struggling.

Drawing Strength from the Old and the New

Alentejo is drawing strength from its past in this transition and from new ideas and initiatives, too. The sense of history is never far below the surface here. Évora is a Unesco World Heritage site, for example, with Roman ruins around every corner. The Romans made wine in this region and the big clay pots they employed are inspiring today’s winemakers (watch for a future column on this).

Portugal was once part of the Arab world (“Portugal,” we were told, means “orange” in Arabic and this was not hard to believe with orange trees everywhere). The name Alentejo itself reflects this history. Alentejo comes from Al Entejo (just as mathematic’s algebra was originally al gebra).

Old practices and a wealth of indigenous grape varieties are more than living history — they form building blocks, but bold initiative is needed for glue. The next three columns will explore this dynamic.

First I will introduce you to Adega de Borba, a big cooperative winery that is moving decisively into the future. Then I will take you into the world of cork by visiting Amorim cork’s processing plant in Alentejo and its high tech labs and production facilities in the north. Finally, we will go back in time to the wines made in big clay pots when we meet with winemaker Domingos Soares Franco at José Maria da Fonseca‘s José de Sousa winery.

>><<<

One of the highlights of the conference was a dinner that featured a group of men who sang the famous Cante Alentejano that is unique to this region. It was a moving experience to hear the singing that turned to pure joy when we learned that the singers were winegrowers — members of the Vidigueira  cooperative. And to top it off, we were drinking their excellent wines. What an experience!

How Much Has the Strong Dollar Affected U.S. Wine Exports?

loonieLast week I wrote about the strong U.S. dollar and its impact on U.S. wine imports. My conclusion was that there was an exchange rate effect, but it was less than you might otherwise expect because of specific factors that are at work in the sparkling, bulk, and bottle wine import markets today.

This week we turn to U.S. wine exports. Econ 101 tells us that a strong currency discourages exports by increasing their cost to foreign buyers and this is an important factor. Thus, for example, we would expect U.S. wine exports to Canada to have fallen over the last year.

Loonie Times

The U.S. dollar has appreciated  dramatically against Canadian dollar (or “Loonie,” as they call it) over the past two years. After coming close to parity in 2014 the Canadian dollar nose-dived and it now takes in the neighborhood of C$1.45 to purchase one U.S. dollar.

After weathering the global financial crisis better than most countries, Canada has fallen victim to its dependence on natural resource exports, especially oil exports. As the price of oil has fallen the foreign exchange value of the Canadian dollar has plunged, which raises the cost of imports for Canadian buyers. They are feeling the pain.

How bad is it? The New York Times reported that the combination of drought in California, which raised agricultural goods prices, and the falling Loonie has resulted in  soaring imported fruit and vegetable prices. How high? Eight dollars for a head of cauliflower! Yikes!

Canada is largest single market for U.S. bottled wine exports so you would expect this situation to depress wine sales to Canada and to have a similar but perhaps smaller effect in other countries where the exchange rate shift has not been as extreme. Has it happened? Let’s look at the data.

us ExportsU.S Wine Exports by the Numbers

Here are wine export data for the first three quarters of 2015 as as provided by Wine by Numbers, a publication of the Unioni Italiani Vini (click on the chart to enlarge). These data show that U.S. wine exports actually increased in the time period covered here rather than decreasing as theory predicts. The story varies from country to country (as it did with imports), but the overall trend is to higher exports — exactly opposite of the textbook prediction. What gives?

A first answer is that perhaps it takes more time than has passed so far for the higher exchange rate value to pass through to higher import prices, higher wholesale prices, higher retail prices and then for the quantity effects (lower depletions, lower reorders etc) to funnel back. International finance theory has a whole chapter on how these lags can create distortions. There is something to this lag theory, but I think there is more going on.

A second factor, especially on higher value bottled wines, is branding strategy. Rather than raise price and lose market share, it is possible that some big players are absorbing lower margins to keep on the shelves and in the game abroad. How long can they do this? Some Argentinean wineries have been doing it for three or four years so far here in the U.S. It’s expensive, but could be worthwhile if things turnaround before too long.

A third factor, which applies especially to the bulk wine market, is that U.S. tanks are full of these wines with no indication that domestic consumer demand for them will pick up soon. Better to sell them off abroad as bulk exports than dump them out when they are too old and tired to find buyers.

A final piece of the puzzle is the duty drawback program, which I wrote about last year. This is a very peculiar U.S. government program that under some circumstances will refund import duties for a winery if it exports a similar U.S. wine abroad. Sometimes this makes it seem like exports subsidize imports and, as now, it might be true that imports provide rebated duty funds that can subsidize exports. To be honest, I am not really sure of the net effect except to say that there is an incentive for large integrated wine companies to balance imports and exports.

As we saw last week, while bulk wine imports have not surged due to the exchange rate effects, they have remained significant. This fact means that, for certain companies (especially larger wineries) importing and exporting the right wines to and from the right places, duty drawbacks can be significant.

General Conclusions

Looking back over these two columns, the first conclusion is that so far in this cycle the pure foreign exchange effects have largely been offset by specific forces in different sectors of the wine business and in different countries. Exchange rates matter, but they are just one of many forces at work. Since those forces are likely to be different in the future, it is important to be cautious in projecting these trends ahead too far.

I used to warn my students against trying to forecast foreign exchange rates. Too many variables. Too many unknowns. Exchange rates are the most difficult thing in economics to predict, I would tell them. But now I know that I was wrong. Wine trade may be more difficult because it is affected by all the forces that hit the exchange rate and a whole lot more.

>><<<

I encourage readers to drill down in the data provided here because there are a lot of individual country stories to be examined along with the big picture analysis I have provided here.

 

Valpolicella Revisited: What’s the Story?

.

So, what’s the story? That’s a question that Sue and I frequently ask each other after a tasting or winery visit. We’ve learned a lot, tasted interesting wines, met fascinating people. But what’s the takeaway message?

Sometimes it’s a fairly straightforward choice but to be honest I think we live for the complicated narratives– the experiences that really make us sit down and think. What is the story!? Our recent visit to the Valpolicella region was like that. We didn’t find a story — we found a lot of them and the other members of our merry media band — Mauro Fermariello, Michelangelo Tagliente, Michelle Williams and Mads Jordansen — who shared the same experience with us, found many different stories, too, and different ways of telling them.

(Click on the names above to see our colleagues’ work. Mauro Fermariello’s video, which I have embedded above, is a particularly striking account of our journey.)

We’ve already told several of the stories we found in earlier columns and  I’m using this final post to fill in some gaps and sum up. What are the stories? Here are three of them chosen to say something about the winery business models we encountered.

The San Rustico Story

Let me start with San Rustico, a winery with a long history that it wears proudly and gracefully. As you can see in Mauro’s video, the tasting room is decorated with artifacts that give a sense of the past. Touring the cellar we were struck by the wooden grape drying racks, key to Amarone production, that spoke to us of time and tradition. Great atmosphere.

A visit to the winery is a warm and friendly experience here — very personal. Sort of like tasting wine with a family friend in a farmhouse kitchen. And while the wines honor tradition they do not seem especially  trapped in it. Wines are made in two ranges and Amarone in particular in several styles.

One wine we tasted for example was made to appeal to new world export markets, a bit sweeter and with more new oak  (60 percent of the winery’s 170,000 bottle annual product is sold outside of Italy). The premium Gaso Amarone, on the other hand, is made in the traditional style. It was delicious — our favorite glass in the line up.

The two brothers who are responsible for San Rustico (one works in the vineyard and the other in the cellar) have purposefully focused on their traditional production base, limiting output while looking outside the region for sales.

Sartori di Verona

History is also a strong theme at  Sartori di Verona, but the business strategy is much different. Andrea Sartori is the fourth generation of the Sartori family to lead the winery and he has taken it in a different direction from San Rustico. Actually (and this fits into the theme of this column), Sartori’s strategy involves moving in several directions at once.

Go big or go home is one part of the story. Seeking the resources needed to expand production, Sartori entered into an agreement with the Cantina Colognol cooperative in 2000 that gave it secure access to 6200 acres of vineyards in the Valpolicella and Soave regions. This base allowed a three-fold expansion of production necessary to fill an increasingly export-oriented pipeline. About 80 percent of production is exported today. The well-regarded Banfi firm imports Sartori into the U.S. market.

At about the same time that the volume push began a super-quality brand was also established. Sartori partnered with consulting winemaker Franco Bernabel, who began to work with both vineyards and cellar practices, raising quality and drawing out the characteristics of the different vineyard terroirs. Four years later, in 2006, the I Saltari line of super-premium wines was launched. Sartori has also expanded its reach beyond the Veneto, establishing relationships with Cerulli Spinozzi in Abruzzo and Feudo Sartanna in Sicily. There’s also a partnership with Mont’Albano, a pioneering organic estate in Friuli.

Sartori reminds me a bit of the Mondavi strategy of years past. Mondavi moved upmarket with Opus One and also mass market with the Woodbridge wines. The story did not end happily for everyone, as Mondavi went public to raise expansion capital and eventually lost control of the business (wine giant Constellation is the current owner).  The stories differ here: there’s no indication that the Sartori strategy will have anything other than a happy conclusion.

.

The Cesari Story

One of our favotie stops was at Cesari. We loved the wine, the people and the story.  The fact that we like the wines is perhaps not an accident. The U.S. is a prime export market for this winery and it is not impossible that the style was evolved over the  years with American tastes in mind — rounder, fuller wines, but still striking the authentic classic notes.

The Americans in our group were all familiar with the Cesari brand so I was a little surprised when someone told me that it is not as well-known within Italy. The strong export focus makes it different even among wineries (like those above) who sell more than half their production abroad.

Cesari was founded in 1936, during a particularly turbulent period for wine in Italy and Europe. Many private firms failed and cooperatives went bankrupt. Some of the wineries that emerged (or simply survived it) were led by supremely talented entrepreneurs. This sprit in part drove Cesari to push dramatically into global export markets in the 1970s and guides them today to produce the distinctive wines that are needed to attract discerning customers.

I’ve embedded a Cesari video above to give you a sense of the winery and its vision and also to show you how effective they are in telling their own story. Story-telling is almost as important as wine-making when it comes to the business of wine today. Fascinating that the global market’s demands appear here, don’t you think. And I agree with the narrator — all kidding aside, the wines really are good.

Eight Million Stories?

Years ago there was a U.S. television series about life in New York City called “Naked City” that closed each week with the line “There are eight million stories in the Naked City — this has been one of them.” (Scroll down to see a video clip.) There may not be eight million stories in Valpolicella but there are sure a lot of them. Some, like the three above, about different business models and different historical evolutions. Others, like my earlier posts, are about wine tourism, weather problems and  the difficulties of establishing and maintaining a luxury brand for the region in an increasingly competitive marketplace.

There are very personal stories too, like two of my favorite wineries (Zyme and Secondo Marco) that exist today more or less because of family issues that caused a younger generation to start out in a different direction. Reminds me a bit of the story of Robert Mondavi and  the family disagreements that led to the founding of his eponymous Napa Valley winery.

Lots of stories and not enough time or space to tell them all. Maybe that’s what makes a wine region really great. I realize that wine marketers are attracted to the idea of a silver bullet story — a signature grape variety, an iconic brand or rock star winemaker — that can make a region’s reputation in a single stroke. There are good examples for each of these strategies, but I have my doubts about this as a general theory. Maybe real strength comes from diversity and not from a monolithic approach?

I’m glad there are millions of stories to tell and not just one because that means a world of different and distinctive wines … and job security for story-tellers like me! Thanks to everyone who made our Valpolicella visit so rewarding.

>>><<<

Here is a list of the wineries we visited during our Valpolicella tour. See if you can identify each one of them in Mauro’s video. At the end of the list I have embedded a bit of the old “Naked City” television show for those of you too young to have seen the original. Cheers!

Wineries we visited in Valpolicella:

Valentina Cubi, Fumani

Scriani, Fumani

San Rustico, Valgatara

Terre di Leone, Marano di Valpolicella

Villa Cordevigo and Villabella, Cavaion Veronese

Casa Vinicola Sartori, S. Maria di Negrar

Cantina Valpolicella Negrar, Negrar

Monteci, Pescantina

Cesari, Cavaion Veronese

Zýmé, San Pietro in Cariano

Santa Sofia, Pedemonte

Secondo Marco, Fumane

Salvaterra, San Pietro in Cariano

Wine Uncorked: The Rise of Big [Really Big] Box Wine

This is the fourth in a series of articles on Tight, Fat and Uncorked, the three trends I see shaping the wine industry. This week’s topic is how wine is becoming increasing “uncorked” and what this implies.

If you take the “uncorked” metaphor and add it to the “box wine” reference in the title, you might reasonably assume that I’m going to talk about alternative wine packaging — boxes, bags, 1-liter tetrapak containers and so on. That would sure make sense.

But you’re wrong. The box I’m talking about is big [really big] as in 20 foot ocean shipping containers holding maybe 25,000 liters of bulk wine in a “flexitank” bag.

Welcome to the New World of international wine trade — the ultimate ‘uncorked’ experience!

The Incredible Bulk

I’ve known about Big Box wine for a while — my 2009 post on “Wine’s Future: It’s in the Bag [in the Box]” is one of the most-read articles in Wine Economist history. But I didn’t realize how big the big box wine trade had become until I received a Rabobank  report titled “The Incredible Bulk: The Rise in Global Bulk Wine Trade” earlier this year.

Rabobank’s report focuses on New World wine trade since 2001 and the change in the composition of wine shipments (in terms of bottled versus bulk) is dramatic. Bulk wine (the big box stuff) accounted for about 22% of New World wine exports in 2001 (the remaining 78% was shipped in bottle). By 2010 the bulk share increased to over 40% while the bottle share fell to less than 60%. That’s a near doubling of the bulk wine share of New World wine trade in less than a decade, an amazing shift that is all but invisible to consumers.

Big Green Wine

What drives the shift from bottle to bulk in New World wine trade? The short answer is Big Green, but green in two ways. Green, first, in the environmental sense. Bottled wine is both heavier and bulkier than bulk wine (glass accounts for more than 40% of a standard bottle’s total filled  weight). All else being equal (a big assumption in wine economics) shipping wine in bulk and bottling closer to the final consumer should lower the wine’s carbon footprint.

Tesco, the world’s largest wine retailer,  is reported to be particularly aggressive on this front with bulk wine imports being bottled in screw cap-topped lightweight glass for its high volume private label brands. (Click here to read about their very green “furnace glass” wine bottles!)

Cost is another green (as in greenback) factor and there are savings here as well. Rabobank estimates that bulk shipping yields an average cost savings of $2.25 per standard 9-liter case (they estimate total annual savings of $142,300,000 in 2010 compared with the 2001 level of bulk shipments).  This is a very substantial saving for commodity wines of the type that often appear in private label brand portfolios.

The movement towards increased bulk wine exports started in the Age of Abundance, when surplus wine flooded the markets and it was important to move it as cheaply and efficiently as possible. Those days are now in the past; rising costs and tight margins are likely to make that $2.25 per case saving even more attractive to producers now, especially as they scour the world for supplies of wine (did someone say “Moscato?”) to supplement scarce domestic juice.

Subtracting Value Added

For vertically integrated international wine producers, the decision to ship in bulk and bottle in the domestic market is mainly about these cost savings.  They pay less to ship the wine and pay lower import excise, too, since the wine enters the country at the lower bulk value rather than a higher bottled value.

But more is at stake, as the Rabobank report notes, for wine makers who sell to third party importers. In this case bulk shipping results in a new division of value added in the supply chain, with less in the producing country and more further down the line. The impact is thus complicated: bulk wine shipment subtracts some value added in the producing country, although the lower overall cost encourages exports.

There are also relative price effects to consider. Bulk shipping increases the relative price of traditional bottled wine imports relative to bulk products, a difference that may be magnified as wholesale costs differentials are passed along through the supply chain.

Economic Impact: The Box

The standard 20-foot shipping container (a.k.a. “The Box”) revolutionized international trade when it became widely adopted. It changed everything (OK, maybe not everything) because it was so much more secure and efficient than the previuosly standard “break bulk” shipping system. One of the things it changed was the scale of international transactions because the greatest economies were realized by those who could reliably fill ocean containers.

I don’t think the rise of “uncorked” big box bulk wine shipments is going to change everything in the same way the ocean container did, but I do think the effects will be significant. I’ll talk about this more in my next post where I consider how the world of tight, fat and uncoked wine is likely to unfold.

Is Carmenere Chile’s Next Big Thing?

Can Carmenere be for Chile what Malbec has become for Argentina — a game-changing wine that opens up new markets and upgrade perceptions in old ones? That’s the question I asked at the end of my last post.

An Unlikely Curse

Chile has earned a reputation for good value Cabernet, Chardonnay and Sauvignon Blanc; this good reputation is ironically an anchor holding the industry back as it attempts to move upmarket. It will be quite a struggle to get consumers to pay more for established varieties of Chilean wines in the UK and US. New markets and new wine varieties may be the key to future success.

This is where Carmenere comes in. Carmenere is a variety that once produced famous wines in Bordeaux. But when vines were replanted after phylloxera, Carmenere was phased out because of its succeptability to a disease called coulure, which reduces yields. It thrived in phylloxera-free Chile, where it was mistaken for Merlot, an error only corrected in 1994. It is still unclear how many of Chile’s Merlot vines are really Carmenere.

Carmenere is a niche product here in the United States. If you take varietal Carmenere and blends together they account for about 0.2 percent of Nielsen- measured U.S. off-premises wine sales. Concha y Toro is the leading brand followed by Santa Rita and Root 1. By comparison, Chile has about a 2.7% overall share of the measured U.S. market by dollar value, so Carmenere is still quite small, but not insignificant. Total sales of all Chilean Carmenere and blends are less than the dollar value of revenues from Concha y Toro’s 1.5 liter Cabernet Sauvignon alone.

The first Chilean Carmenere that I remember seeing here in the U.S. was a line of wines called Oops, playing up the Merlot-Carmenere mix up. Here’s a nice Chilean Merlot … oops! It’s really something else! I remember trying a bottle and while the label was memorable it didn’t do much to establish Carmenere or Chile in my mind as a quality wine segment.

Carmenere Comes to Britain

Fast forward to 2010. Wines of Chile launched a big campaign in the key UK market called  Carmenere: made for Curry.  It was apparently quite successful, winning the prize for “generic promotion campaigns” at the International Wine Challenge Awards. The idea was to link Chilean Carmenere with Indian food (generically called “curry” in the UK), which is Britain’s most popular ethnic food category, and hope that Chicken Tikka Masala would do for Carmenere what Argentinean steak has done for Malbec.

But a big Carmenere tasting report in the July 2011 issue of Decanter raises some doubts about the quality of the wines, which is obviously a key factor in the strategy. Chilean Carmenere is a “work in progress” according to one of the panelists. Others suggested that Carmenere’s best bet is in blends (especially with Syrah), not as a varietal wine. None of the 132 wines tasted earned Decanter’s top 5-star rating and only 6 received 4 stars. Eight-six wines were “recommended” and 35 were named “good value” (Chilean good value — of course!).

[By comparison, a June 2010 Decanter tasting of 255 Argentinean Malbecs produced four 5-star, twenty-one 4-star and 131 three-star “recommended” ratings.]

Interestingly, the panel suggested that the “overt, oaky, alcoholic, heavy-bottle wines” were made to appeal to the U.S. and South American markets and lacked the balance they’d need to find favor in the U.K. The tone of the review was not as dark as I am probably painting it here, but the conclusion was clear: there was nothing revealed in those 132 bottles that would fundamentally alter Chile’s reputation.

Curry and Carmenere in the U.S.A.

The Curry and Carmenere campaign was so successful in the UK that Wines of Chile brought it to the U.S. earlier this fall and we were invited to participate in a blogger tasting. Sue and I asked two of my “Idea of Wine” students, Marina Balleria and Mike Knape, to join us.  Marina and Mike both studied abroad in Chile and brought local wine knowledge to the table as well as excellent critical thinking (and tasting) skills.

 We concluded that Curry and Carmenere is not a ridiculous idea (Mike reported a “perfect” bite with one of the wines and an onion empanada with a curry sauce), but not all the matches were equally successful. In any case, curry doesn’t have the same significance here in the U.S. that is does in the U.K. Even if Carmenere hit a home run with curry that wouldn’t automatically open up a very large U.S. wine market segment.

We found the alcohol and oak that the Decanter tasters noted, but Marina suggested that oak is part of what she expects from Chilean red wine, so this was a positive feature for her — a defining style. One of the bottles was heavy indeed — 1084 grams according to our scale, the heaviest bottle I’ve encountered since I started keeping track.  Not exactly in keeping with the “Chile is good for you” environmental theme. Most of the wines were more interesting when re-tasted the next day.
 So what did we decide about the critical question — is Carmenere the special one that will lead Chile into the next phase of its wine market evolution? Not yet — I think that’s the answer. We didn’t find the distinctive style and consistent quality that we were looking for although there were some we really liked (and — sorry! — thought were good values).
Project Carmenere is still under construction. When will it be finished? This is hard to say. Malbec wasn’t built in a day, although the Malbec boom, when it came, developed very quickly. Carmenere’s story may be the same — or maybe the time has passed when hot new red varieties can make wine drinkers swoon.
Either way I think it will be tough for Chile to achieve its 2020 goals but I think they need to try. Carmenere may be Chile’s best bet and I look forward to tracking its progress.

>>><<<

Here are the wines we tasted for the Curry and Carmenere event. Thanks to Wines of Chile for inviting us to participate and thanks to Mike and Marina (see photos above) for their insights.

Blogger Tasting Wine List

1- Emiliana Natura Carmenere 2010 / Colchagua Valley 100% Carmenere SRP: $16.99

2- Casa Silva Los Lingues Gran Reserva Carmenere 2008 / Colchagua Valley 100% Carmenere SRP: $22

3- Santa Rita Medalla Real Gran Reserva Carmenere 2008 / Colchagua Valley 100% Carmenere SRP: $19.99

4- Montes Alpha Carmenere 2008 / Colchagua Valley 90% Carmenere, 10% Cabernet Sauvignon SRP: $24.00

5- Carmen Gran Reserva Carmenere 2009 / Apalta Valley 100% Carmenere SRP: $16.99

6- Santa Carolina Reserva de Familia Carmenere 2009 / Rapel Valley 100% Carmenere SRP: $19.99

7- Concha y Toro Marques de Casa Concha Carmenere 2009 / Peumo Vineyard, Rapel Valley 100% Carmenere SRP: $20.00

8- Haras de Pirque Cabernet Sauvignon / Carmenere 2007 / Maipo Valley 40% Cab. Sauv., 37% Carmenere, 13% Cab. Franc, 10% Syrah SRP: $13.00

Chilean Wine at the Crossroads


When Oz Clarke spoke at the Wines of Chile Awards seminar earlier this year, his theme was simple and clear: Chilean wine is at a crossroads and it was up to the people in that room to decide which direction to go. Would they make the same mistakes as winemakers in Australia, for example, or choose another path? Oz, who was a stage and film actor in a previous life, is a dramatic speaker, but if you watch the video I think you will agree with me that his message is even more powerful than the delivery.

Preaching to the Choir

Oz Clarke is not alone in this view and to a certain extent I’m sure he was “preaching to the choir.” Wines of Chile released its ambitious  Strategic Plan 2020  about a year ago (you can download a pdf of the full report here). The plans calls for Chile to become the #1 New World producer of “sustainable and diverse” premium wines by 2020.

The carefully devised Plan projects an average annual growth rate of 9.2% and is based on strengthening the recognition and appreciation of  “Wines of Chile” as a world-class appellation, which will in turn increase the average price, sales, and added value for all Chilean wine industry stakeholders, including small and large growers, suppliers, wineries, and exporters.

The plan focuses on four messages to drive the transformation:

  • Diversity and Quality. Chile has much to offer with respect to quality, diversity, and wines that over-deliver at every price point.
  • Sustainability. Sustainable Chile: Clean, efficient, and responsible.
  • Country Image. Chile is good for you.
  • Innovation. Chile: Moving above and beyond.

The plan’s ten year time horizon speaks to the sense of “Chile at the Crossroads” immediacy while the four “strategic pillars” indicate how much needs to be done in terms of recasting Chile’s image. Chile’s reputation as a producer of bargain Cabernet Sauvignon, Chardonnay and Sauvignon Blanc needs to be reshaped in terms of both wine types and price points. And the image of Chile itself must be updated or redefined, according to the plan’s analysis, so that the country sells the wine  (as Italy’s image obvious does for Italian wine) and not the other way around. (Whether a campaign built around the slogan “Chile is Good For You” can accomplish this is debatable.)

Audacious Goals?

Exports are key for Chile since domestic consumers drink up only about 30% of total production.  The idea that revenues might grow by 9.2% in the next decade is not as ridiculous as it might sound, given the current economic climate, although it is certainly an audacious goal.

Chile’s wine exports grew by a yearly average of 33% in the 1990s (according to data in the Wines of Chile report) and by 11% per year between 2000-2009. But whereas growth came through both increased price (7%) and quantity (25%) in the 1990s, the 11% revenue growth in the 2000s was due to volume growth (12%) offsetting 0.1% average price declines. The new strategic plan calls for a radical change, with rising price not higher production driving revenue growth.  Good idea, but easier said than done.

So (and this is the “crossroads” theme again), Chile needs to turn things around in a fundamental sense and this may be difficult in today’s market environment as an excellent interview with  with Rabobank’s Stephen Rannekleiv in a special September 2011 Chile Report  issue of The Drinks Business makes clear. Rannekleiv is an optimist about Chile’s wines, but very cautious about its wine industry’s ability to meet the 2020 goal.

 Something Completely Different

Rannekleiv suggests that Chile seek out new markets to supplement but not replace the UK, its largest export market today, where margins currently are thin or even  negative and where upward price adjustment is extremely difficult. Focus must be on price and quality, Rannekleiv notes, so major supply surges must be avoided.

It is very difficult to raise price (without dramatic loss of market share) for existing product lines in today’s market, so  “Chile needs to find something different, such as marketing around new varieties that are exceptional; it also needs to continually work on improving quality.”

There is no silver bullet, Rannekleiv suggests. It will take a combination of controlled output growth, continuing quality improvements, image development and new products and markets to turn the Chilean wine industry onto the right path.

Getting the Message Out

One element of the Wines of Chile strategy is a series of blogger wine tastings that are designed to educate, inform and persuade social media representatives and their audiences of Chile’s new direction. I took part in one of these programs last year that featured Chilean Syrah and Pinot Noir, stressing the diversity of Chilean wine.

This certainly is part of the 2020 strategy’s message (and the wines told that story pretty well), but Syrah is a problematic market these days and while Pinot is popular, it is hard to break in except at the bulk level. (Although both Chile and Argentina produce Pinot Noir, for example, neither country made the cut for inclusion in Benjamin Lewin’s recent book In Search of Pinot Noir.)

Is Carmenere The Key?

Which brings us to Carmenere, the focus of the most recent blogger tasting program.  Is Carmenere the key (or one of them) to Chile’s crossroads dilemma? Carmenere is (like Malbec) a Bordeaux variety that is now better known in the New World than the Old. Can Carmenere be to Chile what Malbec has become for Argentina, a signature variety that creates a new market and that serves as a brand ambassador for the entire country?

A Carmenere boom would tick a lot of the Wines of Chile 2020 plan boxes. Is Carmenere the key? Come back next week for my answer.