Reimagining Chile’s Wine Identity

What do you think of when you think of Italian wine? Many people think first of Italy — the place, the art, the people, the culture and the food (OK, especially the food). The romantic idea of Italy sells Italian wine. Brand Italy is stronger, it is said, than any Italian wine brand and Italian winemakers have profited from this fact.

Changing Places

The relationship between country and wine image is reversed for Chile, or at least that’s the theory I found in a recent report called the Wines of Chile Strategic Plan 2020.  The wines of Chile are the nation’s ambassadors to the rest of the world, the report asserts. The wines of Chile have a more distinct image than Chile itself (although of course the two are related) and so when people think of Chile they think first of its wines.

I am not sure that I completely agree with this idea — “Chile” conjures up many images and associations for me — but I am willing to consider it for the sake of argument. Certainly how we think about the wines of Chile has some impact on our attitudes towards this country more generally. Chile’s wine identity, as important as it is to people in the wine industry, may have an even broader significance in terms of international investment, export sales, tourism and so forth.

Good and Good Value

So what is Chile’s wine identity? Well, for most of the last 50 years Chilean wine has been synonymous with “good value for the money.” As I wrote in a previous post, Chile has been trapped in a vicious cycle of rising expectations that has made it difficult for them to increase price even as the quality of their wines has continued to improve.

Is this a bad thing? Yes, I know that it is better to be known for good value than for bad value, but in today’s very competitive global market it is also good to have products that consumers are willing to pay a bit more for. The average FOB export price of Chilean wine hovers around USD 2 per liter or less than USD 20 per case. The appreciation of the Chilean peso in 2010 combined with the difficulty of raising the USD price has really put the squeeze on Chilean wine producers.

Chile is the most trade dependent of the top wine producing countries, according to the Wines of Chile report, exporting nearly 70 percent of their production.  Wine accounts for over 2.5% of Chile’s total export earnings. So enhancing the image of Chilean wine abroad by moving it upmarket is important.

There are several ways to define a country’s wine identity and this video illustrates the current theme, Wines of Chile: The Natural Choice. As you can see the theme connects the dots of factors contributing to Chile’s complex terroir and stresses the fact that that its phylloxera-free vines grow on their own rootstocks — a  nice “natural” connection.

But broad messages like this have their limitations since by definition they cannot thoroughly take into account detailed factors that may be important to understanding and promoting the wine.  The New Zealand wine tagline is “Pure Discovery,” for example, and here in Washington the motto is “The Perfect Climate for Wine.” None of these tag lines is especially stirring or sharply defining, although the key words — Natural, Pure, Perfect — have obvious appeal.

Is Carmenere the New Malbec?

Another way to think about wine identity is in terms of grape varieties, although this has limitations, too. If you think Burgundy  you think Pinot Noir and Chardonnay, for example. And Napa Valley is Cabernet Sauvignon. There is much more to the wine from these regions than type of grape, of course, but the iconic varieties are straightforward identifiers that confused New World consumers can easily understand.

Wine in Chile is really about three varieties: Cabernet Sauvignon, Sauvignon Blanc and Carmenere. Cab Sauv and Sauv Blanc together account for more than two-thirds of all wine grape plantings in Chile. These wines can be very good, but it must be said that they are cursed with that “good value” label that will be hard to shake no matter how many Wine Spectator Top 100 awards they receive.

Carmenere represents only 7 percent of vineyard plantings now, but it is seen by many as the breakthrough wine of the future, a uniquely Chilean wine that has the potential to do for Chile what Malbec has done for Argentina. The Wines of Chile report has high hopes for Carmenere both as an export product and as a tool to redefine Chile’s wine identity. But it warns against cutting corners to capture low price sales. Carmenere needs to be a premium brand if it is to serve its useful symbolic function.

Blogger Wine Tasting

Which brings us to Syrah and Pinot Noir — not grape varieties that you usually associate with Chile. They were the focus of a recent tasting organized by Wines of Chile that brought together, if that is the right phrase, a virtual group of U.S. wine bloggers including members of The Wine Economist staff. The idea was to use new media to get out the message about Chilean wine’s new directions and to help establish its wine identity among younger tech-savvy consumers. We were sent wines to sample, literature to read and provided with online access to Chilean winemakers for interactive Q&A.

Are wines like these the way forward for Chile? Syrah and Pinot Noir are high value bottled wine exports (FOB prices of $4.66 and $4.08 per liter respectively in 2009 compared with $3.37 for Cab Sauv and $2.79 for Sauv Blanc) and so they may be useful tools in this task of getting consumers to rethink the wines of Chile and what they might be willing to pay for them.

(Math note: Chile receives only about $2 per liter on average for its wine exports because lower priced bulk wine sales drag the average down while higher priced bottled wine exports try to hold it up.)

I asked the winemakers to comment on the potential for these wines on the international markets. How can Chilean Pinot Noir differentiate itself from New World Pinots from Oregon and New Zealand? And how can Chilean Syrah succeed in the U.S., where Syrah sales are slumping?

Wine Economist volunteer tasting staff: Scott, Janice, Kevin and Jeni

Their responses were not very enlightening, but I blame the online environment for that, with the group of winemakers in a boardroom in Chile trying to answer questions submitted from thousands of miles away by faceless bloggers. Anyone who has been on a conference call knows the problem. But, like conference calls, this internet session facilitated a great deal of interaction even if it wasn’t completely satisfying and so the pluses outweigh the minuses. I’ll just need to follow up, that’s all.

Tasting Notes? From the Wine Economist?

No one comes to The Wine Economist to read tasting notes, but I thought you might be interested in the team’s reactions to the wines. On the whole we liked the Pinots a bit better than the Syrahs — we just found more complexity in the glass and more to talk about. That said, I noticed that when everyone was given the opportunity to take home a partial bottle, it was the Syrahs that disappeared. Interesting.

The Syrahs were better with food, which in our case included tasty empanadas purchased from Pampeana Empanadas here in Tacoma and bruschetta with Fontina and  Huerto Azul Myrtleberry Chutney with Merken, a Chilean product that was provided by Wines of Chile along with the wines and is available from puro-gourmet.com.

I was especially interested in how college students Jeni and Kevin reacted to the tasting since young consumers are a key wine marketing target and new media initiatives like this are often organized with them in mind. Jeni said that she had never purchased a bottle of wine from Chile — her image of Chilean wine was pretty much a blank canvas —  but that the tasting put Chile on the wine map for her and she was more likely to try these wines in the future. Jeni’s image of Chilean wine changed from invisible to positive — a good sign.

Kevin had tasted Chilean Pinots before — he comes from the Willamette Valley in Oregon and is friends with many winemaker families. In Oregon, the aim is to be Burgundian, he said, and he was surprised by a couple of these Chilean Pinots. They weren’t exactly what he was expecting, which made him want to taste more to try to understand the Casablanca Valley terroir and the winemaker styles a bit better. Another good sign

Overall I would say it was a successful tasting that answered some questions and raised many more. The question of the future of Chile’s wine identity remains to be answered, however, so I’ll come back to it in an upcoming post.

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Thanks to Wines of Chile for inviting us to participate in the blogger tasting and to Amber Gallaty of the thomas collective for making the arrangements. Special thanks to Sue Veseth, Janice Brevik, Scott Hogman, Jeni Oppenheimer and Kevin Chambers for their insights on the wines and the virtual tasting process. The photos are by Sue and Scott.

Here are the wines featured in the April 2011 blogger tasting

Everything Old is New Again: Wine in Mexico & Turkey

This is the seventh  in a series of articles on wine in the BRICs and the New BRICs. Today we examine Mexico & Turkey.

Old Old and Old New

What in the world do Turkey and Mexico have in common? It is easy to generate a list of differences ranging from geography to history, language, and religion. Jim O’Neil probably included them on his list of the New BRICs because they both have relatively large populations (107 million in Mexico, 75 million in Turkey) and so substantial market potential as their middle classes expands

From a wine standpoint, Mexico and Turkey are linked by the term “oldest.” Turkey may be the oldest Old World wine producer, with evidence of wine production going back more than 6000 years. You cannot get much more “Old World” wine than Turkey, even if most people in the Old World never give Turkish wine a second thought.

Mexico is the oldest wine producer in the New World. Spanish soldiers and priests brought wine grapes with them,  The first evidence of wine production dates from 1521 (I see a 500 year anniversary celebration on the horizon). Conquistador Cortés ordered that new settlers plant grape vines (1000 vines for every 100 persons, according to the Oxford Companion to Wine), thus spreading Spain’s wine culture throughout the New World empire. Wine production in Mexico grew so successful that King Felipe II of Spain order a stop to new production in 1699 in an effort to protect Spain’s domestic wine industry.

Red and White vs Raki and Brandy

It is ironic that we don’t associate wine production with these two countries today given their deep historical roots. Turkey? It’s a Muslim country, of course, so we don’t think of alcohol or, if we do, it is raki, the fiery anise flavored drink. Mexico brings images of tequila (and wasting away in Margaritaville), beer, and perhaps Mexican brandy, the national liquor. Casa Pedro Domecq’s Presidente brand is said to be the best selling brandy in the world. Domecq is now part of the French drinks group Pernod Ricard.

Both Mexico and Turkey are important grape and wine producing nations today. Mexico produced a little over 1 million hectoliters of wine in 2007 according to OIV data — about  as about as much as New Zealand made in 2005 before its recent boom. Turkey is the world’s sixth largest table grape producer, surpassing Italy in this area, but only a small fraction of its output is made into wine. Turkey makes roughly the same amount of wine (213,000 hl) as Israel (218,000 hl).

Wine production in Mexico has fallen by almost 50% since the 1980s according to the OIV records while Turkey’s production levels have been more stable. Both Turkey and Mexico have the potential to rise up in the world wine rankings, but they each face particular challenges.

The Taste of Turkish Wine

Turkish wines can be stunningly good. Jancis Robinson’s tasting notes (from a 2009 research trip) find many peaks among wines make from international grape varieties. A Corvus Corpus 2004 received a rating of 17/20, for example. “This right bank style wine is really quite rich and full, verging on overripe. Extremely opulent and velvety.” A Robert Parker kinda wine, she said.

Ron and Mary Thomas, my senior Turkish wine correspondents, reported similar success on their 2010 tasting trip. “We found the wines of Turkey to be ubiquitous, great values, and extremely enjoyable,” they write. Among the reds they found the Syrah  wines hard to beat — some of the best Syrahs they have tasted anywhere — high praise. But the highest peak came from an unexpected source.

Our greatest discovery was the varietal called Emir.  We found it from several different producers in each area of Turkey where we stayed, most of the producers (or the fruit) located in the area we first stayed (Cappadocia—central Turkey).  This stony, flinty land produced this wonderful grape that is unlike anything I’ve tasted.  Think about a cross between a flinty sauvignon blanc from the Loire and a very dry viognier.  It had a light golden color and a very crisp finish.  Some lemony-apple notes, wonderful minerality, and pleasing to sip while it stood up well to fish and the ever-present smoky-roasted aubergine (which I had at every meal in Turkey).  This was a favorite wine we would drink anytime.  We found the same bottles to cost anywhere from about 15 Turkish Lire in the winery, to 30-90 in a restaurant (depending on the scale of the restaurant).  That’s a range of about $10 USD to $65.  We sometimes did not find it on the wine list, and started asking for it:  in all cases but one, they found a bottle in the back and presented it to us, and no matter who produced it, it was great.  It went beautifully with the bronzino in Ephesus and Istanbul, and was perfect with the stuffed zucchini flowers in Cappadocia.  Emir is king.

Indeed. And that’s part of Turkey’s problem. As the Oldest of the Old World countries, it has perhaps the richest treasury of native grape varieties. But who has heard of them, of King Emir and his court? Very few, I think, and this is problematic in a world where so many consumers are already confused by wine and have trouble mastering the basics.

The domestic market for wine in Turkey is relatively small and its international exports are limited. Belgium is its largest international customer according to a government report (Belgium?) followed by Northern Cyprus, Germany, Britain, the USA and Japan. A local search for Turkish wine uncovered a few bottles at a Mediterranean restaurant and not much else.  As the report says, there is much work to do for Turkey to realize its great wine potential.

More Than Margaritaville

“Baja — the New California?” was the title of Jancis Robinson’s review of Mexican wine after her visit to Baja California in 2010. “I am excited about the potential for wine in Mexico,” she said. And indeed some of her tasting notes are enough to make anyone excited. Here’s what she had to say about Union de Productores Textura 1 2007 (a blend of Tempranillo, Zinfandel and Grenache): “Deep crimson. Very sweet and dusty and ripe berried. Very Mexican. Very rich. Sweet spicy then nice dry finish. There’s a real beginning, middle and end to this wine. Good refreshing stuff on the finish.”

Very Mexican! I like that. Not a me-too wine. Not all the wines are big or sweet, of course, which is just as well. Lots of variety. Lots to look for and to like.

The biggest challenge? Climate, according to Jancis. Not enough rain. And, while I’m sure she is right in the long run, I think that infrastructure is probably an even bigger short term problem.

People who taste the wines of Mexico at wineries rave about their quality. But then when they order them in restaurants in the cities they are sometimes puzzled. Is this the wine I liked so well? I wonder what’s happened to it, they ask?

The answer, in many cases, is that Mexico’s transportation system of poor roads and long rides in hot trucks has baked the freshness out of the wine and left just a  hollow shell behind. Mexico can produce excellent wines, but it must also find ways to get them to market in good condition. This is a wine problem but of course it is much more than that.  It is a symptom of a general challenge to Mexico’s continued development.

Fair Trade Wine’s Long Journey

In this global age we are accustomed to having the world’s assorted products (including wine) wash up conveniently on our local supermarket shores. We seldom give much thought to how they got there or why, but wines don’t make, move or sell themselves so there is always a story to tell.

Case in point: this bottle of 2008 Fairhills Mendoza Vineyards Carbernet Sauvignon purchased last week at a Cost Plus World Market store in Tacoma, Washington. It is the product of a rather complex process of globalization.

Uncorking a Bottle’s Biography

The Fairhills brand is South African, but the wine is from Argentina. Must be a story there. The logo at the bottom proclaims that it is Fair Trade certified – wine with an ethical intent. You don’t see Fair Trade wines every day. The red tag up on the bottle’s shoulder indicates market reality: marked down from $9.99 to $8.88.

(Some studies suggest that wine buyers are not willing to pay more for “ethical” organic or biodynamic wines. In fact, one study found that wines labeled “organic” sold for less than identical wines without the ethical indicator. I wonder if this inverse price/ethics relationship holds for Fair Trade wine as well?)

Fair Trade products, like this wine, ask us to think about supply chains more seriously because they promise to return a bit more to the original producers to help build sustainable communities. I’m interested in the Fair Trade wine movement (I wrote about Fair Trade wines here, here and here), so I thought I’d try to learn a bit about this particular bottle’s long journey.

Twists and Turns

The story begins, unexpectedly, at the Du Toitskloof Winey in South Africa, founded in 1962 as a cooperative by six wine families. Originally a bulk wine producer in the bad old days of South African wine, DTK as it is known has moved upmarket in the post-apartheid export-driven era and Fair Trade wines are part of its strategy.

Since 2005 DTK has worked with the Fairhills Association to produce Fair Trade wine. Fairhills brings together a group of South African vineyard owners and their workers, with the workers having a majority of votes. Fairhills wine farmers supply the grapes, DTK makes the wine and Origin Wine, the third partner, provides logistical and market support. The growers receive a premium for their Fair Trade grapes and funds are returned to the Fairhills Association for community investments, a typical Fair Trade practice.

The initial market for Fairhills wines seems to have been Great Britain, since they worked closely with the UK-based Fair Trade certification group there. Susy Atkins,  the Telegraph’s wine critic, reports that Fair Trade wines have good penetration in London through supermarket chains including Co-op and Sainsbury’s and are featured in annual Fairtrade Fortnight programs. Click here to view a list of Fair Trade wines available in the UK. Fairhills has the largest listing (44 wines).

Fair Trade Pipeline

The South Africa-UK wine pipeline proved very robust (South African wines are now the fastest growing segment of the British market) and helped to expand the market both in terms of supply (drawing Chile and Argentina into the mix) and demand (introducing Fair Trade wines to the U.S. and other markets). Argentina is the biggest supplier of Fair Trade wines to the U.S. and the Fairhills Mendoza Vineyards Cab that I purchased at Cost Plus is part of that pattern. Organic Wine Trade Company distributes Fairhills here along with their other “ethical” wine products.

Whole Foods Market is one of the most important retailers of Fair Trade wine in the U.S., which makes sense since they sell so many other Fair Trade products (coffee, tea, chocolate, sugar, energy bars, body care products, flowers and rice according to one list). Other national retailers that stock Fair Trade wine include Sam’s Club, Target and of course Cost Plus World Market where I bought this bottle.

TransFair USA reports that over 120,000 cases of Fair Trade wine were sold in the U.S. in 2009, up from about 20,000 cases in 2008. The growth rate is a source of optimism, but the absolute quantity is relatively modest  – about the production of a single medium-sized domestic winery. TransFair says that the 2008-2009 sales produced a “premium” of over $130,000 that was returned to the grower cooperatives — quite a lot relative to the low wages they receive as farm workers. The distributor website reports that:

Fairhills Cabernet Sauvignon benefits the local farmers of Bodegas y Viñedos de Marañon and three small producers along with their farm worker community in Mendoza, Argentina.  The Fair Trade initiative is dedicated to ten farms to improve the quality of life for 210 members and 300+ children. The initiative is one of the first in Argentina and has used their sales to upgrade various schools in the region, purchasing new toys, establish a soup kitchen, and purchase an ambulance for the local health care center.  Future plans are to convert from conventional farming to all organic, building a sports club, and continue improving health care clinics and schools.

The journey that brought this bottle to my cellar is thus quite complicated. The wine comes from Argentina, but it wouldn’t have got here without help from people in faraway London and South Africa. The fact that this complex web can return community benefits to Mendoza farm workers is heartening, even if the amounts are quite modest at present.

The Future of Fair Trade Wine

Fair Trade coffee is easy to find these days — in fact it is impossible to buy anything other than Fair Trade coffee on my university campus. Fair Trade chocolate is everywhere, too. But Fair Trade wine remains a tiny (but growing) market niche. I wonder if this will change and what barriers Fair Trade wine must overcome to achieve the success of Fair Trade coffee? With this question in mind I’m starting a small research project to learn more about Fair Trade wine’s present market condition and future prospects. Watch this space for occasional related posts in the coming months.

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Thanks to Kazuko Golden at TransFair USA for helping me with statistics about the Fair Trade wine movement. Thanks to Leigh Barrick for sharing her research on Fair Trade wine with me.

Wanted: Retail [Wine] Therapy

I know that it is not easy to make good wine. And wine can be difficult to sell, too. But apparently buying wine is even harder.

That ’70s Wine

At least that’s the word from some top wine critics. Lettie Teague’s column in this weekend’s Wall Street Journal was ostensibly about that 1970s favorite, Pouilly-Fuissé, but much of it was actually a gentle rant about the difficulty she experienced in trying to buy a few bottles for a tasting. Seems the specialist wine merchants she contacted just didn’t have much in stock. She had to work pretty hard to put together a reasonable sample.

Is it just a Pouilly-Fuissé problem? Maybe, but Teague reported much the same experience a couple of weeks ago when she tried to put together a tasting of wines  from Washington state. Teague’s merchants carried just a bottle or two of Washington wine, same as that 70’s wine. That’s all we need, they told her. No one cares, they said.

What do Washington wines have in common with the French? I used to think it was latitude but now I know — you can’t buy them in New York! (BTW word of mouth evidence suggests that Washington wines might be easier to find in New York than Teague’s article indicates.)

Mind the Gap

I know there are many factors at work here including New York’s peculiar retail wine regulations, the dollar-euro exchange rate and especially the recent “flight to safety” among wine sellers who seek to minimize inventory in a very uncertain market.

America’s byzantine interstate wine trade regulations are part of the problem, too. I’ve often looked across the pond to Britain and imagined how great it would be to have a unified wine market (without dozens of state and even local regulatory regimes). Wine is easier to sell in Britain because of this and so I’ve always thought that it was easier to buy, too. I guess I forgot my own frustrated wine buying experiences living in London a few years ago, when I tried to find interesting U.S. wines to share with British friends;  pretty much all I could find in my local drinks shop was bottom shelf generics.

I was reminded of this by one of Jancis Robinson’s recent Financial Times columns where she vented her frustration about trying to buy just a bottle or two of very good wine for dinner. You can buy vast quantities of cheap and cheerful wine as Tesco, she said, and of course you can purchase many of the finest wines on earth by the case and have it delivered to your door the next day. But what if you just want one bottle of something a notch or two above the supermarket category?

Yes, you can do it, she said, but it isn’t easy. And then she listed the five British merchants that she thinks fill the bill. Five! Ouch. “… this list is just about it – in a country of 33.4m wine drinkers,” she moaned. The gap between BOGOF Tesco and a case of Chateau Lafite is bigger than I thought! Robinson cites the increasing dominance of the big supermarket chains as a critical factor driving the specialist wine merchant out of business. Tesco, of course, is now the world’s largest wine merchant and 70% of British wine comes from a supermarket shelf.

Decanter published an article last year (in the 2009 California supplement) bemoaning the fact that so few American wines are available in the UK. Bottom and top are easy enough to find, but nothing much in the vast middle. They cited a number of factors including American winemakers’ resistance to the deep discounts needed to make export sales, high British retail margins and the incompatibility of American wine styles and British palates. Whatever the reason, it seems that British wine buyers are surprisingly under-served when it comes to America’s diverse wine array.

Why Can’t a Wine Be More Like a Book?

It occurs to me that the situation facing wine buyers today is a lot like book buying was twenty years ago. It was easy to find best sellers and trashy paperbacks. And specialist shops catered to particular interests at a price. But much of the vast book supply was very difficult for buyers to access.

And then came Amazon.com, of course. And now the world of new and used books is only a click away.

Wouldn’t it be great if there were an Amazon.com for wine? That would be one “killer app,” as they say. But I don’t think it is going to happen, at least not soon. Amazon.com announced plans to start selling wines online a couple of years ago, but nothing seems to have come of it and it is easy to see why.

Although bottled wine does share many of the attributes that made books Amazon.com’s initial target market, there are a number of discouraging negatives to consider. Wine is heavy and costly to ship compared to books.  A books doesn’t care if the weather is hot or cold while it is in transit, but your half-case of Chianti surely does. And of course there are the legal barriers that restrict interstate shipping at every turn.

I’m hoping that someone will come along with that Killer Wine App that makes fine wine buying as efficient as shopping for books, but until then I think that retail [wine] therapy will remain a source of frustration, not relief, for at least some of us.

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Jancis Robinson’s column in Saturday’s Financial Times suggests that wine books share some of the same distribution frustrations as wine. She reports a trend towards self-publication of specialist wine books.

Good News & Bad News from Oz

Sometimes the good news is that the bad news could be much worse. At least that’s how it seemed to me when the wine economists met at UC Davis last week to discuss the continuing Australian wine crisis.

Kym Anderson, a leading expert, spoke about the problems in Oz at the symposium on “Outlook and Issues for the World Wine Market” and I thought his assessment of the “challenges” Australia faces was pretty grim.  Big oversupply. Falling grape prices. More and more quality grapes sold off at fire-sale prices in the bulk market (40% this year compared to 15% in the past).

The best selling white wine type in Australia isn’t from Australia any more — it’s Marlborough Sauvignon Blanc. Even the Australians are tired of “Brand Australia” Chardonnay!

Maybe, Baby

Professor Anderson looked for a light at the end of the tunnel and was able to point to some potential sources of relief. Maybe water reforms could be implemented. Maybe R&D to help the industry deal with climate change would produce results. Maybe the new export strategy to promote Australia’s regional diversity and wine families would catch on. Maybe the China market will open wider and drink up the surplus.

Since the bad news was so compellingly concrete and the hopeful notes so speculative, I took the overall forecast to be very dark indeed. Imagine my surprise, then, when I attended a talk by another Australian expert the next day who described  Anderson’s presentation as optimistic! When the good news is this bad, the bad news must be really bad.

Bad News, Bad News

Sure enough more bad news arrived shortly thereafter in the form of a Wine Spectator article, “Aussie Wine Company Faces Angry Creditor,” concerning the financial problems of The Grateful Palate group, which exports many hot brands to the U.S. market including the unlikely-named Luchador Shiraz shown here.

Trouble is brewing in Australia. The Grateful Palate’s Australian affiliates, which produce wine under labels such as Bitch Grenache, Evil Cabernet Sauvignon and Marquis Philips for American importer Dan Philips, are in receivership and face the danger of possible bankruptcy. Growers and other creditors for the South Australia-based affiliates of the company received notice on June 18. Many growers, already facing tough times, worry that they’ll never get paid for fruit they sold Philips.

Philips, the company’s founder and owner, confirmed that he is in negotiations with his top creditor, Dutch lender Rabobank, but declined further comment. The bank initiated the action to put Grateful Palate International Pty Ltd and several related Australian companies into receivership. The most prominent is R Wines, a partnership with winemaker Chris Ringland, but 3 Rings, a joint venture involving Philips, Ringland and grower David Hickinbotham, is also part of it.

This is bad news, of course, but bad news is no longer a surprise to those of us who are following the Australian wine scene. Perhaps it is really good news of a sort — an indication that the necessary industry shake out is gaining speed. Hard to tell good news from bad.

Darker or Brighter?

The same situation applies to the Foster’s de-merger situation. Foster’s, the Australian beer giant, bought into the wine business at the top of the market, paying an estimated $7 billion for an international portfolio of about 50 top brands including Penfolds, Wolf Blass and  Beringer. The investment may be worth as little as $1.5 billion in today’s market.

Foster’s beer business is an attractive target for global giants like SABMiller, but not with the wine portfolio attached. So Foster’s announced a de-merger to allow the beer group to move ahead independently of the wine group. What will happen to the wine business?  Who will buy these assets in today’s depressed environment?

When I posed this question to an Australian winemaker several weeks ago the answer came back quickly: China! Everyone in Australia is paranoid about the Chinese buying up our natural resources, and so we are convinced that they will buy up Foster’s wine business, too.

Interesting idea, I thought at the time. No multinational wine firm (Constellation Brands? Gallo?) would want to go bigger right now. But maybe a Chinese firm that wants to break into the global markets would take the bait. Might make sense. Maybe.

Bright Idea

Sure enough, the Bright Food Group. (Mission: “To build the company into a leading enterprises group in the national food industry, with famous brands, advanced technology, strong competitive power and deep influence in the world by the end of 2015.”)  recently signed a three-way memorandum of understanding with the New South Wales government and the China Development Bank to explore opportunities for the Bright Group to invest in the sugar, dairy and wine industries.

A Financial Times article reports that  the company is interested in “global top ten players in wine, sugar, food packaging, commodities and healthcare sectors.” Bright Food is currently studying both wine and beer assets in Australia, but has not decided to buy either yet according to the FT.

Many Australians no doubt consider the potential sale of yet another natural resource business to Chinese buyers bad news in terms of their economic sovereignty, but that bad news might actually be the best news they can expect given the sorry condition of the global wine market today.

The {Wine Economics} Magnification Effect

One of my pet theories about globalization could be called “the magnification effect.” Although global markets change things for sure, often their biggest effect is to magnify or exaggerate existing trends and conditions. A Decanter report from Bordeaux provides a good example of how the Magnification Effect works.

The Law of One Price

Although people talk about “Bordeaux wine,” there has never been a “Bordeaux wine market.” The Law of One Price holds that if there is a single market there will be a single price. But it is the difference in prices that is Bordeaux’s most notable feature. Some wines from the region sell for thousands of dollars, others for a few bucks and some … well they go to the distillery for mere pennies.

This market segmentation occurs in all wine regions, but it is more noticeable in Bordeaux because these wines have always been targeted for export (the globalization element) and so price stratification is more pronounced.

Students of wine history know that Bordeaux is in fact defined by these differences. The Classification of 1855, which established a strict hierarchy of Medoc wine producers that persists to this day, was not based upon sensory evaluation, as you might expect, or critical analysis but simply on market price.

The gold's at the top ...

The Twilight Zone

Over the years, as global markets expanded, the price differentials recognized in 1855 became embedded in the market and magnified. The Decanter article illustrates the current extreme. Announced prices for 2009 are substantially higher for the 400 top-tier Bordeaux wines that are sold en primeur: up an average of 18.6% over the 2005 “vintage of the century” and 48.7% above the recession-plagued 2008 market. Good times for the top names, as Orley Ashenfelter pointed out on two occasions during the recent American Association of Wine Economists meeting at UC Davis.

But there are thousands of wine producers in Bordeaux and times are very hard for many who are not in the top tier. Decanter reports that

…  the official price paid by merchants for a tonneau (900 litres, or the equivalent of 1,200 bottles sold in bulk) of AOC Bordeaux red has dropped to around €600 per barrel – less than the ex-chateau price for a single bottle of any of the top wines.  Most producers report that actual transaction fees are dropping as low as €500 per tonneau. Bernard Fargues, president of Syndicate of Bordeaux (which represents over half of the regions’ 8,000 winemakers, all producing AOC Bordeaux and AOC Bordeaux Superieur) told decanter.com that around 90% of his members were in difficulty, with at least 50% suffering serious financial problems.

If my math is right, some Bordeaux wines have fallen into the Two Buck Chuck danger zone while others have risen to … to what? The Twilight Zone!

This magnification effect has become global, as was readily apparent at a symposium on “Outlook and Issues for the World Wine Market” held in association with the Davis meetings. Speakers emphasized the widening market segmentation. Bulk wines (wines that sell for less than $5 per bottle equivalent and often for much less) have developed a truly global market in part, as several speakers noted, because bulk wine buyers aren’t particularly interested in terroir — they basically don’t care where their wine comes from, only what that it has a familiar taste and doesn’t cost very much.

Somewhere vs. Nowhere at Trader Joe’s

I noticed this on a recent visit to Trader Joe’s where a new line of Two Buck Chuck has appeared — Charles Shaw International wines, sourced from Australia’s surplus wine lake and selling for the same low price as the original product. I don’t imagine that anyone will refuse to buy it because it is “international” rather than from the San Joaquin Valley like the rest of the Two Buck Chuck lineup.

Bulk wine prices are deeply depressed because of this mass global market, squeezing out inefficient producers (or those who don’t benefit from government subsidies of one sort or another). Profits per acre in the San Joaquin Valley (where most of California’s bulk winegrapes are grown) is down to $200 acre — an amount so low that growers are switching to other crops such as walnuts and almonds where the global competition situation is more favorable. One grower who attended the symposium talked of leaving fruit on the vine for the first time in 25 years.

If the market for bulk wines is global, I guess you could say that the premium wine market is “international.” Buyers do care about where these wines come from and so global sourcing is not an option. This exposes producers to a different set of risks and rewards. Australian winemakers, for example, find themselves victim of the strong Australian dollar. China’s huge needs for Australian minerals has driven the currency up and helped price Australian premium wines out of their traditional market niches.

The Law of Yuan Price

(The exchange rate obviously affects the bulk wine market, too, and is one factor in Australia’s excess capacity in that market segment. The exchange rate depresses price both directly, by raising export costs, and indirectly as unsold premium wines are diverted to low-price bulk wine markets.)

Wines at the very top of the pyramid also face challenges, but they are different from those of bulk wine and premium wine. Globalization is a positive benefit to top-flight Bordeaux, for example, because it means that Hong Kong and Chinese buyers can be found to replace (or apparently more than replace) declining buyer interest elsewhere.

Decanter recently published their first Chinese language Bordeaux report — a clear indication of the expanding global market and a suggestion that the Magnification Effect has not yet reached its peak.

Secrets of Argentina’s Export Success

#1 Wine

Argentina’s wines are hot here in the United States. Recent Nielsen Scantrak off-premises  data show a 38.7 percent dollar value rise in sales of Argentinian wines for the 52 weeks ending April 3, 2010. That’s an enormous percentage increase, much greater than the total market (up 3.5 percent) and a good deal above the next biggest gainer (New Zealand with a 17.2 percent rise).

What’s Argentina’s secret?

The secret? As usual, there is no one simple answer. There are important factors on both the supply side and the demand side: good products, the right products at the right time and favorable economic policies.

Argentina produces excellent wines. Decanter magazine recently (June 2010 issue)  published a report on Argentinian Malbec that featured the largest tasting in their history — a record 255 wines. Four of them received  five stars, the highest designation. The Achaval Ferrer Mendoza 2008, which often sells for less than $20 here in the U.S., led the pack with 19/20 points.

Argentina is fortunate to be producing wines for the times. Many Argentinian wines are good values at a time when consumers are careful with their money and they represent good choices for ABC (anything but Chardonnay) and ABS (anything but Shiraz) buyers.

International Influences

#1 Export Brand

Argentina’s economic policies are another consideration. The favorable dollar/peso exchange rate contributes to Argentina’s competitiveness on the export market. And although I don’t know very much about them, I think that barriers to foreign investment in the wine industry must not be very high because so many important producers have international connections.

Bodega Colome is owned by Donald Hess of Switzerland, for example, who also owns The Hess Collection in the United States. Achaval Ferrer is a joint venture with a Montalcino winemaking family. Bordeaux wine investors are players in Diamandes and Clos de los Siete. O Fournier’s owner is Spanish. Cheval des Andes is a joint venture of Moët Hennessy’s Terrazas de los Andes and St-Emilion’s Cheval Blanc. Bodega Norton is owned by the Swarovski family of Austria (famous for their crystal.) Dig deeper and you’ll find even more international money and talent at work.

Top Export Brands

These are good reasons for Argentina’s recent success, but a recent article on WineSur.com titled “The Top 5 Export Brands” got me thinking that there might be other factors at work. I was particularly intrigued by the table showing the top bottled wine export brands to different markets. I’ve pasted the table below so that you can analyze it along with me. Click on the table to read the full article and view a larger image of the data.The first thing I noticed is how heavily weighted Argentina’s recent exports are toward the North American market. Britain, still the most important wine market in the world, has much lower export volumes as shown here. I suspect that one reason for this, however, is that these data are for exports of bottled wines (including bag-in-box and Tetra-Paks) and I’ll bet that Tesco and some of the big supermarket chains import their Argentinian value wines in bulk and bottle them in the U.K as house brands. Those export sales don’t show up here.

The second thing that caught my eye was the wide range of export prices. Alamos, the U.S. leader, sells for $30.57 per case export price, about the same as #2 Don Miguel Gascon. Marcus James, the top export wine in volume but only #3 in value, sells for just $12.54 per case.  Catena, the #4 brand, exported just 39,000 cases in the time period under consideration, but received an average of $64.97 for each one. Argentina’s exports to the U.S. (and the other markets shown here) span the price spectrum — another advantage.

Location, Location, Location?

Finally, I became interested in the particular brands that topped the export market tables and I think I discovered another secret weapon: distribution. It’s a cliche that in business the three most important things are location, location, location. Location is important in wine, too (ask any terroirist), but efficient distribution sure makes a difference and Argentinian producers have been wise in making good use of the most efficient distribution networks in each country.

Alamos has the highest export earnings by a good margin — why? Well Alamos is made by big gun Bodega Catena Zapata. It is a value line and is imported and distributed by the Gallo company. I suspect that Gallo’s large and efficient distribution network and its marketing prowess are reasons for Alamos’s great success. Significantly, Gallo also handles Don Miguel Gascon, the #2 export brand.

Marcus James, the #3 export brand, is a Constellation Brands product and is also backed by substantial marketing and distribution power. I was actually surprised to see Marcus James on this list because I didn’t realize they sold Argentinian wine. Guess I need to pay closer attention.  They used to source their wine from … Brazil!

Fuzion (a Shiraz-Malbec blend, I understand) is the best seller in Canada. It is made by Familia Zuccardi and distribution is one of its advantages, too. In Canada government wine and liquor shops are key sales vectors. The support of Ontario’s Liquor Control Board (in addition to successful viral marketing) seems to have made Fuzion a hit in a market that is otherwise very difficult to penetrate.  (At one time the Ontario Liquor Control Board was the world’s largest retailer of wine. I think Tesco is #1 today.) Distribution is key and both Alamos and Fuzion seem to have it.