When Will Wines from Asia Hit U.S. Shelves? (Hint: They’re Already Here!)

chinasaleMost people are surprised when I talk about the growing wine industry in Asia. In working on my next book  Around the World in Eighty Wines I have sampled interesting wines from China, India, Thailand, Korea, Japan, Vietnam and even Bali. And I know there are more out there waiting to be discovered.

Why are people so surprised? Stereotypes are part of the answer — wine isn’t part of the way that we usually think of these countries. But availability is also important. We understand that wine is made in far-away New Zealand because we see it on store shelves. When will Asia wine arrive in the U.S. market?

Flying Below the Radar?

Asian wines are a little more visible in Europe and the U.K. Reports from Paris suggest that Chinese wines can be found in many places (perhaps reflecting in some way the boom in Chinese investment in Bordeaux) and Berry Bros. & Rudd, the London wine seller, proudly advertises its commitment to Chinese wine offerings. Sue and I enjoyed some lovely Thai wines from Monsoon Valley on our last visit there to London, too.

Asia wines are pretty much flying below the radar in the U.S., but they are here if you know where to look. I found a nice Korean raspberry wine at one local Asian market, for example, and a Chinese wine — a Changyu Cabernet — at another. A brand of Chinese wines crafted specifically for the U.S. market appeared a few years ago and made a bit of a splash, but now Dragon’s Hollow wines seem to be hard to find.

Not Sherlock Holmes
sula-sauvignon-blanc-premium-white-wine

You won’t have to be Sherlock Holmes to find wines from India if Rajeev Samant has his way. Samant is founder and CEO of Sula Vineyards and his wines are not just here, but are getting a good deal of attention. They were featured in the May 2016 issue of Wine Enthusiast magazine, for example. The Sula Dindori Reserve Shiraz was named an Editors’ Choice and the Sula Sauvignon Blanc, Chenin Blanc and Shiraz all received ‘Best Buy’ recommendations.

Wine was probably  not high on priorities when Samant was growing up in Mumbai, but things changed when he came to the United States to attend Stanford University and work for a while in Silicon Valley. Visits to Napa Valley and wineries like Robert Mondavi left their mark.

Coming home to India, Samant accepted the challenge of reviving a family farm near Nashik. He cast about for crops that would provide higher margins and wondered if wine grapes might thrive. With help from a California flying winemaker, he learned tropical viticulture and made the necessary winery investments.

The rest, as they say, is history, but that phrase doesn’t begin to capture the challenges that Samant has faced and overcome over the last 20 years. Sula is today India’s largest winery, with capacity to both service the growing India domestic market and also make targeted export sales.

The Mondavi of Mumbai

The Stanford University alumni magazine published an article about Samant a few years ago, calling him the “Mondavi of Mumbai,” a reference to Robert Mondavi, who was also a Stanford graduate.  It was a bit of journalistic hyperbole then, but the title is not without merit today.tasting1

Samant seems to have followed the Mondavi blueprint in many ways, both in breaking new ground in wine production and promoting his products and the region through wine tourism. The Sula Vineyard winery includes attractive hospitality facilities and hosts concerts and festivals, too.

The operation is world class. Or at least that’s what the experts at The Drinks Business believe — they presented Sula with the prize for  Best Contribution to Wine and Spirits Tourism at their London awards ceremony in May.

Once the Novelty Wears Off …

The thing about wines from unexpected places is this. People will try them once just for the fun of it, but the quality and value have to be there to earn a repeat sale. Sue and I have had an opportunity to taste the Sula lineup and we think the wines pass the test.

No one comes to this URL looking for tasting notes or point scores, so I won’t give any, but the Sauvignon Blanc was particularly noteworthy. It managed to walk a fine line. It was made in an international style — clean, crisp, balanced — but it had its own character, with a rather nice finish that wasn’t Marlborough or Napa or anywhere except Nashik. Not a me-too wine, if you know what I mean, and therefore a good addition to the wine shelf.

Sula isn’t the first wine from Asia to arrive on these shores and I expect we will see more and more of them now, especially if (as I worried in a previous column) the recent UK Brexit vote makes London a less desirable wine market and more of these wines are directed our way. If that’s what happens, I guess London’s loss is our gain.

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This brief video does a good job telling the Sula story. Watch it — I think you will be surprised!

It’s Complicated: Four Things I Think I Learned at Riesling Rendezvous 2016

rrSue and I are back from Riesling Rendezvous 2016, a gathering organized by Chateau Ste Michelle and Dr. Loosen. The conference brings together winemakers and industry leaders from the four corners of Planet Riesling for three days of tasting, discussion and debate.

I have been fortunate to attend four of the five editions of Riesling Rendezvous beginning with RR2 in 2008. Herewith a quick accounting of my takeaways from the 2016 meeting.

1. Talking around in circles

One constant of the conferences has been a tendency to talk around in circles during the formal tastings — twenty dry Rieslings on Monday and twenty more off-dry wines on Tuesday. (Twenty wines for three hundred participants each day– that, my friends, is a lot of stemware to set up, fill, dump, and replace and a lot of bottles to organize.)

Don’t get me wrong — these tastings are amazing. What a great opportunity for winemakers to benchmark their own wines and assess the state of the industry than by tasting forty of the finest Rieslings on earth and hearing from the winemakers. Truly a priceless experience.

But as the discussion unfolds I have found that the same issues seem to come up over and over again. Do you really think this is a dry Riesling (often stated as an accusation more than a question)?  The focus often shifts to the analytical data (RS, TA, PH), which is another set of circles. Then the big question: is this Old World or New World (the wines are tasted blind)? It is as if each wine must fit neatly into a set objective category and, of course, they don’t because wine isn’t really like that.

These debates, unlike the actual tasting of the wines, seem like a dead end to me. Perception of sweet and dry is individual and subjective, so what is dry to you might be sweet to someone else. The analytical data have limited significance, as Jamie Goode, who also attended the meetings, recently explained.

And it doesn’t matter to me very much if someone can guess where the wine is from — wine should not be a game of Where in the World is Carmen Sandiego. In any case, even the experts usually couldn’t answer the Old/New geography question with confidence and there were many surprises when makers and regions were revealed.

Talking around in circles doesn’t lead anywhere by itself, but I think it does serve a purpose. Like the tasting itself, it brings people together and often puts them in a frame of mind to take action either in their own winemaking or address the industry’s collective problems.

2. Actions speak louder …

The good news is that once the Riesling folks get beyond ritual circle talking they can and do accomplish quite a lot. One problem that is often noted is that many consumers think of Riesling as a sweet wine, unaware of its great diversity of styles and unable to figure out what is what. The International Riesling Foundation and its very useful Riesling  scale came out of earlier Riesling Rendezvous gatherings. Not every winery uses the scale as a back label way to communicate with wine drinkers, but those that do give consumers useful information and the confidence to try a new wine.scale-300x103

Chateau Ste Michelle uses the scale, for example, and has seen significant growth in both its Dry and sweeter Harvest Select wines that share shelf space with the big-volume off-dry Columbia Valley bottling. Consumers seem to be able to find the particular wine style they like best and come back from more. That’s progress.

The “winemaker only” sessions at Riesling Rendezvous allow for transfer of knowledge as well as a frank exchange of opinions and it seems like these discussions have had an important impact. The quality standard of Riesling has risen as technical expertise about vineyard and cellar practices have been shared. That’s progress, too.

3. Riesling’s rising tide

One impact of the rising quality tide, as noted earlier, is that even the  experts find it more difficult to tell Old World Riesling from the New World wines. At one point in the dry wine tasting, for example, Tom Barry (of Jim Barry wines) responded to a question by looking at the unidentified wine in his glass and saying simply and approvingly, “This is a nice wine from somewhere.”

The days are gone when Old World wines were typically better made than their New World competitors. Now there are well-made wines from all the regions that participated in the program. But I don’t think the wines have been reduced to a homogeneous “international style” — there is still great diversity even if there is also a trend, well documented in John Winthrop Haeger’s recent book Riesling Rediscovered, toward market-friendly drier styles.12182-110

The big moments of the earlier meetings happened when we found a stunningly good wine (and great wines still earned applause in 2016). This time most of them were stunners and the oohs and aahs were loudest when we encountered a wine that surprised  by walking a tightrope defined by terroir, vintage or technique with great success, like the memorable 2014 Tantalus Old Vines Riesling from British Columbia. The rising quality tide has served to accentuate and reward originality and authenticity, which is a good thing in my view.

4. Keep it complicated (and tell stories)

Riesling is special — it is my Desert Island wine if I have to choose one. The wines that we tasted spoke clearly and truthfully about Riesling’s progress around the world.

But as quality has increased Riesling has also become a bit more like other wines in the sense that the key factors are not simple dichotomies — Old versus New, dry versus sweet, good versus not-so-good and so on. And this is also a good thing.

Riesling Rendezvous revealed a wine world taking the next step from dichotomies to richer ways of thinking. As Ernie Loosen said at the opening session, complicated things need to be understood in complicated ways. How is this done?  People understand complicated things through the stories they tell about them.

And that’s where I see Riesling headed now. The story of what is happening today is complicated and important. It’s time to move beyond dichotomies and develop richer narratives about Riesling wine in the Loosen style that will attract and engage consumers, especially younger ones, by connecting them more persuasively to the people and places behind the wines and to their friends who they invite to share them.

Riesling Rendezvous has an important role to play in shaping those stories and helping producers get their complicated messages out. Can’t wait to see (and taste) the next chapter.

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Thanks to Chateau Ste Michelle and Dr Loosen for sponsoring Riesling Rendezvous and allowing us to attend. Thanks to everyone we met and talked with for your insights.

No Sale: Liv-Ex Report on Low Interest Rates & Bordeaux’s Dismal New Normal

bigstock-no-sale-280I have sometimes made fun of my wine collector and investor friends, saying that they are engaged in what Thorstein Veblen might have called “Conspicuous Non-Consumption.” They buy some fine wines for the purpose of not enjoying them in the glass, or so it seems at times.

Owning the wines and visiting these great wines in their climate-climate-controlled secure storage lockers is pleasure enough. Drink them? Horror! Then they’d be gone! OK, I know it is more complicated than this, but  you get the idea of the joke.

Not For Sale

Now a fascinating report from liv-ex.com, the fine wine market trading platform and research center, suggests that non-drinking of great Bordeaux wines must be considered along with another phenomenon that would make even Veblen scratch his head: producers who make a business of not selling their wines. Or not selling very much of what they produce.

livex“Final Thoughts on Bordeaux 2015” is the title of a Liv-ex report that tries to make sense of the recently concluded Bordeaux en-primeur campaign. This year’s market for 2015 wines was unusually complicated, the report indicates. Vintage quality varied greatly by sub-region, for example. And while critics gave the wines high markets overall, they didn’t do so consistently, which is important since the speculative value of a 97 score (Suckling’s overall rating of the vintage) is very much greater than 94 points (Wine Spectator‘s evaluation).

Add to this exchange rate changes in the run up to the Brexit vote and you have a recipe for confusion. But all of this doesn’t really explain the fact that seller prices were well above what the market expected and so not much wine changed hands (at least compared with a few years ago). The opportunity to re-set the market, which the Liv-ex analysts had anticipated, was apparently wasted.

High Taxes, Low Interest Rates

This wasn’t a universal situation, the report makes clear. 2015 was the best vintage ever for some producers and the market accepted the higher prices. And some producers offered necessary discounts to move their stocks. But many raised prices and seemed content with meager sales and big retained stocks. Why?

The answer, according to Liv-ex, is complicated and begins with today’s historically low interest rates, which make the cost of carrying inventory low. Fine, but don’t they need to sell wine to pay costs? Yes, Liv-ex explains, but the margins on the grand vins are very high and so most costs can be covered quickly with an initial tranche of sales. Second- and third-wines provide additional cash flow.

France’s high tax rates are also mentioned — postponing revenue is also postponing taxation (possibly until a more business-friendly administration takes office).

A Different Economic Model?

But perhaps the biggest factor, which contributes to the “new normal” that Liv-ex sees, is a change in the economic structure of the business. Profits from making and selling wine are now less important than maintaining and advancing the capital value of the chateau itself. Selling wine at a lower but very profitable market price is old news. Raising price to enhance reputation and capital value is the new strategy.

The Liv-ex study notes that

“Priorities have shifted from making sales and generating cash flow to trying to maximise prices (of the grand vin in particular) and by extension the capital value of their properties. Indeed, …  the motivation to generate profits is dwarfed by that of keeping land values high. … Owners have achieved this by releasing smaller quantities onto the market and spreading their production across a second and sometimes a third label.  … Many commentators ascribe this trend to deep pockets. It is true that most top chateaux these days are owned by billionaires and insurance companies, but this has always been the case. The main motivation for the strategy is exceptionally low interest rates.”

The combination of the factors described here combined with similar incentives for the negoçiants results in prices generally above what consumers are willing to pay, the Liv-ex study concludes. The 2015 Bordeaux market was an improvement over 2014, but this is a “low bar,” the study says. “Moreover, for as long as the current environment — distorted by low interest rates — persists, there will continue to be a standoff … ” between supply and demand.

Hotelling’s Rule Alternative

The Liv-Ex researchers study Bordeaux closely, so their theory is probably correct, but as I read the report I couldn’t help thinking of one of the most famous microeconomics theories of the first half of the 20th Century: Hotelling’s Rule, named for Harold Hotelling. Hotelling was interested in the rate at which a firm exploits a finite resource that it owned, assuming the usual (for economic theory) perfectly competitive market environment.

To over-simply, the objective is to maximize the present value of the finite resource and so the short-run production decision depends on whether market price is expected to rise faster or slower than the rate of interest. If price is expected to rise faster than the rate of interest, it paid to hold back production for the future. If price is expected to rise more slowly than the rate of interest, then selling now and investing the returns makes more sense.

Under theoretical conditions, the equilibrium occurs when market price rises at an exponential compound interest rate.

A given vintage of a particular wine is indeed a finite resource to be sold today or sold tomorrow. Interest rates today are extremely low and so only very modest expected price increases are necessary to induce a winery to hold back stocks. At zero interest, prices need only remain steady to make stock-building a viable strategy.

The incentive to retain inventory is stronger than this, in fact, because the Bordeaux fine wine market is not perfectly competitive and restricting supply of a particular classified wine raises its current price. So in fact withholding stock may allow a wine firm to have its revenue “cake” today (scarcity premium for the wine that is sold) and eat it tomorrow, too (in the form of future sales of the retained inventory at prices above the low compound interest bar).

All else being equal, when market interest rates inevitably rise, this will shift the calculation towards current sales. But in the meantime, No Sale is the name of the game.

Logical Extreme: No Sale

I don’t think this application of Hotelling’s Rule is a better explanation than the Liv-Ex analysis or inconsistent with it, but it does open up a different way of thinking — looking at the situation in terms of the present value of the income stream.

It is possible to take this way of thinking too far, however, which is what New York Times columnist Frank Bruni hilariously did earlier this year when he wrote an “April Fools” column about college admissions. He announced that Stanford University had taken selective admissions to its logical extreme … and admitted zero percent of its applicants!

Because it was now totally unattainable, Bruni reported, Stanford was even more ardently desired than before and admission applications and strategic financial donations poured in. In Bruni’s fictional world, zero admission “sales” maximized Stanford’s reputation and revenue stream. Wow!

I wonder if that would work with wine? Whatever you do, don’t let the folks at Lafite, Latour and Margaux read Bruni’s column.

What Next? Wine Industry Mid-Year Report & Preliminary Brexit Analysis

economist-cover“What next? was the question I asked to open my report at the Unified Wine & Grape Symposium‘s “State of the Industry” session in January. Risk and uncertainty were my forecast for 2016.

Bernie, Donald, Zika, Brexit. Look out! Anything can happen, I told the audience, although I ended with a Frank Sinatra theme. It could be a “Very Good Year” if we can dodge the many potential hazards.

I wasn’t the only one who was worried. Four speakers in a session on wine industry investment were asked about their expectations for 2016. All four said that the prospects for the U.S. wine industry were bright … unless something happened to the economy.

Cautious Optimism?

We are halfway through the year and the cautious optimism expressed earlier seems justified. The U.S. remains one of the few large economies to be growing, for example, and unemployment rates are low. The June jobs report offered evidence of further recovery. But confidence in economic growth seems very fragile and the Federal Reserve has hesitated repeatedly to raise key interest rates.

One worrisome indicator is the yield curve, which tracks the difference between short- and long-term interest rates. The yield curve has become unusually flat recently, a pattern that is sometimes associated with economic slowdowns. A  recent Deutsche Bank analysis of the yield curve forecasts a 60% chance of a recession in the U.S. in the next 12 months. Yikes!

Interest rates around the world are so low (and sometimes even negative) that policy makers are worried. What if something goes wrong? How can we push interest rates even lower? Would it make any difference if we did? With fiscal policy handcuffed by political chaos in many countries and monetary policy seemingly out of ammunition, there is concern that a crisis in one country could easily spread to others.

What next? That’s still the right question, both in general and when it comes to wine. While the U.S. wine market continues to grow and attract the attention of international competitors, the Nielsen figures reported in the July 2016 issue of Wine Business Monthly suggest caution. Off-premise wine sales increased by a rate of just 1.1 percent overall in the four weeks ending April 23, 2016, indicating a possible deceleration of earlier more healthy growth.

Brexit’s Many Potential Impacts20160702_cuk400

The list of potential challenges and threats is very long but the U.K.’s vote to leave the European Union (a.k.a. Brexit) is at the top of most lists. What does Brexit mean to the wine business? The answer is that it is too soon to be sure, but here is a quick guide to what to look out for and the impact on wine.

The biggest impacts of Brexit to far have been political, with the heads of the Conservative Party and the nationalist UKIP group both resigning (for very different reasons) and Labour’s leader under sharp attack from his own members. Since British tax policy has been a significant burden on wine sales there in recent years, the uncertainty about the who will lead and where she (Theresa May will take over as Prime Minister in the next day or so) will want to go is significant for wine.

The partial political vacuum in England has seemingly increased the influence of Scotland’s talented leader Nicola Sturgeon, who suggests that Scotland might once again consider leaving the U.K. (a Scexit?) in order to remain closely linked to the E.U. Sturgeon has taken strong anti-alcohol positions, which could affect wine policy, although this is way down the list of things to worry about if Scotland breaks away and the U.K. breaks apart.

Financial markets react to news more quickly than the “real” economy and the rise of the U.S. dollar and fall of the British Pound are the most visible effects so far. The Pound has tumbled dramatically as the graph above show and some observers believe that it will continue its descent although this is far from certain.newfx

Short Run: Exchange Rate Effects

The falling Pound is important because, as this table of U.S. exports for the first quarter of 2016 from Wine by Numbers indicates, the U.K. has become a more important market for U.S. wine exports in recent years. The U.K. is second to Canada in U.S. bottled wine exports and first in the bulk wine market.

The falling Pound makes imports from the U.S. and other wine nations more expensive in the U.K. U.K. consumers are notoriously price sensitive, so the falling Pound could produce substantial wine demand impacts, especially if there is a U.K. recession, as many expect, due to falling investment (see below).

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The exchange rate effect will hurt U.S. exports to the U.K., but the biggest impacts will be on other countries that rely upon the British market to a greater extent than we do. Australia, South Africa and of course European wine producers will take a bigger hit.

The problem is compounded by the fact that supermarkets are a critical sales vector in the U.K. and much of the food they sell is imported and will therefore be more costly to source. Supermarket margins are likely to be squeezed as they attempt to pass on higher costs to consumers with uncertain economic prospects.

Don’t be surprised if this puts pressure on foreign wine suppliers to cut their wholesale prices to British supermarket buyers and thus absorb some of the exchange rate impact. That is an incentive to develop alternative markets … such as the U.S. The margin wars are just getting started.

So the wine news is not very good in the U.K., where wine prices are likely to rise, incomes could fall, wine taxes may also increase, margins come under attack, and prohibitionist forces may be strengthened. Bad news for the British who drink wine and bad news for others including U.S. producers  who want to sell it to them.

Long Run: The Vultures Circle

But the biggest impacts are likely to be the long-term structural changes that will be required if and when Britain or England or whoever is left leaves the European Union and the single market. The U.K. is an important wine center both because of the large British domestic market and also because of its essentially unrestricted access to European markets and resources. It is too soon to know how this will change for wine, but it is instructive to watch other sectors to get a sense of the dynamic.

There is already concern about disinvestment in British steel and automobile manufacturing, for example, if resources are shifted into other E.U. zones. Much of British auto production is exported and would be disadvantaged if the U.K. loses its open access to E.U. markets. Voters in Sunderland may eventually rue their strong Brexit support if Nissan moves production (and some of the current 7000 factory jobs) away from its big plant there to new homes in the E.U. heartland.

And everyone in The City, London’s big financial center, is openly concerned, too. London residents voted overwhelmingly to remain in the E.U. in part because of their desire to protect The City’s economic standing (and their jobs), which would diminish if movements of capital and skilled workers to and from the continent were restricted.

Any major disruption in The City will have widespread impacts on wine, especially the on-premise trade but not limited to that. The vultures (in the form of European cities hungry for those high-paying finance jobs) have already started circling.

I am still cautiously optimistic for the U.S. wine economy and for Britain, too, but there are lots of risks to consider. That question — What Next? — still applies.

The “Demolition Man” Syndrome: A Vision of the Future of Wine in America?

 

I’ve been catching up on my wine industry reading and one report that grabbed by attention is Rabobank’s May 2016 Industry Note,  “The Premiumization Conundrum”.

The gist of the analysis is that the premiumization trend in the U.S. wine market isn’t simply a case of what Paul Krugman calls “up and down economics” — in this case demand for $10+ wine is up, demand for cheaper wines is down –but rather it needs to be understood in the context of a broader set of wine market changes.

Not Just Up and Down

The Rabobank report examines five important tensions that are part of the premiumization syndrome:

  1. Demand for premium vs. basic wine grapes
  2. Securing long-term premium grape supply vs. managing return on capital
  3. Wholesaler consolidation and retail “chainification” of wine vs. premiumization
  4. Traditional retail vs. DTC vs. NIMBY
  5. Domestic wine vs. imports

As I was reading the Rabobank report I began to wonder how these trends might unfold if continued at their present rates  well into the future. In other words I was doing exactly what economists are trained not to do, which is engage in straight line projection. The future is out there somewhere, but it is almost never on a straight line that connects the last few dots on your time-series chart and then continues on out to infinity … and beyond.

But humor me with a little thought experiment. What might the future look like under the admittedly unlikely “straight-line trend projection” circumstances? Take today’s trends as Rabobank reports and fly them straight out to wherever they take you.

Pondering this thought, I unexpectedly found myself channeling a 1993 Sylvester Stallone, Wesley Snipes, and Sandra Bullock film called Demolition ManStallone plays a police officer named John Spartan who was put into suspended animation only to be awakened 36 years into the future in 2032 in order to catch Wesley Snipe’s bad guy character.

All Taco Bell Now

Stallone’s updated Rip Van Winkle encounters a lot that surprises or shocks him including, as in the film scene above, the inconvenient truth about retail consolidation run amuck. Invited to dinner and dancing at a Taco Bell, he can’t help but think, Taco Bell? Really?

But it really is, as Bullock’s character explains. Taco Bell was the only chain to survive the franchise wars and now all restaurants are Taco Bells. “No way!” Way!

Rabobank’s report notes a number of important trends that, if taken to a ridiculous Taco Bell kind of extreme, might produce something that Demolition Man would recognize. Here are three that I can’t help pondering.

All MoVin Now

The fictional John Spartan goes shopping for wine in 2032 San Angeles and the first place he sees is a big box MoVin store, bigger than the biggest wine-beer-spirits stores of the past, but recognizably the same concept. He continues on in search for a small, specialist shop, but soon runs across another MoVin. And then another and another and slowly it comes to him that just as all restaurants are Taco Bell, all wine is now retailed by MoVin.1353026500232-577831165

How did this happen? Well, as the Rabobank report notes, all of the growth in off-premises retail sales of wine in the U.S. in the last couple of  years has come through retail chains, not independent shops and stores. Take away BevMo, Total Wine, Costco and other multiple retailers (I assume Kroger fits here, too) and Rabobank’s data show off-premises wine sales would be flat.

Follow that trend to its illogical extreme, with the chains seizing market share each year, add logical pressure to consolidate and — hey, presto! — you have a retail wine monopoly.

How did MoVin win this fictional competition over other chains? Because, in this made-up universe, they drew upon the growing consolidation in distribution channels (another Rabobank finding).

Yes, all wine is sold by MoVin in 2032 because they are a wholly-owned subsidiary of NSEW (North-South-East-West),  the only company to survive the vicious distributor wars of 2021.

All Kiwi White Now

There are lots of different super-premium brands on offer at the big box wine store of the future, but the vast array of colorful labels and fictional names actually disguises a certain sameness. Much of the wine comes from the same few large producers, the ones who were able to able to secure reliable quality grape supplies in the grape wars back before 2022, when the last independent North Coast vineyard was swallowed up.

The imperative to lock up vineyard resources is another of the trends that Rabobank spotlights and it is natural to wonder where it will all end. But that isn’t the only source of concern.affiche2

When John Spartan looks closely at the super-premium white wines that he favors (because they pair so well with his favorite Taco Bell fish tacos), he slowly realizes that they are all made by a few large multinational firms in New Zealand. Just as Taco Bell conquered food, the Kiwis were the victors of the white wine wars.

The one constant of U.S. wine import statistics in recent years has been that New Zealand Sauvignon Blanc imports will grow, often faster than any other import category. I keep waiting for the run to end (and I know Kiwi producers who hold their breath and cross their fingers because they are worried, too). But nothing has stopped or even seriously slowed down New Zealand wine imports so far. And you know where that can lead!

You Want Grapes with that Wine?

What about inexpensive wine? Glad  you asked because that’s where John Spartan had his harshest shock — it made him want to give up wine altogether. It seems that as grape supply became less and less secure and falling prices pushed basic grape producers to other crops like almonds and pistachios, wineries were forced to weaken links to particular regions and then to grapes themselves.

Appellations and geographic designations generally are an expensive luxury if you’re not sure if you can buy the grapes you need to maintain a region-specific brand, so they had to go. And then wine companies gave up specific grape variety designations for the wines for essentially the same reason. All inexpensive wines in 2032 are now proprietary blends. No one knows what might be in the bottle, box or can or where it might have come from. Not many seem to care.

Absent place of origin and clearly-identified grape variety components, inexpensive wines evolved into branded alcoholic beverages and, once consumers accepted that, there wasn’t any reason why they had to be made out of grapes any more. The laws were re-written to allow inexpensive wine-like products to be made and marketed and people lapped them up. Wine for the masses endured, but in an ersatz Taco Bell kind of way.

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Or at least that’s where bad economic analysis (and not enough sleep) takes you if you follow recent trends to ridiculous extremes, which I have done here just for fun, but the Rabobank report definitely avoids.

The future? Taco Bell? No Way! That’ll never happen. Don’t worry. Go back to sleep. G’night!

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Thanks to New York Times columnist Thomas Friedman, who indirectly inspired this column. He told the story of the “Demolition Man” Taco Bell scene in his best-selling 2000 book about globalization, The Lexus and the Olive Tree.

 

Portugal’s Adega de Borba: the Very Model of a Modern Cooperative Winery

P1110444They say that you shouldn’t judge a book by its cover and I think this applies to wineries, too. We visited Adega de Borba as part of a brief tour of wineries active in the Alentejo vine and wine sustainability program and found ourselves led astray by our first impressions.

Adega de Borba is a cooperative winery founded in 1955 and was a pioneer at the time. All the economic incentives in those days were stacked against wine and in favor of grain production in this part of Portugal in those days. It took some effort and determination to nurture and expand wine production here.

Beyond the First Glance

At first glance the original 12,000 square meter facility was what I expected from a “mid-century modern” winery, but on closer inspection I began to realize that this was both more and different than it seemed. More because the winery is a surprisingly large operation. The 300 members together farm 2000 hectares of vineyards and the winery produces over 15 million bottles a year.

And different because while the winery dates from mid-century, the ideas are not frozen in time. Looking closely, we saw that everything was meticulously clean and well-maintained as it should be but so often is not in the case of “vintage” production facilities.

And the answers to our questions about economic incentives were the right ones, too. Do the members have to sell their grapes to the cooperative, or are they allowed to hold back some (usually the best ones)? No, they must sell to us. How are they paid? By weight, of course, but with substantial adjustments plus and minus based upon objective measures of quality. Are the premiums enough to motivate a movement to quality? Yes, they are very high for the finest grapes.

Adjusting to New Market Realities

The large scale is important because wine in Portugal is low-priced by U.S. standards and price pressure is increasingly intense. Consumers who bought €3 wine (that’s where the mass market is here) before the global financial crisis are spending €2 instead and margins for exports to some markets can be low as well. So efficient production is key as well as quality that will allow sales in the higher-price categories. imagem_rotulo_cortica_reserva_tinto13_pagina

Former Portuguese colonies Angola and Brazil have been the largest export markets for Alentenjo wines in past years, but both are going through difficult times at the moment (especially Angola with its dependence on petroleum export income), so attention is shifting to other markets such as the U.S., Canada, and Switzerland, which demand higher quality, and Russia and China, where low price is a powerful factor.

Adega de Borda has moved in both directions. The Rótulo de Cortiça wines, which are easy to spot because the label is printed on a thin sheet of real cork (cortiça in Portuguese), are a good case in point. The winery sells about a million bottles of this wine each year at the astounding (for Portugal) price of €9 and even more for the reserve bottling.

That €9 price won’t seem like much to my Napa Valley friends, but it is a stunning achievement for this volume of wine in the context of the Portuguese market and is only possible because of the care and attention that goes into every stage of the process.

Uphill / Downhill

But this doesn’t explain how Adega de Borba is able to compete in markets where margins are razor thin and competition from other producers and other wine regions fierce. To understand that we had to walk up a gentle hillside to the biggest surprise of the day, a stunning  140,000 square meter state-of-the-art production and storage facility that was completed in 2011 at a cost of €12 million. A system of underground pipes connects the new winery with the old one down the hill so that the wines can be bottled there.

Everything is big about the new facility from its crushing capacity (1200 metric tons of grapes a day) to the fermentation and storage capabilities. But it is the technical efficiency that it creates that is most impressive since it allows both volume and margin-boosting quality to co-exist.

Thought and Action

I said at the start that you shouldn’t judge a book by its cover, but this big modern building might be an exception to that rule because the exterior of the new building gives away something of its high-tech interior. It is blistering hot in this region in the summer, so the building is clad in white ceramic tiles to reflect the sun with horizontal rows of white marble from a nearby quarry that, a bit like radiator fins,  provide a certain amount of natural heat control as well. Very cool (pun intended) and not necessarily what you would expect from a wine cooperative.

We came to Adega de Borba because it has embraced the Alentejo region’s sustainability initiative, but it is easy to see that this is part of an overall approach to wine growing and production, with attention to every detail and eyes firmly set on horizon. Cooperatives tend to struggle when they get the incentives wrong, fail to note changing market environments, and hesitate to invest for the future. Adega de Borba shows us how wine cooperatives must think and act to be relevant and successful in today’s markets. It is how all wine enterprises must think and act.

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As you probably guessed, this column’s title was inspired by the Gilbert & Sullivan tune from Pirates of Penzance. Enjoy.

Anatomy of Wine Profit and (Mainly) Loss: South Africa versus Australia

Australia and South Africa are rivals on the rugby field, where they compete at the highest levels, and on your store’s wine shelves, too, where they fight for shelf space and consumer attention.

It is a good idea to study your opponent to see similarities and differences and that is just what Christo Conradie did earlier this year at the  Vinpro Information Day meetings in the Cape Winelands in a talk called “Producer and Winery Realities.” Conradie revealed the results of a study of profitability within South Africa’s wine industry and the data were sobering. (You can download a pdf of the presentation here.)rsa

Profit and Loss

Overall, only about 15% of South African producers are making strong profits while 49% have what might be unsustainably low profitability and 6% are breaking even. Fully 30% of producers reported losses. That’s a lot of red ink.

That news got my attention, but Conradie’s comparison with Australia really made me sit up. Breaking profitability down by region, the data for Australia show what you might expect. Profitability is best in some of the premium wine areas — Barossa, Yarra Valley, McLaren Vale, Coonawarra — where a majority of producers are profitable. But in Riverland and even in Mudgee the red ink flows and flows. Almost no one reported a profit in 2014 in these two regions.

Lots of reason for red ink. Weather, exchange rates, market momentum, problems in China and so on. Margins are the key to profitability and the premium prices that Barossa and Coonawarra producers are able to earn are certainly an important factor in their success.oz

The Premium Premium Problem

Now turn to an analysis of South Africa’s regions and a somewhat different picture emerges. Stellebosch is a premium wine production zone but also a high cost area. The price premium that  Stellebosch wines receive in the market does not appear to be enough to offset higher per bottle costs, eating into margins. Only 8% of Stellenbosch producers reported strong profits while 56% indicated loss.

The South Africa regions with the best profitability were generally those where higher yields were possible, which brings down cost, although Conradie made a point to show that the problem is not as simple as getting higher yields. A balance of many factors is needed to produce sustainable profit levels.

Supermarket Empiricism

Sue and I last visited South Africa in 2014 (I was a VinPro Information Day speaker) and we were surprised by the wine prices we saw. Converted into dollars, the inexpensive wines (including a South Africa-sourced Gallo Barefoot that we spotted in one supermarket) were about where we expected them to be. But premium RSA wines, many of them world-class, seemed  under-priced, especially when converted to U.S. dollar amounts.

In other words, it seems that the quality price premium for South African wines is relatively low and I think this is true in the export market as well as for domestic sales. Higher quality South African wines get higher prices, but not always to the same extent as producers in other countries. Or at least that our unscientific observation.

This is not news to the South African winemakers, who seem divided about whether to focus on the profitable higher-yield sector of the industry or to invest in reputation  and regional identity to differentiate products and raise the premium premium (if you know what I mean). Selling more is important in the short term, but earning higher prices is key in the long term.

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