Category Archives: wine markets

Anatomy of Italian Wine Industry Success

June 6, 2023 By in Italian wine, wine, wine markets Leave a comment

Economics is sometimes called the “dismal science” and I guess it is true that the Wine Economist is often focused on the problems that the wine industry faces (see the recent column on California vineyard profitability, for example).  So it is a pleasure to write about two wine regions in Italy that have achieved rather remarkable success.

The regions I want to highlight here are Conegliano Valdobbiadene Prosecco Superiore DOCG — home of many of Italy’s best sparkling wines — and Lugana DOC on the shores of Lake Garda, makers of one of Italy’s most distinctive white wines. Although the wines of the two regions are very different, the sources of their success have some things in common. Why are these regions successful? What challenges do they face? Read on.

Wine and Words

Sue and I came to Italy as guests of the Conegliano Valdobbiadene Prosecco Superiore Consorzio to participate in the first edition of a wine literature festival called Co(u)ltura Conegliano Valdobbiadene held in the scenic and historic Castello San Salvatore di Susegana. It was two days of author interviews, masterclasses, walk-around wine tastings, and more that drew a large and appreciative crowd. A highlight was the special recognition of five young Italian writers whose essays on this region were collected and published for the event. (The photo at the top of this column shows a fantastic video-mapping demonstration.)

Sue and I took advantage of this opportunity to meet with winemakers and Consorzio officials and learn as much as we could about this dynamic wine region. When the festival was over, we changed locations to join a small press tour organized by the Lugana and Garda wine consortia. The result was a very revealing set of experiences.

Signature Grape vs Taste of the Place?

I am not sure that anyone has ever thought to directly compare the Lugana DOC and the Conegliano Valdobbiadene Prosecco Superiore DOCG (henceforth Prosecco Superiore DOCG) regions the way we found ourselves doing, but it is an interesting exercise. Although the wines are completely different in terms of sensory and market characteristics, there are still interesting shared qualities that are worth considering.

Each region is best known for wines made from a single grape variety. Glera is the go-to grape in Prosecco Superiore DOCG, producing several variations of sparkling wines as well as traditional still white wines that you can find if you look for them. Lugana DOC is built on the Turbiana (a.k.a. Trebbiano di Lugana) grape variety, which is made in several styles of still white wines and sparkling wines, too.

You might think these wines would be defined by their signature grape varieties, but you would be wrong. These are wines of place. The Lugana DOC wines are different from the many Trebbiano wines you will find in Italy and the particular climate and especially geology of the Lugana region at the south end of Lake Garda has a lot to do with it.

The Prosecco Superiore DOCG wines are distinctive, too. Although you can see the family resemblance in many cases between the Prosecco Superiore DOCG wines and similar wines made from Glera using the same processes from the Prosecco DOC and Asolo DOC zones, to my taste the DOCG wines are often brighter, more alive in the glass. They always make me smile.

The wines of Lugana DOC are distinctive, too, and for a long time, I found it hard to describe them. But a masterclass we attended led by the brilliant Constantino Gabardi has given me the words I need. The Lugana DOC wines are not so much defined by fruit as we often think for white wines, but by salinity and minerality held in tension by acidity. It is a different idea of wine than I am used to and so it is no wonder I find the Lugana wines so fascinating.

In both cases, the land and the grapes interact to create a complicated but fascinating experience. The landscape between the wine towns of Conegliano and Valdobbiadene is varied and stunningly beautiful, which is why, I suppose, it has been designated a UNESCO World Heritage site. Vineyard regions are often pretty, but these vineyards are special — even more spectacular than the Douro Valley. The dramatic landscape terroir is reflected in the wines. Fruitier, they say, in the more rolling hills near Conegliano. More structured on the sharp peaks and valleys near Valdobbiadene.

The area around Lake Garda is beautiful, but it is nothing like the stunning Valdobbiadene landscape. Yet the more subtle variations here matter a lot. The balance and dynamic interaction of Lugana DOC wines stem from the land, in this case, the complicated geology that was left behind as glaciers scraped the landscape eons ago. The soil is very different at lower elevations closer to the lake and the wines reflect this and the balance of salinity and minerality that is so attractive in the glass is the result.

Victims of their own Success?

Both regions have achieved great success and are developing strategies to climb even higher on the wine wall in the future. Having navigated the shifting market tides of the Covid era very well, producers in Prosecco Superiore DOCG find that they have hit a plateau. Virtually every available hectare of potential vineyard land is planted (to Glera for the most part) and yields have been effectively maximized. The challenge is not so much to produce and sell more wine, but to better differentiate the wines in the market to increase margins.

Lugana DOC producers are also victims of their success to a certain extent. The Turbiana grapes that go into Lugana DOC wines sell for several times the value of other grapes in the region, creating a prosperous environment for producers. Lugana is effectively differentiated and benefits from its reputation. The potential problem, I was told, is that just a few export markets dominate sales. What happens, one winemaker asked me, if tomorrow Germans decided they don’t like Lugana wines so much?

The Prosecco Superiore DOCG producers hope to raise margins. The Lugana producers who to expand and diversify their markets. Neither of these tasks is easy in today’s competitive marketplace, but then there was nothing easy about getting to their current high plateau, either. Watch for additional analysis of these two fascinating regions in the weeks to come.

Back to the Future with Dry Rosé Wine?

May 23, 2023 By in wine, wine history, wine magazines, wine markets Leave a comment

More than five years ago, I wrote in these pages that “dry rosés are increasing in popularity not only among open-minded wine drinkers but also among California winemakers.”

If I could write these words today they’d make me look like a pretty savvy wine economist. Dry rosé wines have experienced a boom in recent years and not everyone was convinced back in 2018 that the pink wave was real.

But I didn’t write this sentence. Mark Bittman did in an article titled “The Perfect Summer Wine?” that appeared in the August 1998 issue of Cook’s Illustrated magazine. (This issue sort of fell into our hands when Sue found it in the Little Free Library down the street. Someone in the neighborhood must be cleaning magazines out of the basement.)

Tutti Fruity?

You might be surprised to know that dry rosé was fashionable back in 1998, but actually that’s not the point that Bittman makes in this article. You see way back in 1993, Bittman’s tasting panel found lots of dry rosés that pleased them. But by 1998 things were going downhill, he writes. Too many of the wines they tasted were sweet, not dry. “Tutti fruity” one tasting note reads. “Just drier than black cherry soda, not unlike it,” says another.

That’s not to say that Bittman’s team couldn’t find delicioous dry rosés for the 1998 tasting. The thing that struck them was that most of them came from France and only a few from California. Three out of four of the “not recommended” wines were California products. Not exactly a Judgement of Paris result.

All but one of the “recommended” and “highly recommended” wines came from France. The sole California selection? Heitz Cellars Napa Valley Grignolino Rosé!

The Curse of the White Zinfandel?

I wonder if this was a “white Zin” effect? There was a time when sweetish pink California wines were very popular and the leader of the pack was White Zinfandel. Do you suppose that the popularity of that style of wine influenced Calfifornia rosé wines generally the way that the success of Kendall-Jackson Private Reserve Chandronnay influenced a lot of California Chardonnay producers?

The sweet/dry cleavage isn’t the only one that Bittman’s article highlights. There is also pale and dark to consider.

The top rosé wine, according to the tasting panel, was the same in both 1993 and 1998: Chateau de Trinquevedel Tavel. Younger readers may wonder in what part of Provence is Tavel found? This is a trick question because Tavel is in the Rhone valley and the wines are dark and full-bodied. I have always thought of them, in my simplistic way, as pink wines for red wine drinkers. Pale Provencal wines (like the #2 wine in 1998: Domaine de la Gautiere en Provence) are, by contast, pinks that appeal a bit more to those who like white wine.

Delightful and Affordable

The wines were not especially cheap in 1998: $15 for the Tavel and $8 for Provence. That is much more than Beringer White Zin in those days, but worth every penny, Bittman assures us, and I am sure he was right. The most expensive wine reviewed cost $22 in 1998 prices, which was a lot for a rosé back then. But what a wine: Domaine Tempier Bandol 1996.

Dry rosé is back with the French in the vanguard. But darker rosés like the Tavel are hard to find (Tavel wines are very hard in my local market). Everyone tells me that consumers strongly prefer pale pink to dark pink, even though the experts say that color and hue don’t determine flavor and aroma. If the conventional wisdom is correct in this case, then I feel a certain loss. Those Tavel rosés and wines like them deserve more attention.

Mark Bittman concluded his 1998 Cook’s Illustrated article saying

I wish I could write, as I did in 1993, that this was a “group of delightful, affordable wines.” But there are some delightful and affordable wines in the group; you just have to be a little more picky than you did a few years ago.

I wonder what he’d write today? Certainly there are many more rosé wines and a lot of them are surely delightful (how affordable they are is a matter of judgement I leave to you, but the majority seem affordable by the standards of the 1998 tasting). You probably still need to be a bit picky, however, to find what you want.

America’s Wine Regions: Re-Imagining Colorado

May 2, 2023 By in emerging wine regions, wine, wine markets Leave a comment

What do you think of when you think of Colorado? Chances are that Colorado wine isn’t the first image that comes to mind, but it should be somewhere on your radar screen. Wine is both old and new in this Rocky Mountain state.

Peaks and Valleys

Wine was first produced in 1890 from grapes grown on 60 acres of vineyard and orchard land on Rapid Creek above Palisade along the Colorado River. The decades since these first wines were made have been full of peaks and valleys for Colorado wine and Sue and I have had sort of a rocky road experience ourselves with these wines.

We’ve had several chances to taste Colorado wines over the years, especially when I spoke at the state’s annual VinCO Conference in 2018. While we’ve been impressed by some of the wines, we were disappointed by others.

Peaks and valleys. This uneven experience is a problem because you seldom get a second chance to make a first impression when people taste your wine. But it is also understandable. Honestly, I don’t know any wine region that doesn’t have its share of peaks and valleys.

Climbing to the Heights

It is also understandable because, although the Colorado wine industry is surprisingly old, it is also unexpectedly young. You see, Colorado citizens embraced Prohibition even before the national policy was enacted and the vines were ripped out more than 100 years ago. Wine really didn’t restore its foothold in Colorado until the 1970s (Warren Winniarski, of Judgment of Paris fame, made some of those early wines). The industry has charted an upward path since then, but the road has remained rocky.

Sue and I were delighted when offered the opportunity to taste Colorado wines from The Ordinary Fellow winery, a project of the winemaker Ben Parsons and located in the old United Fruit Growers COOP peach packing shed in Palisade. I don’t know Parsons personally, but his career path reminds me of Randall Grahm. Grahm is a brilliant brand-builder who is also a committed terroirist. Both land and brand, if you know what I mean. I think Parsons might be the same.

Parsons achieved brand-building fame with The  Infinite Monkey Theorem winery. He started out making wine in a quonset hut in Denver, far from the vineyards but up close to the urban customer base. He set out to be different, which drew him to keg wine and then to cans. Infinite Monkey Theorem became a canned wine phenomenon to such a degree that at one point a second winery was opened in Austin. Parsons and the Infinite Monkey Theorem brand were way ahead of the curve in terms of cans and creating an image and environment that appeals to younger consumers.

Parsons left Infinite Monkey Theorem in 2019 to found The Ordinary Fellow (named for a favorite pub in England), making wine in Palisade from grapes grown on two high-elevation vineyards in southwest Colorado.

More Than Mile High

We tasted three of the Colorado wines. Our favorite was a 2021 Riesling ($18) from the Box Bar vineyard, elevation 6200 feet. It had intense Riesling character and developed nicely in the glass with dinner. We also enjoyed the 2021 Cabernet Sauvignon ($25) from the same vineyard. Can you taste high elevation? I wonder. This wine reminded me of some high-elevation Malbecs from Salta in Argentina. The acidity really lifted the and balanced the tannins. Was it really an elevation effect? Probably the power of suggestion, but very interesting.

The 2021 Pinot Noir ($25) from the 6800-foot Hawk’s Nest vineyard struck us as a work in progress, but one we’d be interested to follow in the years to come. What a beautiful light color and nice nose! But Sue thought it tasted more like a Grenache than Pinot Noir, which is not necessarily a bad thing. Me? I’m just amazed that Pinot Noir can be grown in Colorado, but I guess I need to reimagine what’s possible in Colorado. Overall I would say these wines are a “peak” experience for sure. I hope we have a chance to visit the winery in Palisade somewhere down the road.

Parons produces about 2500 cases of wine these days with plans to grow to 5000 cases. He’s working hard to develop the vineyards and to make wine that reflects their particular terroir.

Rocky Road Ahead?

Colorado has 163 wineries according to Wine Business Monthly’s annual survey, which puts it just ahead of Missouri and just behind of North Carolina (two important wine producers) on the list. A WineAmerica economic impact study suggests wine is an important driver of jobs and income.

I asked my friend Doug Caskey, who is executive director of the Colorado Wine Industry Development Board, about the road ahead for the state’s wine industry and he provided a very realistic assessment. On the plus side, innovation is rising, including new sparkling wines that expand the state’s wine menu. But scale (and therefore economies of scale) is limited by several factors including water availability, the risk of severe winter weather, and the cost of vineyard lands.

Colorado recently expanded wine sales from specialized shops to include supermarkets and convenience stores and this change introduces a big question mark for Colorado wines. On one hand, wine will be more readily available for the state’s shoppers, which is likely to increase wine sales. But will it increase Colorado wine sales, or will those supermarket shelves be filled with bigger-volume wines from California and elsewhere? Lots of uncertainty.

Will the rising tide lift all wine boats? Maybe. Supermarkets like to demonstrate their commitment to local products and producers. What could be more local in Colorado than Colorado wine? However, based on what we’ve seen in other states, it’s a tough problem to solve.

Sue and I are glad we had this opportunity to revisit Colorado wine and look forward to learning more about this state’s evolving wine industry in the future.

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As you probably already guessed, The Ordinary Fellow wine isn’t ordinary at all. Its exceptionalism begins with the colorful labels, which are actually more complicated and interactive than they appear in the photos. There are two parts to the label. The first is a very colorful inner label that reminds me a little of the Beatles’ “Yellow Submarine” type of art, then a plain white outer label that rotates to reveal different aspects of the inner art. Kinda psychedelic! Not ordinary at all.

Unsustainable? Anatomy of California Vineyard Economics

April 18, 2023 By in economic crisis, Economic impact, wine, wine markets 9 Comments

The April 2023 “Vineyard Issue” of Wine Business Monthly features articles that address many different important winegrower issues. I find W. Blake Gray’s analysis of “Prices Don’t Pencil Out for Growers Who Saw Production Costs Double” particularly interesting because it deals with a problem that I wrote about earlier this year in a Wine Economist column titled “Margins? What Margins? The Big Squeeze in Winegrowing 2023.”

Red Ink Harvest

The Wine Economist column was provoked by a conversation with some California growers at this year’s Unified Wine & Grape Symposium and connected the dots linking their observations with Vinpro data presented a few weeks earlier for South Africa. Only 9 percent of South African winegrowers earn a sustainable return on their vineyard investment.  A little more than half break even or earn small nominal profits, but not enough to sustain continuing investment. And almost 40 percent reported losses. And the margin gap is getting wider.

My California grower friends said their situation was not much different from the South Africans and, indeed, this is a problem I have seen around the world, although not typically backed by the sort of data that Vinpro collects for the South African industry.

The two simple strategies to claw back margins are to reduce yields to try to raise quality and therefore price or to reduce unit cost by increasing yields. South African growers have found it difficult to raise prices enough to make the first strategy work, so many are focusing on higher yields. But it is not as simple as that, the California growers told me, because sometimes buyers won’t allow higher yields and, in any case, some older vineyards just aren’t set up to make high yields possible.

Losing in Lodi

W. Blake Gray’s article digs deeper into the California situation, specifically for District 11, the San Joaquin Valley North, which includes Lodi. He quotes Aaron Lange of Lange Twins Family Winery and Vineyards in Lodi, for example, who explains that average grape prices are lower now than they were 25 years ago (despite higher costs throughout the production chain). Lodi Cabernet Sauvignon, for example, sold for an average of $695 per ton in 2022 according to the UDSA grape crush report. It sold for an average of $794 in 1997. The figures for Chardonnay grapes are $627 in 2022 versus $774 in 1997. That, my friends, is a big squeeze.

Is it possible to increase yields enough to break out of the big squeeze? Gray provides data from a 2021 UC/Davis study of the District 11 situation that suggests that higher yields can sometimes, but not always, solve the problem. At a price of $650 per ton (which is close to the average current Chardonnay and Cabernet prices), for example, the Davis study calculates a $156 per acre profit at 12 tons per ace and a $780 per acre product at a yield of 13 tons, but losses at lower per-acre yields.

The situation is only a little different at a price of $750 per ton. Profits ($633 per acre) appear at a yield of 11 tons per acre, rising to $2080 at a yield of 13 tons. But yields below 11 tons per acre still generate red ink even with the higher price.

Lower prices make things much worse. At a price of $550 per ton, no level of yield between 7 tons and 13 tons generates a profit. It’s red ink all the way down.

Unsustainable Yields

These data and reports make me wonder if winegrape growing is economically sustainable for many producers in District 11 and similar regions and these doubts are heightened by Gray’s interview with Jeff Bitter, the President of Allied Grape Growers (and a grower himself). Bitter notes that the economics of winegrape growing have made it difficult or impossible to focus solely on grape production.

Why continue to farm grapes? Some farm winegrapes because it is what they want to do (a “lifestyle” choice), Bitter suggests at one point, or because the alternatives are unattractive. There are a lot of factors that define the situation, including market conditions in different regions (Central Valley, Central Coast, North Coast) and farm size. There is money to be made in winegrapes under the right circumstances, but there are plenty of losses, too, and it is easy to understand why generational transitiions among growers are often in doubt.

When we talk about sustainable winegrowing, we usually focus on the environmental impacts, but Gray’s article suggests that we need to take the issue of economic sustainably more seriously, too.

Thanks to Wine Business Monthly for all the great articles in this issue and to W. Blake Gray for his focused report on the vineyard margin problem and the economic issues facing growers generally.

America’s Wine Regions: Mainly Mendocino

April 11, 2023 By in emerging wine regions, wine, wine markets 1 Comment

The American wine scene is incredibly deep and wide. There are thousands of wineries (more than 11,000 in 2023, according to Wine Business Monthly) producing tens of thousands of different wines with prices ranging from two bucks to several hundred dollars.  Wine is produced in every state and the District of Columbia, too.

Spoiled for Choice

This explosion of American wine is noteworthy for many reasons, especially in the context of history. Don’t forget that commercial sales of wine were illegal during Prohibition and are still heavily taxed,  regulated, and often discouraged in many parts of the country.

The widespread production of wine is also challenged by what the economist Robert H. Frank called The Winner-Take-All Society in his book of the same name. When consumers have a choice (and wine consumers have an incredible abundance of choice), it is natural for them to begin to look for the best choice and to focus on that once it is identified. (Wine critic numerical scores reinforce this process, of course). Add in the band-wagon effect as transmitted through the internet (think Yelp rankings of winery visits) and pretty sonon attention is firmly focused on a relatively small number of favorites with most of the rest left behind.

It was easy to see the Winner-Take-All effect when Frank’s book was published in 1995. It is easy to see it now, too, and it represents one of several powerful forces for consolidation in the wine industry. There may be more than 11,000 wineries all across America, but most of the wine is made by a small number of large wineries in California. The winner doesn’t take it all in terms of market share, but lots of smaller wineries struggle a bit for market traction and attention.

Think Local. Drink Local.

Sue and I try to seek out local wine producers when we travel and we are fascinated by what we discover. A recent Wine Economist column on Arizona Wine Revisited has inspired us to highlight Mendocino County, California. It isn’t a new wine region — quite the opposite! But, sitting just north of the bright lights shining on the Napa and Sonoma valleys, Mendocino has suffered from the downside of the winner-take-all situation.

Jancis Robinson and Linda Murphy summed up one part of the Mendocino story in their 2013 book on American Wine. 

Only in the last two decades has Mendocino County won acclaim for its wines; previously it was known for selling its grapes outside the county. In the early 1900s Mendocino didn’t have railroads or river systems with which to deliver finished wines to San Francisco, where they could be sold. So growers transported their fruit by wagon to the Italian Swiss Colony co-op in Asti (Sonoma County), where they were ” lost” in large, inexpensive blends. … Those discouraging days are finally over.

Some of those early Italian Swiss Colony wines cited Sonoma, Napa, and Mendocino (great billing!) as the source of the grapes. But that, I think, was before the advent of American Viticultural Areas and their regulations. Soon these wines were designated “California” and Mendocino sort of fell off both the label and the consumer radar. The wine wars became brand wars and brand Mendocino struggled.

But, as American Wine notes, Mendocino is back. Although lots of Mendo grapes are still “exported” to other parts of California to make popular wines, home-grown producers are getting recognition, too.

Sue and I sampled wines from three Mendocino producers during a pair of “Mendocino weeks” at our house: Husch Vineyards, Graziano Family of Wines, and Ettore Winery. Although this only scratches the surface of Mendocino wine, these wines show some of the many faces of the region.

Both Sides Now: Husch Vineyards.

Husch Vineyards dates from 1968 and became the first bonded winery in Mendocino’s Anderson Valley in 1971. The Oswald family purchased the operation in 1979 and it has stayed in the family ever since.

Husch wines show two distinctly different faces of Mendocino County. The Anderson Valley’s cooler climate yields elegant Pinot Noir, Chardonnay, and a Dry Gewurtztraminer with a loyal following. Warmer inland vineyards produce Cabernet Sauvignon, Merlot, Old Vine Zinfandel, and Chenin Blanc grapes among others.

The wines are impressive, but the Dry Gewurtztraminer, off-dry Chenin Blanc, and Old Vines Heritage red wine blend of Petite Sirah, Zinfandel, and Carignane from the historic Garzini Ranch vineyard, are special favorites. We are fans.

All in the Family: Graziano Family of Wines

If Husch Vineyards is old by contemporary California standards, Graziano, founded in 1918, is positively historic and makes a point to honor its history in its wines. After 70 years as  growers, Greg Graziano started making wine, too, in 1988. I think he realized his grapes were too good to let them disappear into other wineries’ big vats. The wine family today includes four labels: Saint Gregory, Monte Volpe, Enotria, and Graziano.

The Saint Gregory wines exploit cooler vineyard sites and include Pinot Noir and Pinot Meunier. The Graziano wines, on the other hand, highlight the old vines planted by the family in warmer spots, including the California classic trinity of Zinfandel, Petite Sirah, and Carignane, plus a lovely Chenin Blanc.

The Monte Volpe and Enotria labels honor the family’s Italian heritage with wines made from traditional Italian grape varieties such as Sangiovese, Vermentino, Negroamaro, and Aglianico (Monte Volpe) and Arneis, Dolcetto, and Barbera (Enotria).

Obviously, the wines are very different from one another, but they share a certain undeniable family resemblance that I characterize as “Italian sensibility.” What do I mean by that? Well, Italian wines are just different, with their lifted acidity and the way they call for food to pair with them. Greg Graziano is the dean of Mendocino winemakers and I think the winery and its distinctive sensibility is likely to stay “all in the family” for decades to come.

Fresh Faces: The Ettore Winery

Mendocino continues to attract and inspire winemakers. Ettore Biraghi is one of the fresh faces on the scene. Born in Lombardy, Ettore began his winemaking career in the Italian-speaking Swiss canton of Ticino. He owns, with business partner Franco Bruni, Tenuta Agricola Luigina winery in Stabio, Switzerland. Ettore visited California in 2015 to learn about its vineyard regions and discovered Mendocino. His winery opened in 2019 and the first organic wines were released a year later.

We have tasted two of Ettore’s wines. The Cabernet Sauvignon, from Sanel Valley Vineyards vines of 21 to 29 years of age, would compete very well in a lineup with Napa Valley Cabs of twice the price (Mendocino wines in general are very good value  for quality). We also sampled the Chardonnay “Zero,” which is made without added sulfites using a process called “Purovino.” I thought it was a bit weird and didn’t much remind me of Chardonnay, but Sue thought it was interesting. More research required.

Mendocino has a long history and, I think, a bright future. As noted above, we have just scratched the surface, but it is a start and we encourage you to pick up where we left off.

Watch for a series of occasional columns about America’s wine regions. Colorado and Michigan are next on our agenda.

Arizona Wine Revisited

March 28, 2023 By in wine, wine markets, wine tourism 1 Comment

It has been 15 years since our last visit to Arizona to check out the wine scene (our report appeared in an early Wine Economist column), so it didn’t take much to persuade us to go back to see how things have changed.

Our first trip was based out of Tuscon, near the main vineyard areas in the southeast of the state. This time we traveled up north to scenic Sedona to explore Arizona’s newest AVA, the Verde Valley. Our visit was interrupted by that big winter storm that swept across the country last month and threatened to block our way home. But all’s well that ends well — we were able to start our fieldwork in Sedona and end it in Old Town Scottsdale, which is home to many tasting rooms.

Here is our report, starting with some broad facts about Arizona wine and then drilling down a bit into specifics.

Bigger and Smaller

The Arizona wine industry is both bigger than you think and smaller than you might imagine. Arizona now has 108 wineries according to the January 2023 issue of Wine Business Monthly. That includes 90 bonded wineries and 18 “virtual” wineries. Virtual wineries? Yes, this is a growing trend. These are wine brands without vineyards or their own winemaking facilities. About 1000 of California’s nearly 5000 wineries are virtual operations. And virtual wineries account for almost 300 of the 900 total wineries in Oregon.

Arizona ranks #17 among U.S. states based on the number of wineries — bigger than you might have guessed. But the individual wineries tend to be small. Arizona Stronghold Vineyards, for example, is the largest winery in the state with an annual production of about 20,000 cases.  Total production for the state is about 350,000 cases a year, we were told. If that’s correct, that means all Arizona wineries taken together make about as much wine as Daou Family Estates or JUSTIN Vineyards and Winery (data from Wine Business Monthly).

Lattitude versus Elevation

One reason you might not expect Arizona to be a wine state is its latitude. It can indeed be very hot in Arizona, which is why snowbirds flock there in the winter. But elevation compensates for latitude in Arizona much as it does in Mendoza, Argentina.

Wine grapes grow well in Arizona at elevations between 3500 and 6000 feet. Most of the vineyards are in the southeast near Willcox and about 75% to 80% of the grapes are grown there. But other parts of the state have active winegrowing, too, including the Verde Valley near Sedona.

Arizona wine is a premium product — there is no such thing as Arizona Two Buck Chuck. Lack of scale is one cause of higher cost, of course, but basic supply and demand play an important role. The amount of vineyard acreage has not increased as fast as the number of wineries seeking grapes. So grape prices have risen and wine prices along with them. We heard several people talk about $3000 per ton grape prices, for example, and that means $30+ bottle prices.

The vineyards are smaller than you will find in many regions and tend to be planted with many different grape varieties, further limiting economies of scale. I don’t think Arizona has a “signature” wine grape variety, although Syrah and GSM-style blends seem to be on every tasting room list. One reason for the kaleidoscope of grape varieties is just that Arizona is a young industry still in the experimentation stage.

Free to Choose

Another factor, however, is probably that making wine in Arizona means being free to do what you like to a certain extent. In Napa Valley buyers expect to find Cabernet Sauvignon. Ditto Malbec in Mendoza. In Cottonwood or Jerome, on the other hand, you can follow your personal preferences.

One source of this freedom is the fact that a lot of Arizona wines are hand-sold direct-to-consumer. Arizona wine sales regulations allow small wineries greater freedom for direct sales, so many focus on tasting rooms and wine clubs. Several wineries, for example, have tasting rooms in Willcox, Scottsdale, and Cottonwood. Scottsdale is a big tourist destination and Cottonwood is just a short drive from popular Sedona.

Local Market Focus

In part because of the scale issues and local regulations, most Arizona wineries focus on in-state sales through their direct channels. There is a lot of work to do to make Arizona wines more visible within Arizona before taking on bigger markets. Sue and I thought that on-premise sales might be a good way to spread the word, but neither Sedona restaurant we tried had Arizona wines on their list.

One manager shrugged when we asked about the situation. Too costly, he said. I can appreciate that problem. Once you apply restaurant markups to Arizona wine that visiting diners might not have heard of, it could be a tough sell.

But not impossible, as we discovered at lunch at a great Mexican restaurant in Scottsdale. They featured Chateau Tumbleweed wines in their by-the-glass program to support local producers. We tried a Mourvedre-forward GSM blend called Dr. Ron Bot and it was terrific with our meals. We appreciated that the Arabella Hotel where we stayed in Sedona featured Arizona wine tastings for guests.

Arizona Highlights

We enjoyed our brief visit to this part of Arizona wine country. Highlights included …

Arizona Stronghold

  • Arizona’s largest winery is small (by California standards) but mighty. The wines we sampled were delicious and we were very impressed with the entrepreneurial spirit. Arizona wines are relatively expensive for the reasons noted above, but somehow Arizona Stronghold manages to produce a good-value line of wines called Provisioner that includes “Float Tripper Sipper” canned sparkling wines that are a perfect complement to the Arizona outdoor lifestyle. Very impressive.

Page Spring Cellars

  • The Verde Valley is a great spot for outdoor activities and for wine tourists, too, with several wineries and even more tasting rooms. But with most of the vineyards down south in the Willcox area, there are not many classic destination wineries with vineyards, cellars, and tasting rooms. Page Spring Cellars has it all plus an outstanding restaurant. No wonder it attracts thousands of visitors each year for the wine, the food, and the experience.

Carlson Creek Vineyards

  • A winter storm prevented us from visiting the tasting room in Cottonwood, but we learned a lot about Carlson Creek Vineyards in an hour spent at the Old Town Scottsdale tasting room. The place was really buzzing on a weekday afternoon and the wines were among our favorites of this visit. If you visit Phoenix and don’t check out the wine scene in Old Town Scottsdale you are missing a bet!

Caduceus Cellars / Merkin Vineyards

  • Caduceus Cellars and Merkin Vineyards are projects of Maynard James Keenan, the frontman for rock groups including Tool. Some celebrity wineries are vanity projects or over-hyped branding exercises, but wine clearly is the central element here. We weren’t able to visit the winery in Jerome, but the Merkin tasting room in Old Town Scottsdale is a popular stop for both food and wine. Sue and I shared the signature charcuterie platter perfectly paired with Caduceus Nagual del Agostina, a white wine made from 80% Vermentino and 20% Malvasia Bianca from the Agostina block vineyard in the Verde Valley’s Cornville district. That’s a blend of grapes you might not expect to find in Arizona, or anywhere else, but it really worked. Arizona is full of surprises like this!

Cove Mesa Vineyard

  • Cove Mesa’s tasting room is in Cornville, with newly planted vineyards nearby. Cove Mesa is another example of a winery trying lots of different grapes, including a new planting of Assyrtiko.

The Arizona wine industry has come a long way in the 15 years since our first visit. It will be interesting see what the future holds. In the meantime, keep Arizona wine on your radar!

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Thanks to the wineries, hotels, and restaurants that hosted us or helped us with our research. Special thanks to Melissa Rein Lively for organizing our visit.

The Wineries:

Accommodations:

Restaurants:

Manias, Panics, Crashes, and Wine

March 21, 2023 By in economic crisis, wine, wine markets 1 Comment

One of the highlights of our visit to the Catena winery near Mendoza a few years ago was the opportunity to spend a few minutes in Nicolas Catena’s private study. Catena was an economics professor before he returned to the family wine business to guide it through the turbulent wine markets of the time and I was interested to see what was in his library (and on his mind) from those days.

As I scanned the bookshelves I was struck by the fact that, back in the late 1970s and early 1980s, Catena and I were following the same news reports and reading the same research, including books such as Charles P. Kindleberger’s classic Manias, Panics and Crashes: A History of Financial Crises. Relevant reading then and now, too, don’t  you think?

This Time is Different?

It is easy to imagine that financial instability, including manias, panics, and crashes, is something that happens in other places to other people at other times, but the recent banking crisis in the United States (and elsewhere) brings the problem clearly to our attention, especially given the involvement of Silicon Valley Bank (SVB), an important part of the U.S. wine industry’s financial ecosystem,

It has always been the case that financial instability potentially affects all types of businesses and,  as Professor Catena understood all too well, the wine business. But, as I argued in my book about the global financial crisis, it is easy to ignore risks, forget the lessons of crises of the past, or to simply conclude that “this time is different.”

Financial instability is baked into the cake, as they say. Crises are a durable feature of modern capitalism so businesses are unwise to ignore potential risks, both direct (the risk that someone who owes you money can’t pay) and counter-part risk (the risk that someone who owes money to someone who owes you money can’t pay).

Wine’s Minsky Moment

It is possible to argue that the four most relevant economists of the 20th century were Schumpeter, Keynes, Friedman, and Minsky. Joseph Schumpeter studied growth. John Maynard Keynes helped us understand unemployment. Milton Friedman’s ideas of money and inflation are very important. Schumpeter, Keynes, Friedman — these are names you might know. What about the fourth, Hyman P. Minsky?

This is a Minsky moment because his work examined instability and crisis, which he thought were an inherent part of the financial system. I first studied Minsky when I was writing my book Selling Globalization. Using Minsky’s analysis, I argued that globalization was more fragile than most scholars believed because it was built, fundamentally, on the unstable foundation of global finance. People thought I was crazy as I worked through my ideas … and then the Asian Financial Crisis hit!

How do financial crises start? And how do they end? Like Tolstoy’s unhappy families, each is different in the details, but Minsky established a general seven-stage pattern that is a good guide. I will paste an excerpt from my book Globaloney 2.0 below so that those of you interested in the details can follow along. Pay particular attention to the distress, revulsion, and contagion stages and see if they sound familiar.

Try to Remember …

So how should the wine industry react to financial crises like the one we are experiencing today? It would be easy to say that crises are a finance problem, not a wine industry problem. Wine just happened to get caught in the cross-hairs this time because of the SVB’s particular pattern of business. What are the odds of that happening again? That’s a fair point. Wine loans had nothing to do with the bank’s collapse.

My view is a little different. Financial crises are a wine problem because wine is a business and businesses are necessarily disrupted by unstable finance. Businesses need to take their financial risks more explicitly into account. That goes for wine businesses, too.

I don’t think that wineries in Argentina have forgotten this lesson, mainly because they have suffered repeated and severe crises (the current 100+ percent inflation rate suggests another crisis in on the cards).

The wineries who found their accounts at SVB frozen for a few days (because they exceeded the $250,000 limit to FDIC insurance that applied at the time) will not quickly forget this lesson, although I wouldn’t be surprised if the memory eventually fades once “normal” operations are fully restored. That’s one of the reasons why Minsky moments like this return.

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Excerpt from Chapter 2 “Financial Globaloney: Safe as Houses” in Michael Veseth, Globaloney 2.0: The Crash of 2008 and the Future of Globalization (Rowman & Littlefield, 2010).

The leading authority on the theory of financial crises is Hyman P. Minsky, an economist who never received the respect he deserved within the profession because his theories challenged the orthodoxy that markets are generally quite stable (I will have more to say about this later).i Every financial crisis is different in the details (and not all bubbles or potential bubbles actually burst), but there is a family resemblance that Minsky explains as the seven stages to a financial crisis.ii

The first stage is called Displacement and it represents a change in expectations. It could be a new invention, discovery or government policy or it could be simply a change in expectations about the future. Whatever it is, Displacement creates a new object of speculation and at least some insiders rush in to take advance of the news.

Displacement happens all the time, of course. That’s why the stock markets go up and down every day and every hour of the day and every minute of every hour. People constantly react to real news, fake news and changing expectations. So there are a million little potential financial bubbles filling the market like fizz in a glass of Champagne, rising up and popping all the time. But some of them are a bit more substantial and gather the attention of both insiders and outsiders. It is hard to predict in advance when it will happen, but when it does a speculative bubble starts to form.

Minsky’s second stage is called Expansion. More and more money begins to focus on the speculative object, whatever it is – gold, silver, real estate or even tulip bulbs. The market can expand in several different dimensions. The most obvious, of course, is through money creation. When central bankers expand the money supply, as they sometimes do, they may expect that new funds will flow pretty much everywhere, but sometimes they are disproportionately diverted to particular investments fueling bubbles.

Leverage is another source of expansion. Leverage refers to the use of borrowed funds (other people’s money) to increase the return on your money. Suppose you have $1000 and you believe that XYZ Corporation’s stock will double in the value in the next month. You could invest your $1000 and, if you are correct, earn a $1000 profit, a 100% return. Or you could take your $1000 and borrow $9000 to invest $10,000 in total. This would be a leverage ratio of nine to one. If your expectations are fulfilled, the profit would be $10,000 on your $1000 investment (minus whatever interest costs you had to pay). Instead of a 100% return you would receive something approaching a 1000% return. Leverage is a wonderful thing when it works, but it is of course very risky. Just as you can earn much more than your initial stake you can also lose much more.

Expansion also takes place as the population of potential investors grows. Insiders (people with specialized investment knowledge) are joined by well-informed amateurs and then rank amateurs who sometimes just follow the herd based on what they read on the internet or hear from friends and co-workers. Water-cooler investors, I guess you could call them. The movement from professionally managed employee pension funds to individually managed 401k and similar retirement instruments has facilitated this sort of expansion in many countries. It is easy to belittle the ill-informed financial decisions that “blind capital” makes, but highly paid geniuses do not always out-performed them.iii

Finally, expansion can occur if the speculative object draws the attention of international or even global investment markets. Interconnected global financial markets are capable of focusing enormous sums on particular speculative objects, with predictable results. It is as if a giant magnifying glass focused the full power of the sun on some object or creature. Destruction seems assured, but first comes the heat.

Expansion does not always produce a crisis because investors can be fickle. There is always something new to consider, always a million different things to displace expectations and the funds that fuel expansion now can quickly withdraw and move on. The markets can achieve a state that Minsky calls Euphoria, however, if attention remains focus and expansion sustained. Euphoria produces a sense that investors can do no wrong. It is impossible to make a bad decision, since the general rise of the market covers any poor individual choices.

Economic logic simply evaporates in the Euphoria stage. Logic warns to buy less as price rises. Euphoria whispers that rising prices today are harbingers of even higher prices now – time to buy! And buy even more as those future price increases appear. The buying binge and the higher prices they produced are indeed self-fulfilling prophecies, which are the best kind. Sometimes Euphoria just fizzles out, but sometimes it can be sustained, especially if expansion from whatever source is maintained.

Distress comes next in the classic seven stage scenario. Distress is the moment when insiders begin to believe that the market cannot be sustained. Doubts creep in and alternative scenarios are reviewed. The market may pause or slow or the collapse could begin.

Revulsion follows as some investors begin to act upon their doubts. Insiders head for the door first, often leaving with substantial profits in their pockets. Others follow, causing the Crisis stage. The self-fulfilling rising price prophecy of Euphoria is reversed as lower prices trigger sell-offs that drive prices even further down. Everyone wants cash in this market, but it is hard to come buy. Who will lend in a falling market? Who will buy when prices are falling to fast? Someone does, obviously, but at much lower prices.

Crisis is often accompanied by the seventh stage, Contagion. The crisis in one market spreads to others. Contagion can happen in several ways. Sometimes the bubble in one market expands to others and all collapse at once. This was the case with the Peso Crisis of the 1990s. Unlucky investors, drawn to Mexico by the prospect of NAFTA gains, ended up putting money into many Latin American markets, all of which surged and then collapsed together. They called it the “Tequila Hangover” effect.

Leverage creates another contagion vector. As prices fall, leveraged investments go “under water” and speculators are required to put up additional funds. Since credit is hard to come by in the crisis stage, there is often little choice but to sell off good investments to cover losses on increasingly bad ones. Thus the Russian financial crisis of 1998 triggered contagion in Brazil as speculators sold off Brazilian investments to cover their rouble losses.

Finally, contagion can take place as credit markets freeze up generally. Businesses that are accustomed to ready access to credit (for themselves or their customers) are shocked as liquidity disappears. Economic misery spreads from the financial sector to the so-called real economy as declining wealth and restricted credit affect change buyer and seller behavior.

This is how a classic financial crisis unfolds. Not every crisis goes full term, of course, and the damage when they do is not always substantial. But as Kindleberger explained 30 years ago and Reinhart and Rogoff’s study has more recently confirmed, major damaging financial crises happen often enough to be considered a common feature of international finance. So no one should be surprised when these markets behave as they so frequently do.

i John Kenneth Galbraith is another economist whose status outside the profession was much higher than within it due to his failure to his unorthodox views.
ii See chapter 2 of Kindleberger Manias, Panics, and Crashes.
iii Walter Bagehot coined the term “blind capital” to refer to uninformed but enthusiastic amateur investors who are drawn into speculative bubbles.

Chutes and Ladders: Wine and the Premiumization Game

March 7, 2023 By in wine, wine markets, wine price 6 Comments

I believe that the games we all played when we were younger taught us valuable lessons, both about life in general and life in today’s wine industry in particular. Risk, for example, taught us to be strategic in analyzing any situation. Checkers and chess taught us to think beyond the next move or the one after that, to anticipate our competition’s reaction to each possible action.

Monopoly, of course, prepared us for the wine industry’s continuing consolidation with big getting bigger at every level — retail, distribution, winery, and vineyard.

Up and Down

Chutes and Ladders (or Snakes and Ladders for some of you) is the game to play if you want to get a sense of the premiumization game that is a distinct characteristic of the wine industry today. Chutes and Ladders is a race to get from the bottom of the playing field to the top. You can climb up one step at a time, but ladders sometimes zoom you to a higher level. That’s great, but there are also chutes that send you tumbling down again.

Wine businesses have been encouraged to play the Chutes and Ladders game because the growth in the market has ratcheted upscale with surprising speed since the global financial crisis. Sales of wine at lower price points have languished or declined. The growth zone has shifted to higher and higher price points (which entail lower and lower volumes). The sweet spot in the wine market is a moving target. Talk about Risk!

Sometimes it seems like if you are not climbing the ladder you must be falling down the chute. Growth-seeking wine brands must keep climbing market ladders as the sweet spot shifts, but (to mix metaphors) it is hard for a tiger to change its stripes. Once a brand has established an identity, it is dangerous to cut prices and difficult to raise prices. Climbing the premiumization ladder can be a roll of the dice.

Early Mover Disadvantage

I have seen this with some European wines that entered the US market back in the day when market conditions were different, It is hard for them now to change stripes. Take the popular-priced red wines of Valpolicella, for example. These were once some of the best-selling imported wines on U.S. shelves and still do very well, but the bargain prices that drew attention back then no longer make the same impression.

Montepulciano D’Abruzzo faces some of the same challenges. Buyers may think of good value, not high quality when they see this wine, which is a problem if spending growth is focused on higher price points.  When we were doing research for our trip to Abruzzo last year, for example, most of the Montepulciano d’Abruzzo wines we found were in the “good value” category — a legacy of the region’s early successful entry into the U.S. market.

The low point came when we found a popular brand of Montepulciano d’Abruzzo in a Grocery Outlet store selling for just $5.99 per 1.5-liter bottle. Not the image you want to see, especially since the region has so much potential.

Climbing the Ladder

We found excellent wines during our trip to Abruzzo. We were especially impressed by the small wineries of Villamagna DOC, for example, and the Cantina Frentana cooperative showed that quality and quantity could go hand-in-hand.

We’ve recently been sampling the Villa Gemma line of wines from  Masciarelli, and they are terrific. The Montepulciano d’Abruzzo Riserva 2017 is an example of a wine that can help redefine the category.

The classic-level Masciarelli wine sells for $12.99 at the upscale supermarket down the street and for just under $10 at a local big-box alcohol superstore. That’s a good price point, but with premiumization moving the ladder, market growth seems to be shifting up a level. Hence a focus on super-premium Villa Gemma and wines like it to take advantage of premiumization without sacrificing the existing profitable market.

North and South

Here in the U.S., we have the tale of Washington state’s Chateau Ste Michelle, which prospered just a few years ago when the sweet spot for wine sales growth was $8 to $10. The wines are very good, but they were pigeonholed by their price point and now the market has shifted higher.

New Zealand wines present the other side of the situation. New Zealand entered global markets at what were then surprisingly high prices. New Zealand’s average export price for still wines was for some years the highest in the world (remember that world wine flows include vast quantities of inexpensive bulk wines, which are not part of the New Zealand portfolio).

Having entered the US market at a higher price point, New Zealand wine (mainly Sauvignon Blanc) has benefited from each upward shift so far. But, seeing the writing on the wall, some Kiwi producers are getting ready for the next ladder climb. For example, we have recently sampled wines from Babich, which seem to be intended to scale the next ladder.

The Babich ladder begins with the classic Babich Marlborough Sauvignon Blanc and then climbs through Black Label, Family Estates, Select Blocks, and Winemaker’s Reserve tiers. Babich is a well-known champion of sustainable wine-growing and this is part of the brand ladder. The classic that we sampled was certified Sustainable and the Select Blocks wine was made with organic grapes.

The classic wine and the Select Blocks were very different  from each other when we tried them — as they should be. The classic was a refined variation on the now-familiar Marlborough Sauvignon theme. The Select Blocks wine was even more elegant and perhaps defines a new category — which is great in terms of product differentiation. But it didn’t say “Marlborough” to us as much as we’d liked.

How High is Up?

How much longer will the premiumization game of Chutes and Ladders last? And who will the eventual winner be? The wine market is like a dynamic pyramid and the volume of wine is smaller at the top of each ladder compared with the one before.

Like the housing bubble of a few years ago, this process doesn’t seem sustainable. That means that Stein’s Law probably applies: if something can’t go on forever … it will end.

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Note: Masciarelli has released a special wine, Pecorino Castello di Semivicoli 2022,  with proceeds to raise funds to support a charity that assists the parent of autistic children. Bravo, Masciarelli family!

Got Wine vs Not Wine? Wine and the Generation Gap

February 14, 2023 By in economic crisis, Unified Wine & Grape Symposium, wine, wine markets 7 Comments

We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress … is over; that … a decline is prosperity is more likely than an improvement.

The economist John Maynard Keynes wrote these words in a 1930  essay called “The Economic Possibilities of our Grandchildren” and I have been thinking about them quite a lot recently in the context of the wine industry. Keynes was writing in the depths of the Great Depression. Is wine in (or headed towards) a Great Depression of its own?

On the Other Hand …

Certainly the mood at last month’s Unified Wine and Grape Symposium was mixed. Obviously I didn’t talk to all the 10,000 people who attended the 3-day event, but I think I got a general sense of what wine industry people are thinking and feeling from those I encountered.

On one hand (a classic economist opening phrase), there was an upbeat mood because the meetings and trade show themselves felt back-to-normal after several years of covid-driven disruption. The house was packed for our State of the Industry session, for example, and there was a record number of exhibitors at the trade show (and a waiting list for next year). Glass at least half full, for sure.

One the other hand (you knew that was coming), it was impossible to ignore some of the discouraging news in the air (I reported on some of this in last week’s Wine economist column). Some people blamed this on the recently released Silicon Valley Bank report, but I think that is unfair. Like our State of the Industry session, the SVB report has an obligation to be objective — to report the straight facts without a lot of spin. And I think their report does that well. Facts are facts. The question is what you do with them and whether, like Keynes, you can see beyond the current crisis to the possibilities of the future?

The Generation Gap: Got vs Not

Keynes was thinking in generational terms when he wrote his famous essay and a lot of the analysis of wine’s current malaise is generational, too. The baby boom generation powered the golden age of American wine, the story goes, but the generations that followed haven’t embraced wine with the same warm hug. What can we do to make Gen Z consumers love wine as much as their grandparents do? How can we close the wine generation gap?

This is a good question (and I am glad so many people are asking it), but it by-passes part of the problem. Yes, boomers as a group drink a lot of wine, but in fact wine consumption is concentrated among just a small fraction of boomers. The baby boom generation is large — it contains multitudes. It is both Gen Got Wine and Gen Not Wine. Generalizing about generations like the boomers is a risky business.

This is true, I believe, for other generations, too. What makes the wine drinking boomers different from the boomers who don’t drink wine or don’t use alcohol at all? And what, if anything, does the boomer wine cohort have in common with wine-drinking members of other generations? Maybe generational differences aren’t the whole story (or even the most important part of the story)? Is the gap as much within generations as between them?

How Full is your Glass?

Should we be optimists or pessimists as we consider the future of wine? Well, our situation is nowhere near as dire as what Keynes faced back in Depression days. The wine market requires only relatively small adjustments by comparison to restore a balance and a bit more to kick-start growth. Not easy by any means, and it might not happen, but not at all hopeless.

Keynes was an optimist and he used this essay to look far into the future, peering past the short term problems necessarily on his readers’ minds. The prospects for our grandchildren are bright, he said, so long as we are able to avoid certain obstacles — over-population, violence and war, and the politicalization of science. Our current economic situation, since we are the future of Kaynes’s past, is indeed prosperous compared wtih 1930 if not quite so bright as he hoped.

A Half-Full Future?

Let me follow Keynes’s example in talking about the future of wine. Wine has endured for thousands of years and survived many dark periods, so it is not unreasonable to imagine a bright future for wine as both culture and industry. But there are obstacles to be avoided.

In my recent book Wine Wars II I propose that wine must deal with a triple crisis: environmental crisis, economic crisis, and identity crisis. The identity crisis is most relevant to today’s topic. Wine is an alcoholic beverage — the fermentation process doesn’t just add alcohol, it transforms the grape juice in miraculous ways. If, as I think is possible, wine becomes defined by its alcoholic content — grape juice alcohol the way that hard seltzer is fizzy water alcohol — then something very important is lost and wine’s future grows dark.

Another obstacle — and this allows me to circle back to the generational issue — is occasion. Opening a bottle of wine is an occasion (there is both an element of ceremony in the cork-pull and the more-than-single-serving quantity to deal with) and must align with occasions in consumer life.

Mind the Gap?

Dinner is an occasion sufficient to pull a cork at our house, but that’s not true for everyone. I wonder how much of the wine that is sold is consumed with meals versus other types of occasions and how this might differ for different demographics?  The wine industry would be wise to try to adapt to the occassions that younger consumers (and older consumers, too) actually experience rather than the ones we imagine they should enjoy.

An article in yesterday’s Wall Street Journal suggests that at least one big beer company is rethinking its marketing plans in light of the threat of recession. Home consumption is rising at the expense of on-premise, for example, so marketing will work to put beer at the center of home and family occasions. Smart thinking!

A recent Financial Times column by Gillian Tett provides food for thought regarding Generation Z attitudes. The article doesn’t talk about wine, but maybe there are implications for wine. Tett cites studies that show that Gen Z workers demand more control over work environments than employers are used to. If they can’t customize the job, they prefer to quit, one expert suggests. Dangerous to generalize, of course, but it makes me think about how the wine experience compares with, say, cocktails in this context?

The generation gap is complex. Lots of food (and drink) for thought!

Margins? What Margins? The Big Squeeze in Winegrowing 2023

February 7, 2023 By in economic crisis, South Africa, Unified Wine & Grape Symposium, wine markets 7 Comments

I was talking with a group of California winegrowers just before the Unified Wine & Grape Symposium‘s State of the Industry session a couple of weeks ago and the stories they told me made me understand that The Big Squeeze, which I wrote about around this time last year, is still going strong.

Margins? What Margins?

The Big Squeeze? Many winegrowers have for some time been caught in a squeeze between rising costs and stagnant or sometimes even falling wine grape prices. Your margins are getting squeezed, I asked? Margins? What margins? they replied. Margins got squeezed away some time ago.

The Big Squeeze is significant and not limited to the United States. When I travel the world speaking to wine industry groups I will ask quietly about how the growers are doing? Often the reply is a shrug, downward look, and slow shaking of the head. Not so good, they tell me.

South Africa is a good case in point. Every year Vinpro, the important South African winegrowers organization, reports its survey of vineyard profitability. Rico Basson, Vinpro’s executive director, released the results for 2022 at the annual Nedbank Vinpro Information Day last month and the chart above summaries the conclusions.

Unsustainable Operations

Only about 9% of the South African winegrowers were earning a sustainable level of income per hectare — a high enough return to support long-term investment. Fifty percent were caught in a low profit zone, with positive net income, but less than they might earn elsewhere. (If you remember your Econ 101 definitions, this would be positive accounting profit but zero or negative economic profit — it’s an opportunity cost thing.)

The actual level of income per vineyard hectare (the green line in the chart above) is far below the sustainable income level (black line). Fully 41% of the South African winegrowers in the survey were either at break-even (3%) or bleeding red ink (38%). The average return on investment in 2022 was minus 2.4% and the gap between costs and revenues was widening. That, my friends, is a really big squeeze.

Volume or Value?

Which is the better strategy to escape the squeeze: volume or value? Do you push to raise vineyard yields or  try to raise price though lower yields  but higher value?

I don’t know the answer for South Africa today, but when I spoke at the Vinpro event a few  years ago the answer was clear. The higher the yields, the better the chance for success. Sacrificing quantity for quality didn’t consistently pay, I was told, because South African wine found it hard to break through the premium price-point ceiling on international markets. Most producers couldn’t manage to raise price enough to compensate for the higher unit costs. Ouch!

I told this South Africa story to my winegrower friends and they shook their heads. Pretty much the same here, they said. Given the limits on what buyers would pay for their grapes, the best way to profits was to increase yields to, say, 12 tons per acre or more depending on grape variety.

Limited Yields, Limited Opportunity

But there were two problems,, I was told. First, some buyers won’t go along — they were concerned about loss of quality at the higher yield, although modern viticulture practices make it possible to raise yields without loss of quality possible in certain circumstances. So in these situations raising yields is a non-starter.

And it isn’t always possible to get yields up to an economically sustainable level because many older vineyards just aren’t set up for that and have built-in limits that were OK when they were planted years ago, but make life difficult today.

So what are you supposed to do, one grower asked me, if you have an older vineyard that needs to be renewed at high cost? This is where the unsustainable profitability issue really hits. Do make a big bet that the Big Squeeze will loosen up in the future? My winegrower friend was less than optimistic.

Unsustainable?

Not all vineyards bleed red ink, of course. The situation is different in different winegrowing regions with different market conditions and vineyards of different ages and farming set-ups. But the problem remains. As I reported last year, wine prices have fallen in real terms recently and one result has been to make the already-serious vineyard squeeze even worse.

When you talk about sustainable vineyards, people naturally think about environmental sustainability. But economic stability is an issue, too.