Beyond Wine Boom & Bust: Taking a Closer Look at the SVB Report

svb-2018wine-thumbSilicon Valley Bank recently released their 2018 State of the Industry report on the U.S. wine market and if you haven’t read it you should. It is well researched, written, and argued. Most important, it will challenge your ideas about the U.S. wine industry and make you think.

Most of the media reaction to the report has focused on two “boom and bust” elements: the predictions that (1) the 20-year wine market expansion is coming to an end and (2) that the relentless rise in grape prices and vineyard valuations in Napa Valley will pause or plateau.

Both of these predictions are significant although, as the report notes, calling a “turn” in the market is inherently problematic and will be difficult to assess until a few years down the road. In the short term, for example, the report notes that the U.S. wine market should continue to grow in 2018, although at a slower pace. Value will grow faster than volume due to the “two track” U.S. market with growth in premium wine sales offsetting declining lower-shelf demand.

This Changes Everything?

Boom and bust make headlines, but there are two important points that the SVB report makes that I think should get more attention. The first is the fact that we are witnessing fundamental changes in the retail market environment. Not just retail wine market, retail everything (or just about). Who buys, when, where, and how, who consumes, when, where, why, and how. Even the way people pay is changing.  Amazon is one driving force in this environmental transformation, but only part of it.

This fact was driven home to me a few weeks ago when I read that the Swiss luxury group Richemont (controlled by South Africa’s Rupert family), announced plans to buy out Yoox Net-a-Porter,  an Italy-based  luxury “etailer.” Richemont’s brands include Cartier, Van Cleef & Arpels, Piaget, Vacheron Constantin, Jaeger-LeCoultre, IWC Schaffhausen, Panerai and Montblanc. High end stuff.

You might think that consumers would be willing to buy books and t-shirts online but that they would hesitate to throw down $5000 or more for jewelry or a watch without holding it in their hands. But you would be wrong, or so the Richemont folks believe. The idea kind of takes my breath away.

It’s a new world for wine as for other things, the SVB report suggests. And the patterns and practices that were successful in years gone by, including but not limited to bricks-and-mortar versus online sales, are not guaranteed to work in the future. Time to question and rethink.

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Talking ‘Bout the Generations

A second interesting but possibly under-appreciated point that the SVB report raises concerns generational analysis of the wine market. Most of what you read about wine today frames the changing market demographics in terms of baby boomers versus millennials. But, as this figure from Statista.com suggests, there is a “missing middle” to this analysis. The figure shows 2016 median household income by age of householder.

Lost in the focus on rising younger, poorer millennials versus declining older, richer boomers is the Gen-X generation who are in their 40s now (more or less) and reaching their peak earning (and consuming) years. They are, SVB argues, an important but sometimes underappreciated market for wine. And, as a recent Wine Access study reveals, although Gen-X is a smaller cohort than boomers or millennials, they are willing and able to spend proportionately more on wine.

I think these are very useful insights, although I’m always a bit cautious regarding generational analysis. My years as a university professor taught me that the differences between generations are sometimes less important than diversity within them. Sometimes it is appropriate to generalize about a generation, but not always.

Take boomers, for example. The conventional wisdom is that baby boomers have driven the wine market growth — and this is true — but remember that most boomers don’t drink wine regularly and many don’t drink it (or any alcohol) at all.

The boomer wine boom is driven by a relatively small segment of this generational group. In a way, the boomer wine phenomenon is about a subgroup that is at least somewhat atypical of its cohort — and that difference is key.

The SVB report goes well beyond boom and bust to include these significant insights and many others, too. Highly recommended for anyone who wants to understand the American wine industry today and where it is headed.

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Congratulations to Rob McMillan and his team for a thought-provoking report.

David Ricardo to Donald Trump: Global Wine Trade and Its Discontents

5788597-mWhen David Ricardo wanted to make the logic of his famous Theory of Comparative Advantage crystal clear he knew what example to choose: wine. It was obvious that Britain should import wine from Portugal in exchange for cloth rather than trying for vinous self-sufficiency. Any fool could see that!

Make Great Britain Great?

But wine wasn’t really the point of his example. He was more concerned about the Corn Laws, a set of trade barriers designed to choke off agricultural imports and promote higher prices for domestic grain (lining the pockets of rural landowners in the process). If Britain should trade cloth for wine, then why not trade cloth for wheat and other grains as well?

The wine story was good enough to convince Ricardo’s economist colleagues, but not so much those in parliament. The Corn Laws lasted from 1815 until 1846. Economic logic triumphed over vested interests in the long run, but the human cost of the trade barriers to urban workers and their families in terms of higher food costs and lower living standards was very high.

Britain really didn’t fulfill the promise of its Industrial Revolution until the Corn Laws were repealed. It is fair to speculate that Parliament could have acted to Make Great Britain Great much sooner if they had been guided by the economic logic of wine trade.

Wine is perhaps a good guide to British political economy today, too. Brexit, which was promoted as a way to Make Great Britain Great Again, seems to have instead made British families poorer even though the change in trade policies has not yet been enacted or even agreed.  Rising import prices and stagnant wages have squeezed consumer budgets for wine as for many other items (sound familiar?). Tesco, the upscale supermarket giant, is reportedly planning a discount chain of its own to compete with increasingly popular “hard discount” Aldi and Lidl stores.

Make American Wine Even Greater?

The wine trade has lessons for the United States, too. Or at least that was my takeaway from two speakers at the “State of the Industry” session at the recent Washington Winegrowers Convention and Trade Show. 

Glenn Proctor of The Ciatti Company presented a very interesting survey of global wine market conditions. There are only two big wine markets that are growing in terms of total consumption, Proctor said: China and the United States. The Chinese market is particularly attractive because of the large rising middle class and potential for further growth.  French wines are top of the import table in China, followed by Australia and Chile — two countries that have benefited from free trade agreements with China.

Indeed, China is now the #1 export market for Australian wine, accounting for 33 per cent of exports, ahead of the US (18%), UK (14%), Canada (7%), and Hong Kong (5%). The Chinese market has powered Australia’s resurgence as a global wine power and the free trade agreement is an important part of the story.

The United States? Well, the U.S. has no free trade agreement with China and President Trump pulled the U.S. out of the Trans-Pacific Partnership negotiations — which could have opened up Asian markets — on his first day in office. Partly as a result, I suppose, the U.S. ranks #6 on the China import list. Australia wine sales volumes are more than ten times the U.S. amount.

If recent import trends continue for a couple of years, U.S. sales to China may be surpassed by relatively tiny Georgia. Georgian wine sales to China have surged (up 45%) in part because of the Georgia-China free trade structure that went into effect at the beginning of the year. The U.S. wine industry is clearly handicapped in foreign markets where other producers have preferential access.

John Aguirre, President of the California Association of Winegrape Growers, also highlighted  the importance of trade agreements for the wine industry. President Trump has raised doubts about  U.S. – Korea free trade (the Korean market has lots of potential for U.S. wine) and launched negotiations to revise NAFTA. Since Canada is the largest export market for U.S. wines, it is essential that NAFTA maintain open cross-border access.

The wine industry would suffer if the NAFTA negotiation somehow collapse, although the negative impacts would obviously be less than agriculture generally and the automotive industry, both of which have become dependent on efficient trans-border industrial integration in order to compete with efficient producers in other parts of the world.

I am hopeful that the NAFTA negotiations will be successful at updating the treaty since there is so much at stake. But my confidence is shaken somewhat by President Trump’s actions to block new appointments to the World Trade Organization’s appeals body — the entity charged with enforcing the rules of the trade game.  This will make it more difficult for the U.S. wine industry to pursue its complaint against the British Columbia wine regulators concerning their discriminatory supermarket wine sales policy, which favors B.C. wines relative to imports in clear violation, in my view, of the WTO’s non-discrimination principle.

What’s the bottom line? If President Trump: wants to Make American Wine Even Greater, he might take a lesson from David Ricardo and re-think administration actions and policies regarding global trade agreements.

Wine Business 101: Exploring America’s Largest Wine Industry Trade Show

unifiedContributing editor Sue Veseth is fascinated by wine industry trade shows. She recently attended the Unified Wine & Grape Symposium trade show in Sacramento, California. Here is her report.

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Making wine is not very stuff-intensive, right? Some grapes, a vessel for fermentation, maybe a couple of barrels, some bottles or jugs, closures — voilà!

But modern winemaking, even for small wineries and those making natural wines, can be very stuff-intensive. A good place to start looking at or shopping for all of the stuff for winemaking is the trade show at the Unified Wine & Grape Symposium in Sacramento, California. This is the largest trade show in North America for the wine and grape industry, attracting more than 600 vendors from around the world and more than 14,000 visitors. A lot of people in the industry use the trade show to connect with friends, colleagues, suppliers, and peers in the industry, in addition to shopping.

Some trade shows are focused on particular aspects of the industry. The SIMEI show we attended in Milan, Italy, in 2015, was all about machinery and technology. Smaller regional trade shows may combine winemaking and other agriculture industries. The January 2018 VinCO trade show in Grand Junction, Colorado, was about winemaking and fruit-based agriculture.

Soup-to-Nuts

In contrast, the Unified is a soup-to-nuts trade show: tractors, plants, fertilizers, trellises, bottling lines, hoses and fittings, flooring, waste and wastewater management, vessels and containers of all types and sizes, construction services, irrigation systems, cleaning equipment, chemicals, testing services, software to manage just about everything, bottles, closures, labels, packaging, marketing materials, financial services, transportation, industry publications — and the list goes on. Some vendors have been in the show for years; a few new vendors show up every year. Some vendors may wait several years before scoring a spot.

It seemed to me that the people staffing the booths this year were spending more time talking to customers and passers-by than staring at their cell phones — hooray! Conversely, fewer exhibitors this year insisted on scanning my visitor badge, probably easily realizing that I was looking not buying.

One vendor in particular especially impressed me. This vendor had a dozen staff members, including high-level executives, in a standard-sized, attractive-but-not-flashy booth. But few were actually in the booth. They were always working the floor, with both intense and casual conversations with customers and potential customers. You could tell that this vendor was focused on business.

The raptors are always one of the most popular exhibits. The falcons are used for pest control. It is easy to anthropomorphize and conclude that the birds’ beady stares may be sizing us up — perhaps as lunch?

I also enjoyed looking at the pruning equipment and vineyard supplies that could be useful to the home gardener.

Vegan Fertilizer?

So, is there anything new? Yes, to me anyway. Especially intriguing were two French vendors with vegan products and processes for winemaking. One was showing vegan fertilizer. I had hoped to bring home a sample to try, but the smell was very strong, very fertilizer-y, even packed in multiple layers of plastic zip bags. Alas, it did not make it into the suitcase. Another company offers a range of products for vegan winemaking.

I was not aware of vegan winemaking, but it turns out that many wines I know and enjoy are vegan, at least based on the Barnivore list (http://www.barnivore.com/), although they are not necessarily promoted as vegan. Another “who knew?” moment.

Costs and Benefits

The question always arises: Is it worth it? There were moments when the trade show was jammed (after the State of the Industry presentations, during lunch, and during the regional wine tasting, for example) and other times when the aisles were open and easy to navigate (such as the afternoon of the second and final day of the show). The busy times seemed as busy as in past years but the slow times seemed slower to me this year.

Participating in the show is not inexpensive, for both the vendors and those attending. A lot of people were looking, but how many were buying? Does the activity level reflect expectations about expansions, contractions, or no change at individual wineries and the industry in general? Is it an opportunity to see and be seen?

The answers probably depend on who you are, what you are selling, and what you are buying. But if you want to understand the scope of the wine industry, the Unified Wine & Grape Symposium trade show is a good place to start.

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New York Times wine critic Eric Asimov attend the Unified trade show for the first time in 2017. You might be interested in his reflections on the experience. Spoiler alert — he was also fascinated by falcon pest control.

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Many thanks to everyone who works to make the Unified Symposium and its trade show a success. Special thanks to John Aguirre and Jenny Devine and to photographer Ken Freeze for providing the image above.

 

Trickle Up Wine Economics and the Big Wine Market Squeeze of 2018

trickleYou’ve probably heard of “trickle down” economics. It’s the theory that if you give money to the rich it ends up benefiting those who are not so rich as the wealthy spend or invest their money and create incomes and jobs for others.

Trickle Up and Down

Trickle down economics is controversial. Not because it is crazy to think that the rich spend or invest their funds; the question is how much actually gets down to the bottom of the economic pyramid? Mega-rich Scrooge McDuck, my favorite childhood cartoon character, didn’t spend much of his money at all, so very little of it trickled down to others.

Although it might initially seem counter to the laws of fiscal physics, it is also possible for money to trickle up. In my studies of Italian economic history, for example, I discovered that the wealthy families of Renaissance Florence sometimes successfully enacted a trickle up policy.

There were some situations where the working class found themselves tapped out and disgruntled. The economy stagnated and social tensions heated up — a dangerous combination. So the rich found ways to get cash into the pockets of the poor, which they spent immediately and, by the end of the month, the coins were back in the hands of the rich where they started, the markets were churning away steadily, and peaceful social relations had been restored. Priming the pump, we used to call it. Enlightened self-interest at work!

How Does Wine Trickle?

Under certain conditions it is possible to experience a trickle down effect in wine markets. When grape harvests are unusually bountiful and grapes therefore cheap, it is possible for a winery to have more quality wine than they need for a particular brand or line of wines. They could of course simply cut the bottle price and sell the extra wine that way, which is what you learned in Econ 101, but price and reputation are closely associated in the minds of many wine consumers, and it is difficult to raise price back up in the future if you cut it now because expectations have change. This is sometimes called an example of economic hysteresis.

So the wine trickles down, either in the form of a second label or through bulk market sales. Trickle down bottom line: the surplus of good wine can trickle down to lesser wine market tiers when the conditions are just right. In recent years a whole industry has developed to take advantage of structural surpluses and trickle down situations. The rise of “asset lite” wine businesses (which own a brand, but no land or production facilities) is predicated in part on the ready availability of wine supplies.

This Time is Differenttrickleup

This time is different. As a recent Rabobank report makes clear, Wine’s Big Three global producers (France, Italy, and Spain) all had significantly short harvests this year and many other major producers had similar experiences either in 2017 (some parts of California) or 2018 (drought will dramatically limit production in South Africa). The tight global market will be felt mainly through squeezed margins, but other impacts may be felt.

A global wine shortage renders trickle down opportunities scarce, for example,  but creates the right condition for  trickle up wine economics. Here’s how it works. The shortage is going to raise wine prices in some categories and put the squeeze on those who are used to selling them. They’ll need to give priority to wine markets where margins are higher and can better absorb the rising costs.  In Spain, for example, this may mean favoring exports over the domestic market.

At some point basic bulk wines will cost too much to go into the boxes and budget bottles where they found homes in the past. To the extent that quality permits (and this is an uncertain factor), they will migrate up to wines selling at a higher price point. And the wines that would have gone there will migrate up a bit, too, as grape demand shifts up  and the effort to preserve and protect margins moves along.

Or at least that’s what the Law of 100 suggests. This is a rule of thumb that holds that you take the cost per ton of wine grapes and divide by 100. The result is the bottle price necessary to make wine production economically sustainable. If shortage pushes the effective tonnage price up far enough, the grapes need to be used for a higher tier of wine.

If the more costly wine cannot trickle up in one way or another, then tighter margins will likely trickle down. Many links in the value chain get squeezed in this process, but wine producers with the greatest ability to substitute and avoid higher costs and shortages face fewer potential difficulties. Brands built around specific grape varieties (versus flexible blends) and narrow appellation designations with limited alternative sourcing options are more vulnerable.

Price and Quantity

How will the Big Squeeze and the trickle up game affect wine price and quality? Well, costs will certainly squeeze margins and higher prices may result, but as I’ve just noted, there are some ways to mitigate that. One of them is to sacrifice quality, so that will be an important thing to watch as grapes migrate to higher price points.

This could be a serious issue for wines at the bottom of the shelf. Some of my wine friends have told me privately in the past that they believe the stagnant market for some of these wines is due in part to a decline in quality — which they often blame on cheap bulk imports used to preserve margins.

The economic impacts of the Big Squeeze could extend to the vineyard real estate market as well. Look for some of asset lite business to try to purchase or lease more vineyards to assure future grape supplies. This is not a new trend — it has been going on for a while in the Napa Valley, for example — but it is likely to accelerate.

It is obviously too soon to tell exactly how the big squeeze will play out — especially on the global markets — but these are some of the forces and patterns that I will be watching for.

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The Wine Economist will pause next week so that I can concentrate on my role as moderator and speaker at the “State of the Industry” session at the Unified Wine & Grape Symposium in Sacramento. Hope to see many of you there.

Big & Hot Wine: Cab Boom, Napa Bubble, Think Pink, Back to the Future?

Last week’s Wine Economist column featured a very basic “Big and Hot” analysis of recent U.S. wine market data, focusing on which parts of the market are the most interesting in terms of “big” total expenditures versus the fastest growing “hot” categories. (If you haven’t read the first column, click here to check it out.)

This week I invite you to give some thought to the implications of that information. Here are a few observations to get you started.

Cabernet Boom, Napa Bubble?hqdefault

Cabernet Sauvignon is both Big and Hot these days. Cab will soon eclipse Chardonnay as the best-selling varietal wine in the U.S. market.

When you combine this fact with the general up-market trend, where the fastest growing parts of the wine market are in the super-premium and luxury segments, it is easy to understand how and why the California wine industry is being transformed by a movement toward quality, with Cabernet Sauvignon in the lead.

The Cab Boom is at its fiercest in the Napa Valley, where sky-high grape prices translate into stratospheric land prices. According to the most recent Allied Grape Growers newsletter (see pdf here),  The average price of Cab grapes in the Napa district was over $6800 a ton. And that’s just the average. The best grapes? If you have to ask how much they cost, you probably can’t afford them.

Cabernet seems to be good as gold generally, especially in Napa.

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Fool’s Gold?

Or is it fool’s gold? In particular, is the Cab-driven Napa vineyard value boom sustainable or is it a bubble that will someday burst? I think the possibility must be considered.

Agricultural markets in general are subject to what my Econ 101 professor called a “cobweb” model of price dynamics, where today’s high price leads to over-investment, which causes next year’s collapse, which leads to under-production, which brings on a future price spike and so on.

You can see the cobweb graph in this photo of Nobel Prize economist Paul Samuelson. Some cobwebs converge to an equilibrium. Some, like the one that Samuelson drew here, explode.

Wine is different from the standard agricultural commodity that was the inspiration for the cobweb model. Its longer production cycle actually makes the potential for price swings worse than for corn or wheat.

Maybe the current boom isn’t a bubble and I am just doing that Chicken Little thing that I sometimes do.  But it seems to me that you have to take the possibility of a bubble seriously unless you have a very good answer (which I do not yet have) to the question, what exactly makes this time different? 

Rise of the Red Blends

The rise of the red blends, which I discussed last week, is an interesting trend that has persisted long enough to be taken seriously. I admit that I have changed my opinion about red blends over time. Initially I saw Hot red blends as a response to Cold market conditions for Merlot and Syrah/Shriaz. Merlot fell out of favor after Sideways and negative reaction to simple Aussie Shiraz wines somehow turned contagious, infecting Syrah generally.

Consumers, it seemed, didn’t want to buy Merlot and Syrah. But they actually liked to drink them! So surplus Merlot and Syrah, plus a few other varietals, were mixed into market friendly Red Blend. Voilà!  You can be a Merlot or Syrah snob and enjoy drinking it, too. What could be better?

Back to the Future?

But then red blends seemed to change, with different grape varieties in the mix, and attention turned to the surge in sweet red blend wines. The focus was on what the higher residual sugar said about the changing wine market generally.

Now I’m more interested in the fact that many of the most popular red blends are intentional creations aimed specifically at the Hot super-premium market segment. Some of the common characteristics of these wines are that they have strong brand identities that are not linked to particular wine-growing regions (hence California appellation) or specific grape varietal (proprietary blends).

The flexibility that this affords the makers of these wines is very useful as they can alter the blend within reason both in terms of grape varieties and grape source depending upon demand scale and supply conditions.  Customers are buying the brand, not the particular recipe.

In a way these two parts of the red blend phenomenon (sweeter wines and stronger focus on brands over regions or varieties) strike me as a “Back to the Future” trend, a throwback to the 60s and 70s, especially since some of the largest wine producers are responsible for many of the new successful brands that have emerged.  What’s different is that we have moved up dramatically on the price ladder.

Is this the end of varietal wines? No, but it is a reorganization of the market. Varietals were seen to be a step up over generic jug wines. Now some of the proprietary blends are positioning themselves above the varietals. Interesting!

Think Pink

The recent popularity of Rosé wine caught most observers (including me) off guard. Why should pink wines (and even relatively expensive pink wines) suddenly be in fashion? A new documentary is about to be released called “La Révolution du Rosé” — can’t wait to see how the Rosé rise is explained in this timely film.

Is Rosé a thing? The biggest skeptics I have met have been the European wine producers who, ironically, have the most to gain from this trend since they have a lot of good pink wines to sell. They have been burned before and hesitate to make big investments until they are convinced that pink wines is not just another short-term fad.

I have heard many theories about the Pink explosion. Here’s one that’s inspired by last week’s Big and Hot analysis. The Red Blend boom seems to be real. What about the White Blend boom? Well, it didn’t happen. Personally, there are many white wine blends that I love, but there has been no real movement in white wine blends to mirror the changes in red wine blends. Unless, that is, you Think Pink.

Rosé wines have a lot in common with the red blends.  They can be and are made from many different wine grape varieties and are sourced from dozens of countries and regions. Some consumers may be nerdy about which grapes, which regions, and (especially) which particular shade of pink they like best. But many more consumers are open to all sorts of possibilities, judging the wines on their qualities more than pedigree.mateus

Sue and I have been on a bit of a Pink wine binge recently drinking pink Cinsault from Lebanon, pink Cabernet Sauvignon from South Africa, and a variety of different pink blends from various regions in the South of France. They were all delicious and refreshing.

Pink wines are often dry, but they can sometimes be sweeter, too, which fits well with the Red Blend comparison. Maybe we are missing the white wine boom because we haven’t learned how to Think Pink?

So are Pink wines the Next Big Thing. No … but I only say that so that I can finish this column on another Back to the Future note. Pink wine is actually an old thing that has come full circle here in the United States. Don’t forget that one of America’s all-time top-selling Big and Hot imported wines was Proudly Pink.

Can you name it? Yes, I am talking about Mateus Rosé! Think Pink!

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New “Wine by Numbers” + Analysis of Global & US Wine Market Dynamics

 

wbnA new edition of Wine by Numbers was released a few days ago and it is required reading for anyone interested in global wine market dynamics. Wine by Numbers presents current data about global wine exports, imports and patterns of trade. It is a free resource provided by the Unione Italiani Vini, the Italian wine association.

Who Buys? Who Sells?

This special edition provides more data and deeper analysis, including essays by leading figures in the Italian wine industry about some of the most important export and import markets. Carlo Flamini of the Corriere Vinicola, which publishes Wine by Numbers, asked me to write an introductory essay for the “Who Buys” issue.

My essay presents a “Big and Hot” analysis of global wine market dynamics based upon the Wine by Numbers data. I invite you to download the pdf and check it out along with the rest of this valuable publication.

Writing the Wine by Numbers essay got me to thinking that it might be time to update my “Big and Hot” analysis of the U.S. market, so today’s column is part of an occasional series here at the Wine Economist where we analyze recent U.S. retail sales data looking for interesting and important trends. The data this week comes from Nielsen reports on U.S. off-premise table wine sales for the 52 weeks ending on April 22, 2017 as reported in the July 2017 issue of Wine Business Monthly.

wbm_cover_2017-7-1

Here’s how “Big & Hot” analysis works. The idea is to look at which parts of the market are big (in terms of total sales) and which are hot (or not) based upon rates of growth, both over the 52 week period and in the most recent 4 weeks covered by the data.

Sometimes as we see below, big and hot are the same, but sometimes they are very different. There is often something to be learned in either case.

Big and Hot Price Points

The overall U.S. off-premise market for table wines as measured by Nielsen grew by 3.5 percent in the 52 weeks of this study, but grew at a faster 6.1 rate in the final four weeks, showing some welcome acceleration that might be related to  Easter and Passover holiday wine sales.

This growth was not distributed uniformly over all price segments. This WBM Nielsen report aggregates price data by three dollar increments ($0-$2.99, $3-$5.99, etc.) up to $14.99 and then $15-$19.99 and $20 and above. The Big price segment measured by total expenditure is $3-$5.99 followed by $9-$11.99. The data suggest that the market is increasingly bifurcated  — the $6-$8.99 price segment between the two Bigs is actually shrinking. A tale of two markets?

Value wines are still Big and probably always will be, but they are not especially Hot. The fastest growing price segment is $15-$19.99, where total expenditures increased by more than 10 percent for the 52 week period. Wines priced $20 and above were “Hot Hot.” Sales shot up by 17.6% in the final four weeks of the reporting period. Amazing!

Big and Hot Imports

The Nielsen retail data reported here show that domestic table wines account for about 72 percent of total off-premise sales. Imports are somewhat stronger in restaurants and in the sparkling wine category, too, and if these sales were included the split would be more like 70% domestic and 30% import.

Italy is far and away the largest import wine source in these data (and growing faster than the overall market)  followed by Australia, New Zealand, and Argentina. France, which is only #5 by total sales, leads the hot parade, however, with 15% growth for the year and more than 25% 4-week growth. New Zealand, which normally is top of the Hot table, grew almost as fast followed by up-and-coming Portugal.

While Australian sales were essentially flat (an improvement over their dismal performance in recent years), Argentina, Chile, Germany, and South Africa had falling import sales in the Nielsen data.

Big and Hot Varietals

Conventional wisdom has it that American consumer reach for wine based upon brand, price, and grape variety. Chardonnay is the Big grape variety, accounting for 18% of all wine sales in the Nielsen table. Growth in Chardonnay sales rose slightly less than the overall market in this period. Cabernet Sauvignon, however, is only a little behind Chardonnay after a Hot surge and will soon take over the top place.

Sauvignon Blanc is the hottest grape variety, with 10.8% growth. Pinot Noir and Pinot Gris/Grigio are also growing while many varietal wine types (Merlot, Syrah/Shiraz, Malbec, Riesling, Zinfandel) have flat or falling sales.

Where is the growth going if not to these classic varietal wines? Look to the next category, which I call the Wild Card wines.

Big and Hot: The Wild Cards144318l

The Hottest categories in today’s market are those wines that defy the conventional wisdom. Consumers are supposed to be drawn to the security of varietal wines, so it is a bit of a surprise that the “Red Blend” category is so Hot, growing at more than twice the rate of the overall market during these 52 weeks. “Sweet Red Blends” are even Hotter, with sales rise at more than triple the overall market growth rate.

The conventional wisdom also holds that pink wines are a pretty narrow category and that is true in part. Sales of White Zinfandel, once a really Hot pink wine ticket, fell by 5% in this period.

So the Rosé wine boom comes as a bit of surprise. Sales of  Rosé table wine selling at $8 and above per 750ml rose at a startling 61.7% for the year and 84.2% for the final four weeks of the survey period.

That last number (84.2%) is especially interesting and not just because it is so big. Remember that these Nielsen data cover the period that ended on April 22, 2017, so the final 4-week period included parts of March and April.  Rosé wine was long thought to be “summer wine,” but these surging sales came in early Spring. Maybe Rosé is a Thing now, and not just a summer Thing?

Economists like numbers like these, but what’s the story behind them? Come back next week and I will try to tease out some broader implications.

The Next New Zealand? Reflections on Cyprus Wine Industry in Transition

pafos“Cyprus wines? Not really sure I have ever had one. Do they make much wine in Cyprus?”

Many readers of this column would probably say something similar when asked about Cyprus wine, but the person I was talking to was a bit different.

I spotted him on the Lufthansa flight from Frankfurt to Seattle and remembered that he sat in front of me on the earlier Larnaca-Frankfurt leg. He did business in Cyprus and traveled there a lot, he told me. Drank wine there, too. But Cyprus wine? Not so much.

Mostly he drank the less expensive import wines while he was in Cyprus — wines from Spain, Chile or Australia. Maybe he tried one from Cyprus, he thought, but mainly he stuck with the value import wines.

In this respect my new friend’s consumption pattern reflects the Cyprus wine market in general. When Cyprus entered the European Union back in 2004 its ability to protect its domestic wine industry from cheaper imports was greatly diminished — imports account for about two-thirds of Cyprus wine sales now — and a new wine regime began to emerge.

Regime Change 101vasilikon

Unable to compete with very efficient international value wine producers, Cyprus had no choice but to reconfigure its wine sector to move up the quality (and price scale). And while Cypriot wines are not expensive by American standards (a bottle of truly excellent Vasilikon Xynisteri dry white wine cost less than $20 at a seaside restaurant in the tourist district — what a steal!) they are necessarily priced above the imports.

This was my first visit to Cyprus, but not my first experience with the types of changes that Cyprus wine is experiencing. My native Washington State, for example, had to make the quality leap in the 1960s when the “California Wine Bill” was passed by the legislature in Olympia and cheaper California wine flooded into the local market. The forced upscale move was the best thing that every happened to the wine industry here.

New Zealand faced the same sort of situation in the 1980s, when the collapse of their protected wine sector forced a dramatic economic course correction. Imports flooded in, foreign investment came, too, and a new export-oriented quality wine industry emerged. New Zealand today has the highest average export price of any country for still wines — an amazing achievement.

I found a similar story in Canada, which was forced to liberalize wine trade with the U.S. when the Nafta agreement was signed in the 1990s. In order to be competitive winegrowers in the Okanagan had to replace their hybrid vines with vitis vinifera — an expensive investment. But the results have been amazing.

The transition from volume to value is never easy and is always controversial (my South African friends can attest to this). Not all firms or regions will make it through the process successfully (there is a “survivor bias” to the data), but the success stories are compelling. This is the world that Cyprus wine has entered.

Revolutionary Vanguard

promara

Revolutions always have a vanguard. As is often the case, some winemakers took the first steps to higher quality before market conditions made this a necessity and we visited several of these pioneering wineries (see complete list below). One that stands out in my mind is Vouni Panayia Winery in the mountains near Pafos, which was the first private regional winery in Cyprus.

Vouni Panayia was founded in 1987 by Andreas Kyriakides, who had previously worked in the enology and viticulture section of the Department of Agriculture and so had a good understanding the Cyprus wine sector. He and his family set out to achieve quality at a time when quantity was still a strong factor and to do it using indigenous grape varieties at a time when international varieties were in vogue.

Kyriakides bet on his vision of the future and the family’s efforts have paid off. Sue and I were impressed with the deep red  Yiannoudi, which went so well with the roast lamb at lunch, and the delightful dry white Alina (made with Xynisteri variety). The white Promara (indigenous Promara variety)  was fantastic — a desert island wine candidate!

Going Native?

Vouni Panayia Winery might have helped start the quality revolution in Cyprus, but they have had plenty of help. The movement is advancing rapidly today and seems to be ready for the next challenge: gaining greater traction (and higher prices) in the domestic and carefully chosen export markets.

My first thought when I tasted some of the wines was that Xynisteri could be the key to this next stage — it is a delightful dry white wine that would appeal to Sauvignon Blanc drinkers. That first bottle of Vasilikon Xynisteri was followed by several others of that variety from various producers and we never had one that wasn’t delicious.

wine

This observation led, of course, to the idea that indigenous varieties should be the prime focus for both red and white wines. Vouni Panayia certainly makes a strong case for the indigenous grapes of Cyprus.

I still believe in the Cypriot native varieties, but as we tasted more and more wines I realized that Cyprus winemakers can do wonders with some of the international varieties, too. Maybe a hybrid strategy is called for.

My heart wants indigenous variety wines that are not found anywhere else in the world, but my pragmatic head says that Cypriot winemakers should make the best wines they can out of other grapes, too. We had wonderful Syrah and Cabernet Sauvignon. Why not? So long as native varieties are not forgotten. The quality of the best of these wines is so high that I think they will thrive.

The Next New Zealand?

So, to return to the headline at the top of the page that I teased you with, is Cyprus likely to be the next New Zealand — a small, almost forgotten wine-making island that makes the transition from volume to value with spectacular success?

It is not a ridiculous question. Back in the mid-1980s not many could have imagined much less boldly predicted the amazing growth that New Zealand has achieved in the last 30 years. That same conversation (Do Kiwis make wine?) that I had about Cyprus at the start of this column could have been about New Zealand wine back then.

That said, Cyprus is not likely to be the next New Zealand. No one is. New Zealand’s unexpected success was the product of global market conditions that don’t exist in exactly the same way today due to the rapid expansion of wine production in other New World nations. The market space that New Zealand has been able to fill doesn’t exist in the same way for other wine exporting countries any more.

But Cyprus doesn’t have to be the next New Zealand to be successful. Wine-makers on this small island have great potential and if they can only work together to realize it in domestic and international wine markets, that will be good enough.

Maybe in 30  years we will ask if some other country has the potential to be the next Cyprus? Wouldn’t that be delicious!

2017 Cyprus Wineries Visited

Ezousa Winery

Nelion Winery

Tsangarides Winery

Tsiakkas Winery

Vasilikon Winery

Vlassides Winery

Vouni Panayia Winery

Zambartas Winery