Lessons from Catena & the Argentina Wine Miracle

The press release begins this way:

MENDOZA, Argentina – February 8, 2022 – Dr. Nicolás Catena Zapata of Catena Zapata winery received the Lifetime Achievement Award at the 22nd Annual Wine Enthusiast Wine Star Awards held last night at the Eden Roc Hotel in Miami. This prestigious industry event recognizes individuals and companies for their exceptional contributions to the success of the wine and beverage alcohol industry.

Dr. Catena’s life in wine is indeed worth celebrating. He was a leading protagonist in what I call the Argentina wine miracle. An economist by training, Dr. Catena was a visiting professor at UC Berkeley in the early 1980s when he was inspired by what he saw happening in California. These were the exciting days that followed the 1976 Judgement of Paris, so there was energy and confidence in the air.

California Lessons in Argentina

Catena took this vision back to Argentina, where he exchanged academic tweeds for vineyard and winery clothes. The family firm, Bodega Catena Zapata, and Argentina’s wine industry in general, faced a dire crisis.

Sue and I visited the Catena Zapa “Pyramid” winery a few years ago and, because I am an economist like Dr. Catena, we were ushered into his personal library. I recognized many of the books because they were the same ones that I was studying in the 1970s and 1980s, when stagflation was a global problem, and the debt crisis was on everyone’s minds.

These were more than academic issues for the wine business in Argentina at the time. Having evolved in the “old world” style to make inexpensive commodity wine for the domestic market, Argentina wineries were caught in a squeeze when inflation pumped up costs at the same time that domestic recession caused demand to slump. Could the surplus wine be diverted to export? Not likely, because the quality of much of the wine was below international standards. Argentina’s economic crisis was a wine crisis, too.

That Argentina wine found the energy and confidence to turn the corner, to make wines of constantly rising quality in the face of daunting headwinds, is noteworthy indeed and Dr. Catena more than deserves his lifetime achievement award for his role in making Argentina a world-class wine producing nation. A miracle? I don’t think it is wrong to apply this term to Argentina’s dramatic transformation.

I think it is important to keep these past achievements in our minds today because the challenges that wine faces, while different from the past, are not so different that important lessons cannot be gleaned. History may not repeat itself but sometimes, as Mark Twain observed, it rhymes.

Dividends from the Argentina Wine Miracle

Argentina is experiencing economic crisis again today, overwhelmed by external debt and internal inflation. Perhaps the single best indicator of the depth of the crisis is this graph of the Argentina peso against the US dollar for the decade 2011 to 2021. Fewer than 5 pesos were needed to purchase a dollar in 2011. The rate was about 15 pesos per dollar when we visited five years later in 2016 — that’s a very substantial decrease in the currency’s value in such a short period of time.

But the exchange rate today is much worse — it takes more than 100 pesos to buy a dollar now. And that’s the official exchange rate. I’m guessing that the peso is much cheaper on the unofficial market. This is what an (official) inflation rate of over 50% a year (even higher than inflation in Turkey!) will do.

Although Argentina’s economy is bouncing back from its covid-induced decline, domestic economic conditions are very challenging — not as bad as in the 1980s perhaps, but difficult indeed.  The uncertainty about what policies will be result from continuing debt negotiations with the IMF cloud the horizon. Argentina wine is not immune to these problems, but it is much better positioned today to ride out the storm. Exports were up in 2021. The miracle continues to pay dividends.

Lessons for the U.S. and Beyond

But the lessons don’t end there. I think it is important for wine business leaders in the United States and elsewhere to study Argentina’s wine history and remember that sometimes it is necessary to radically re-think arrangements to adapt to changing circumstances. “They say that time changes things,” according to one of my favorite maxims, “but sometimes you have to change them yourself.”

In the US, for example, inflation has returned as an economic concern and, for the wine industry, the fact of stagnant demand cannot be ignored. There is no debt crisis at present, but with gross debt levels at record highs and rising interest rates on the horizon, it is foolish to think that cracks in debt markets will not eventually appear. Small increases in interest rates can translate into trillions of dollars of additional interest obligation very quickly with so much public and private debt in play at high levels of risk.

Foreign debt is especially vulnerable because so much of it is denominated in dollars and the dollar is likely to appreciate as U.S. interest rates rise. That’s double jeopardy.

For the wine industry, stagnant demand is a problem that is on the minds of many, just as it was in Argentina four decades ago. The Argentina miracle was to shift from low- to high-quality to escape a race-to-the-bottom scenario. For the U.S., the challenge may well be to produce good quality but more affordable wines to appeal to potential consumers who are put off by wine’s relatively high price compared with other beverages.

I note without comment that Wall Street Journal wine columnist Lettie Teague’s recent column on good $10 wines did not include any U.S. product recommendation. “Sadly,” Teague writes, “I couldn’t find any wines made in the U.S. that fit all my criteria.” That’s pretty much the flip side of Argentina back in the day.

I believe in miracles and in wine’s ability to transform itself without losing its soul. And so I offer a toast to Dr. Nicolás Catena Zapata, the economics professor who became a transformational winemaker and whose miracle offers lessons that are relevant today.

Has U.S. Wine Industry Consolidation Gone Too Far?

Is the U.S. wine industry becoming too concentrated, with just a few big firms dominating the marketplace? That, more or less, was one of the questions we were asked at the press conference that followed the annual “State of the Industry” session at last month’s Unified Wine & Grape Symposium in Sacramento, California.  How would you answer this question?

The query was prompted in part by Mario Zepponi’s excellent presentation about merger and acquisition activity in the wine industry in 2021. Mario is principal at Zepponi & Company, a firm that advises winery and vineyard M&A clients and was very busy indeed last year, when a number of large (for the wine industry) deals were concluded.

How concentrated has the U.S. wine industry become? How competitive is the wine marketplace? The answer you get depends in part on how you look at the data. Wine Business Monthly (which sponsored the State of the Industry session again this year) publishes a report on the U.S. wine industry early in each new year which is required reading. This year’s report appears in the current March 2022 edition, which can be accessed online.

U.S. Wine By the Numbers

Judging by the number of firms competing for retail shelf and restaurant wine list space, the U.S. market is very competitive indeed. For perspective, consider that the WBM report for 2014 found 8,287 U.S. wine producers in total, 3913 in California, 734 in Washington State, 632 in Oregon and the rest distributed across the country. Mississippi was at the bottom of the league table with just two wineries.

Zoom ahead to the just-published WBM report for 2021 and the numbers have jumped.  The U.S. winery count rose by 36% in the intervening years, with 11,300 wine producers in total. California again leads the way with 4804 wineries, Oregon comes second with 877, followed by Washington with 875. Mississippi’s winery count increased to six. The Other Washington — Washington DC — is last with two wine producers.

Looking at the data this way, the U.S. wine industry is very competitive, with amazing growth in number of wine producers for such a brief period of time. The increase in winery count in 2021 was slower than in 2020, WBM reports, but that’s not a surprise given the covid and economic conditions we have experienced.

The U.S. market is actually more competitive than these numbers suggest because imports account for about a third of U.S. wine sales, so thousands of international brands are also vying for buyer attention.

Top of the Table Concentration

But number of competitors is not the only factor to consider when assessing industry competition. Market power matters a great deal and the U.S. wine industry features a number of very large players. WBM reported on the top 30 companies in 2014 and the top 50 companies in 2021 along with the lineup from the first report in 2003 and the lists make interesting reading.

The top five producers, ranked by volume of sales, in the very first WBM report in 2003 were as follows: E&J Gallo Winery, Constellation Brands, The Wine Group, Beringer-Blass Wine Estates (now Treasury Wine Estates), and Bronco Wine Company (followed by Mondavi — now part of Constellation — and Trinchero Family Estates).

The 2014 report produced this list: E&J Gallo Winery, The Wine Group, Constellation Brands, Bronco Wine Company, and Trinchero  (followed by Treasury and Ste Michelle Wine Estates). The current (2021) line-up is: E&J Gallo, The Wine Group, Trinchero, Delicato Family Wines, and Constellation Brands (followed by Treasury and Bronco).

I think you would have to conclude that the top of the U.S. wine table has been very stable, with a good deal of the movement due to transactions within the industry such as Constellation’s acquisition of Mondavi and more recently its sale of many brands to Gallo and The Wine Group. The steady rise of Trinchero (think Sutter Home, Menage a Trois among other brands) and Delicato (Bota Box, of course, and now also the Francis Ford Coppola Winery) is noteworthy.

The 50 largest wine companies (out of the 11,000 total) account the vast majority of sales volume for domestic wines (not counting the imports) and it is easy to see why because firm size is very large. JUSTIN Vineyards and Winery is #50 in the 2021 table but still produces a very substantial 339,000 cases of wine each year. Gallo is at the top of table with a WBM-estimated 100 million case annual wine output. That’s 1.2 billion bottles. Incredible!

It is interesting to look at how production measured by volume of the top three largest wineries has evolved over the years reported here. In 2014, for example, the big 3 totaled over 187 million cases (not bottles) of wine (Gallo 80 million, The Wine Group 57.5 million, Constellation 50 million).  The Big 3 total for 2021 is actually bit less: Gallo 100 million + The Wine Group 51 million + Trinchero 20 million = 171 million total. That is less than in 2014, which could be due to a number of factors including, as I have heard some insider’s comment, a lack of investment in some of the brands involved in the Constellation-Gallo transaction during the long regulatory approval process.

If we assume that the total U.S. wine market was about 450 million cases in 2021, then the Big 3 accounted for about 38% of sales by volume. If imports accounted for a third of total sales, then the Big 3 alone were responsible for 57% of domestic-produced wine sales by volume.

The biggest wine companies are really, really big, but some of the market power has shifted down the line. The 30th largest wine company in 2014 (out of the 30 listed), for example, was Purple Wine Company, which produced 415,000 cases. Number 30 in 2021 is Firstleaf at 700,000 cases. Firstleaf is a direct-to-consumer operation founded in 2016 with more than 75 brands in its portfolio.

What’s Driving Consolidation?

Big is in for U.S. wine and a lot of the bulking-up is taking place in the tiers below the Big 3. What’s driving it? Mario Zepponi presented an interesting perspective in our State of the Industry session. He argued that you have to put wine production in the context of its linkages in the product chain.

A lot of wine is sold in grocery stores, for example, and the top 5 U.S. grocery companies account for about half of total revenues in that sector. Big store chains, with their thousands of assorted SKUs, tend to prefer to work with a small number of distributors in each product segment if possible. So maybe it is no surprise that the top 3 wine distributors account for about 65% of revenues according to Zepponi’s data. Connect the dots here and it is easy to see why distributors might favor large wine companies with broad portfolios.

Big favors big, which favors big. Evolutionary forces point towards increased concentration, even in an industry as fragmented in some ways as wine.

To a certain extent, then, wine consolidation is the result of a process (accelerated by the covid channel shifts) that is affecting retail more generally. Consolidation, in this view, starts at the retail level and works its way backwards.

So has U.S. wine industry consolidation gone too far? It depends upon how you look at it and where you are positioned within the industry — in the Big 3 tier, the broader top 50, or further down the pyramid. And maybe the question should start higher up the food chain with consolidation at the retail and distributor levels. The market sure is competitive even if market power is concentrated at several points.

It is, I am afraid, one of those annoying “on the one hand …” situations that provoked President Harry Truman to ask for someone to send him a one-handed economist.

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Thanks to Cyril Penn and his Wine Business Monthly team for the 2022 edition of their wine industry report. A very valuable resource for anyone interested in U.S. wine market dynamics.

What’s Ahead for the Wine Business? Wine Industry Leadership Conference Next Week

The Wine Industry Leadership Conference, a free group of webinars produced by the Wine Industry Network, is set for next Wednesday (February 9, 2022) at 9 am Pacific time.  Follow this link for more information and to register.

The program is divided into three parts that are relevant to just about everyone in the wine industry.

Session 1: Economic Forecast – What to Expect in 2022 will fill the hour between 9 and 10 with critical analysis of U.S. economic conditions from Sonoma State University Professor Robert Eyler follow by my analysis of some of the implications for the wine industry. I am calling my presentation “Wine and the Big Squeeze,” which may give you some idea of what I see ahead.

The ten o-clock hour is devoted to Session 2: Talent Retention – Keeping A Strong Team Intact featuring commentary by Sandra Hess, Founder / DTC Wine Workshops; Joel A. Miller, Owner & Principal / Chateau HR Consulting; and Karen Alary, Managing Partner / The Personnel Perspective.

Session 3: Successfully Transitioning Your Winery to New Leadership follows from 11 to 12 am and features Greg Brewer, Founder & Winemaker / Brewer-Clifton; Peter Mondavi Jr, Co-Proprietor / Charles Krug Winer; and Mario Zepponi, Principal / Zepponi & Company.

Moderators for the three sessions are George Christie, President & CEO / Wine Industry Network; Stacy Briscoe, Managing Editor / Wine Industry Network; and Kim Badenfort, Director of Marketing Services / Wine Industry Network.

The presentations are being pre-recorded so that the speakers can respond to questions and comments in real time during each session, which promises to make this a more interactive experience than the typical Zoom webinar.

I appreciate the Wine Industry Leadership Conference’s focus on practical business issues facing the industry today and the impressive lineup of speakers. Hope to see you there.

Unified Symposium: Wine and the New Now

These are fast times. I used to think about “getting back to normal” and then I started talking about what the “new normal” would look like. Now I don’t really know what normal is — it’s a “new now” every day.

Crossing the River, Feeling the Stones

Planning for the future in the “new now” era reminds me of the Chinese saying about crossing a river by feeling the stones with your feet. Know where you are going but be sure to take each step one at a time.

I am struck by the degree that the program for the Unified Symposium this year reflects the “new now” of the global economy. The environment has long been a concern, for example, but now there is a timely immediacy that spans the global to the local. The Unified examines the issues starting with Dr. Steven Ostoja’s Tuesday luncheon presentation on “Changing Climate, Extreme Weather and Water Scarcity: What It All Means for the Future of Farming” and extending into sessions on vineyard adaptation, living with climate change, and wild fire smoke issues.

Labor has long been a critical issue in the wine industry, but we often focused on vineyard labor and sometimes, as in Napa, the problem of attracting and retaining cellar staff in a region with sky-high living costs. The labor problem in the “new now,” however, extends throughout the organization, so human resource issues are front and center.

These are just two of the important “new now” issues the Unified will examine this year. Check out the complete program to see what else is on tap. And don’t miss the trade show, which is where new ideas are put into practice.

State of the Industry Now

I will be hosting the State of the Industry session on Wednesday morning and I think you can expect a lot of “new now” thinking from the all-star speaker lineup: Jeff Bitter (Allied Grape Browers), Danny Brager (Brager Beverage Alcohol Consulting), Steve Fredricks (Turrentine Brokerage), and Mario Zepponi (Zepponi & Company). Their collective expertise spans the issues — demand, supply, markets, and investment.

The State of the Industry session looks back at 2021 and ahead to 2022 and beyond but a “new now” problem is understanding exactly where we are at today given the big swings in wine demand, sales channels, and grape harvests that we have seen. It can be hard see through the thicket of short-term events to pick out the real longer-term trends. Prediction is difficult, they say — especially about the future when the present in unclear. But I guarantee that the team will have revealing insights to share.

New Now Sacramento

If you want to get a sense of “new now” maybe the best example of change and adaptation is the Unified itself. It starts with the newly remodeled SAFE Credit Union Convention Center. I haven’t seen it yet but I am told it is state of the art — bigger and better — and safer — than before. I am really looking forward to the new trade show and session spaces.

And then there is the health and safety element of the “new now.” Bringing together thousands of wine industry people during this pandemic and doing so responsibly requires organization, cooperation, and critical analysis.

As Cyril Penn reported recently on WineBusiness.com, the organizers have retained a health data analytics firm to model the Unified from a covid safety standpoint.

Epistemix develops simulations that approximate risk based on venue, audience and anticipated virus levels with proprietary software developed by a team from the University of Pittsburg School of Public Health. The firm partnered with the Exhibitions and Conferences Alliance a year ago and has worked on risk assessments for conferences and conventions in twenty cities. Reiser said Epistemix has been 95 percent accurate in making event projections thus far.

The models take into account the number of attendees and their vaccine and testing status, the prevalence of the covid variants, the mitigation protocols, the varieties of activities that the convention entails, and the various ways that the groups are likely to mix.

The modeling indicates Unified’s masking and vaccination/testing policy at the newly-remodeled Sacramento Convention Center will create a controlled environment with an expected case rate of one in ten-thousand, according to Lindsey Solden Reiser, PhD, Managing Director of Professional Services for Epistemix, Inc. That modeling assumes 12,000 people attend Unified.

If the projections are correct, the convention will have a much lower expected case rate than Sacramento itself, which has a projected rate of eight cases per ten-thousand persons.

Wine and the New Now

The point is that the new now of trade shows and conventions is very different from the old normal, where people like me mainly worried about mundane things like whether the slide-advance “clicker” would work for the PowerPoint presentation.  I am sure I never gave a moment’s thought to the idea that data modeling of pandemic spread would be needed or desired. But here we are now.

And I think the wine business is in the same situation. We need to analyze the new now and to try to understand it, but without assuming that it will somehow revert to the old normal or remain fixed in place as the new normal, either.

Better take off your shoes and socks. Time to get your feet wet.

Scratching the Surface of Sicilian Wine

I was intrigued when we were asked if we’d like to sample wines from a Sicilian cooperative winery. The history of Sicily’s wine industry — and the role of cooperatives within it — is a roller-coaster tale and such sagas in wine do not always have happy endings. I was thirsty to learn more about the situation today.

I learned about the history of Sicily’s wine sector from The World of Sicilian Wine by Bill Nesto MW and Frances Di Savio (see the Wine Economist review here). Wine in Sicily has been buffeted by a combination of shifts in the external markets and changing domestic incentives. It is no wonder that cooperatives arose to help growers navigate the ups and downs and gain a measure of control over their own destinies.  Cooperatives spring up in times of crisis, but it is their ability to adapt when conditions change that is most important.

Incentives Matter

Sometimes the economic incentives the cooperatives and other wine actors faced favored quality, but all too often quantity was the dominant strategy. This was particularly true during the years when EU wine policy unintentionally encouraged over-production of low-quality wines with no obvious market potential. These unsalable wines, the source of the famous EU “wine lake,” were bought up and distilled into industrial alcohol, a process that was not sustainable in economic, political, or environmental terms.

The wine lake days are gone — EU incentives now favor market-driven wine production — and the wines have changed faster than their reputations in many cases. Not all wineries have raised their game, however, and that inconsistency is a headwind.

The wines we sampled were from the Cantine Ermes cooperative, which was founded in 1998 in the Belice Valley in northwest Sicily. The cooperative is very large with 2373 members farming more than 12,000 hectares and operating 11 winemaking facilities.  In total Cantine Ermes produces 11.5 million bottles annually, which are sold in 29 countries around the world. Does this surprise you? Cooperatives are important in Italian wine, more important than most people realize.

Beyond Low-Hanging Fruit

One criticism I have heard of many Italian cooperatives is that they cut their own throats by focusing too much on bulk wine and private label products — they take this low-hanging fruit and fail to build the brands that might yield higher margins that would improve their economic sustainability.

Some of the deep dark red wine made in Sicily, for example, is sold off to be blended with lighter Italian reds to give the result more body, color, and alcohol — a practice that has been going on for a long time. Cantine Ermes gives attention to several brands, however, including the Vento di Mare wines that we sampled.

Vento di Mare means sea winds and so it was inevitable that we would ask our friends R and M to sample the wines with us. Their visit to Sicily was punctuated by gale force sea winds that nearly blew them off the island and caused sea foam to pile up on the shoreline like drifts of snow.

The three wines we tasted were screwcap-topped bottles of Grillo DOC, Nerello Mascalese IGT, and Moscato Frizzante that retail for about $12 here in the US — right about the center of the retail wine wall in today’s market.  The Grillo had nice varietal flavor and good balance. It seemed very versatile and would pair with many dishes as well as on its own. It was probably our favorite wine.

The red Nerello Mascalese was more intense and called out for a bold food pairing. Nerello Mascalese is the most-planted red winegrape in Sicilty according to my sources, and it was easy to see how it could be the foundation of a number of interesting blends as well as a single-variety wine.

The Moscato was fizzy and slightly sweet. Just 10.5% abv, the wine has a secondary fermentation for two months in an autoclave and then ages another two months on its lees. Aromatic (think orange blossoms) and nicely balanced. Like the Grillo it would work in a number of situations. Very pleasant indeed.

Sicilian Wine Ambassadors

We were impressed with the Vento di Mare wines and a bit surprised at the affordable entry-level price point. Other Cantine Ermes brands probe the higher reaches of the wine wall. I hope the attractive packaging and price point encourage consumers to give these wines a try (and that some restaurants see the potential for wine-by-the-glass sales). These wines are good ambassadors for Sicily and its cooperative wineries.

Since we aren’t able to travel to explore the wine world these days as we did in pre-pandemic times, we find it useful to focus on invitations like the one we received from Cantina Ermes. Clearly we have just scratched the surface of the wines of Sicily and the progress of Sicilian cooperatives, but we are encouraged, nonetheless. These are good wines that chart a path out of Sicily’s quantity-driven past towards a more sustainable future.

A Toast to Ferrari Trento & the Year of Sparkling Wine

2022 is here and a rear-view mirror look at 2021 reveals a number of interesting wine trends. High on the list of highlights is the surge in sales of sparkling wine.

It is conventional wisdom that wine consumption is occasion-driven. Generally packaged in a multi-serve 750 ml bottle, many consumers need a reason to pull the cork or twist the screwcap. (There are exceptions — I have friends who insist they need no excuse at all …)

Time to Pop a Cork?

Sparkling wine is even more occasion-driven here in the United States, where it is often reserved for special celebrations such as birthdays, weddings, anniversaries, and so forth. This fact was bad news for sparkling wine when we entered the time of covid in 2020 because those festive gatherings disappeared or were in any case much smaller. The spaces we think of for those celebrations such as restaurants were greatly diminished in number and scope. Sparkling wine sales took a big hit.

So one of the pleasant surprises of 2021 is sparkling wine’s rising sales volume in a relatively stagnant overall market.  Part of this is due to re-opening of on-premise venues where friends and family can gather over bubbles. But I think there is something more going on.

Consumption may still be occasion-driven, but it seems to me that the occasions have changed in at least two ways. First, given the impact of covid restrictions, it seems like many have opened themselves up to sparkling wine’s ability to brighten any day and not just Hallmark card celebrations. Thanksgiving at the Wine Economist household, for example, featured a different sparkling wine on each evening of the extended weekend. Bubbles work nicely with the rich food and they can sure elevate leftovers!

To Champagne … and Beyond!

A second change is that the sparkling wine spectrum, which starts with Champagne and then fans out in all directions in terms of style, grape variety, and origin, has broadened. Prosecco’s great pre-pandemic success has continued, but there is more to it than that.

An unlikely place to observe this important trend is on the victory podium of a Formula 1 race, where drivers have for some years now celebrated by gulping down and fiercely spraying jeroboams of Champagne.

This season, however, the wine of choice wasn’t from France (although it was made from the same grape varieties using the same traditional method). It came from the mountain vineyards of Trentino in Italy and was made by Ferrari —  Ferrari Trento, the Trentodoc wine producer, not the Modena-based maker of the sleek red race cars with the prancing horse badge.

Ferrari Trento is one of the world’s leading sparkling wine producers. Earlier this year it was named  Sparkling Wine Producer of the Year at the Champagne & Sparkling Wine World Championship.  The brand is known throughout Italy and beyond. Indeed, Wine Intelligence named Ferrari the most recognized wine brand in Italy. That’s wine brand, not just sparkling wine brand.

When wine lovers think of sparkling wine in Italy, Ferrari Trento is on their minds (along with Prosecco maker Bisol 1542, a sister winery in the Lunelli Group). Ferrari Trentto exports 15% of their production to over 70 countries (the US, Germany, and Japan are the top three export markets). Italy’s domestic market accounts for 85% of sales.

Taking Ferrari for a Test Drive

We have been meaning to visit the Ferrari Trento headquarters for several years, but it just never happened and now with covid protocols the trip is postponed again. So Sue and I jumped at an invitation to participate in an online media tasting event with Marcello Lunelli, Ferrari Trento’s chief winemaker. We were sent three wines: – Formula 1 Limited Edition NV blanc de blancs, Ferrari Perlé 2016, and Giulio Ferrari Riserva del Fondatore 2008. All three wines are 100% Chardonnay hand-picked from high-elevation mountain vineyards in the Trentodoc zone. Super wines, but very different.

The NV Formula 1 spent 38 months on yeast but was noteworthy for its freshness. It’s the wine that new F1 Champion Max Verstappen can be seen chugging from the big bottle in the image above. Bone dry and refreshing — that’s my tasting note. It is too good to gulp down like that and I hope McLaren F1 driver Daniel Ricciardo doesn’t insist on a “shoey” — drinking the wine from his own sweaty shoe — the next time he’s on the podium.

The Perlé wine is a step up the ladder in terms of grape selection and winemaking — the wine rests at least 50 months on yeast. What struck us about this wine were its savory notes, which called out for food. It paired nicely with schnitzel and salad. About a million bottles are made each year, a significant quantity given that the entire Trentodoc appellation accounts for about 20 million bottles of sparkling wine each year.

The Giulio Ferrari Riserva del Fondatore is the summit for Ferrari Trento, with grapes from a special vineyard and aged on the yeast for at least 10 years. I admit that I haven’t had the nerve to pop the cork on this wine yet. It may be that everyone is more casual about sparkling wine occasions now, but this wine seems to demand a serious occasion, especially given its aging potential.

The Year of Sparkling Wine

It was fascinating to hear Marcello Lunelli talk about his wines and winemaking in the Trentodoc zone. The mountain environment presents challenges, of course, but also opportunities, he noted. The winegrowers expect climate change to increase growing season temperatures, for example, which can be mitigated to a certain extent by establishing new vineyards at even higher elevations.

Lunelli recognizes that wines like his are luxury products and you can see it in the glass, the bottle, the presentation. Given this, you might be puzzled at the images of Max and Lewis and the other F1 drivers chugging Ferrari Trento wines and spraying each other and the crowd. How does this make sense given the wine’s luxury cachet?

Well, I think it might be one of the many reasons why 2021, Ferrari Trento’s first year with Formula One, is my Year of Sparkling Wine. F1 is a global phenomenon and Ferrari Trento’s place on the podium sends a strong message to F1’s vast global audience about sparkling wine in general and wines from the Italian northeast in particular.

So a toast to 2021, the Year of Sparkling wine, and to Ferrari Trento and all the other producers who have made up appreciate the beauty of bubbles to enrich our lives.

Frogs, Tides, and Wine: the Adventure Capitalism Boom

How is the changing investment landscape affecting the wine industry? Some thoughts on adventure capitalism and wine (and frogs and tides at the very end).

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The cover story on the November 27 issue of the Economist newspaper was “Adventure capitalism: startup finance goes global.” It wasn’t, as this illustration might suggest, a story about Bezos and Branson and how their billions were powering rocket adventure tourism in near space. That’s interesting, but it’s another story.

VC become Ad-Venture Capital

The article traces how venture capital (VC) has gone from a niche investment space to something that seems to be much broader and more pervasive. VC is usually thought of as early-stage private investment in privately-held tech and science firms. The old world of VC was mainly focused on the US and just a few sectors — think Silicon Valley start-ups. The idea was to invest early on in what in the best-case scenario might turn out to be a unicorn firm — one that would achieve a billion-dollar valuation while still in private hands and then go public in a big way. Ka-Ching!

High risk is one reason the Economist calls this Adventure (rather than Venture) capitalism.  VC is inherently risky. The investments are by their nature illiquid and you need to hit the target with some very successful investments to offset the inevitable disappointments. I suppose it is a little bit like the old joke about the wine business — the best way to make a small fortune is to start with a big one. But of course some investors do very well indeed.

The Economist argues that VC is changing — being disrupted just as it has disrupted in the past. The VC world has broadened beyond the narrow set of sectors of the past and beyond the US. It has also changed as huge amounts of money have poured into VC firms. The fact that there are more investors taking risks doesn’t make the system less risky.

The Problem of Return-Free Risk

There are a number of factors powering the rise of adventure capitalism, but perhaps the most important is the scarcity of positive real returns in some traditional sectors and the consequent logic of assuming higher risk to achieve higher return. Necessity as much as entrepreneurship drives the trend.

It used to be said that US Treasury bonds were “risk-free return,” for example, and so good foundational investments for a variety of individuals and institutions. Now, an investment advisor I know says, Treasuries are “return-free risk.” The interest return is negative in real terms (below the prevailing rate of inflation) and prices are volatile. This fact forces investors to explore all the nooks and crannies of the financial world to meet their needs.

The VC boom isn’t the only example of their trend. You might not have heard of SPACs (special purpose acquisition companies) before this year, but they are now a big enough market niche to be going through their own boom-bust cycles. Some call them “blank check funds,” which suggests something about the times when high net-worth investors decide it is a good idea to hand a financial advisor (sometimes paired with a sports star or celebrity of some sort) a blank check to buy a private company.

There are also NFTs (non-fungible tokens) that sometimes trade for high amounts. I suppose there could be a SPAC that invests in funds that acquire NFTs — what could be better? And I understand there are active markets in virtual assets on metaverse platforms.

This Changes Everything?

If you want to consider how far investors will go to get a return, consider that huge amounts that some recording artists have received for their back catalogues of songs. A steady flow of fees from music streaming services apparently looks really good when the alternative is something like return-free risk.

The list of investors who are plunging into the world of adventure capitalism investing is amazing, including billionaires and speculators, of course, but also what we might usually think of as very conservative institutions such as university endowment funds and public sector pension funds. (I recently reviewed the endowment report of a major mid-west university that had 22% of its assets invested in private equity and venture capital.)

These institutional investors, who once focused on blue-chip investments, now find themselves pulled into higher risk illiquid investments by the gravity created by their need to achieve certain rate of return targets. Most institutions that I monitor aim to increase their private equity and VC profile in the future.

One important question is this: what happens to all of these investments when the economic environment changes, as it looks like it is doing now, with higher inflation pushing interest returns up and the big quantitative easing flows tapering off at least here in the United States?

Wine Investment Booms

So how is this a wine story? The Economist is right that investments in risky and illiquid assets is no longer limited to traditional venture capital firms and Silicon Valley sectors. It is hard to follow the wine business in 2021 without noting all of the investment activity. Acquisitions (Sycamore’s purchase of Ste Michelle Wine Estates, for example), SPACs, and big moves by some institutional investors, too. Lots of money searching for returns in winery and vineyard investments.

Everyone seems to want to get on the NFT bandwagon, for example. Even Penfolds, the iconic Australian brand owned by Treasury Wine Estates is piling in. According to one report,

Australia’s most celebrated wine-maker is going digital with the announcement that Penfolds is teaming up with non-fungible token (NFT) marketplace BlockBar for an innovative new project. The partnership will see a limited edition NFT tied to the impossibly rare Penfolds Magill Cellar 3 barrel made from vintage 2021. According to the iconic Australian brand, only 300 will be made available, for the cool sum of USD$130,000 (AUD$180,00).

And Penfolds isn’t the only producer to exploit interest in NFTs. Barossa winemaker Dave Powell is offering the entire 2021 vintage of his wine through sale of NFTs. Is the wine’s value greater when linked to a NFT? Many apparently think so in the same way that some firms are trying to raise their profile by linking to blockchain (Square, the payments company, is now Block).

Better than Birkin?

Fine wine has done very well as an “alternative” investment in this environment and I have received several emails promoting funds to invest in fine wine assets. According to a recent article in Forbes, fine wines topped the list of alternative investments over the last decade, a list that includes blue chip art and furniture, classic autos, and colored diamonds. Wine’s rise to the top of the pile was noteworthy because it has now outperformed the previous leader … handbags! Gosh those Hermès Birkin bags did really well — I assume you have a bunch of them in your retirement portfolio, yes? Nah — me neither.

I think it is clear that wine is part of the adventure capitalism story — how could it escape such a broad, powerful trend? So the questions I asked above apply to wine, too. What happens when the economic environment changes, as it seems to be doing now? Which of these investment strategies will endure and which will fade away?

Frogs and Tides

Many, including the Economist, seem to be enthusiastic about the adventure capitalism trend and all that goes with it, but it makes me nervous. It seems to me that this is a process that normalizes risk without actually reducing it. Having taught university classes on financial crises and written a couple of books on this topic, I take risk very seriously (and I don’t think I am alone).

The current investment environment in wine and more generally reminds me of the parable of the frog in the pot on the stove. The water heats up slowly, so you kind of get used to it. Once you realize that things have started to boil up it is too late.

I will therefore be watching closely as the monetary life-support system tapers off and interest rates rise. As Warren Buffet is supposed to have said, you never know who is swimming naked until the tide goes out!

Gearing Up for the 2022 Unified Wine & Grape Symposium

The Unified Wine & Grape Symposium is North America’s largest wine industry gathering — a vast trade show and ambitious collection of seminars and presentations with something new and useful for every wine professional.

The 2020 Unified was the last in-person wine conference that Sue and I attended before the pandemic closures and protocols hit. So we are looking forward with more than the usual amount of excitement to the 2022 Unified, which is scheduled for January 25-27 in Sacramento.

Trade Show by the Numbers

Last year’s Unified was a virtual event and a very good one, but wine is a people business and nothing can fully replace the in-person experience. The two-day trade show will take place in the newly renovated SAFE Credit Union Convention Center on January 26 and 27. Covid protocols will be followed, of course.

You will find 760 booths and 40 large vineyard and winery machinery areas filled with just about everything anyone might need to grow grapes and make and sell wine. If you want to know what’s new, this is the place to find out.

If you haven’t been to the Unified before, you might enjoy reading New York Times wine expert Eric Asimov’s report on his visit to the trade show in 2017. It is interesting to see the event through Asimov’s critical eyes.

Problems and Opportunities

The 2022 conference program features an expanded three full days of meetings January 25-27. The typically ambitious agenda is organized around wine industry problems and opportunities as the Daily Schedule makes clear. There is a strong emphasis on positive take-aways — practical approaches to dealing with wine industry issues and information to help us all make sense of our changing world.

The wine world has changed dramatically in just a short period of time and the themes of this year’s program take this into account, with sessions on environmental shifts, smoke taint problems, new marketing directions, and attracting and retaining essential talent. Two sessions are in Spanish.

State of the Wine Industry

Once again this year I will be fronting the Wednesday morning “State of the Industry” session. I’ll set the stage by analyzing the changing wine market from a global perspective then the all-star line-up takes over: Danny Brager (changing consumer trends), Steve Fredricks (the supply side of the wine market), Mario Zepponi (investment trends, M&A activity), and Jeff Bitter (grower trends and issues).

Danny Brager returns to the podium at the session’s end to recognize wineries that were particularly successful navigating the wine dark seas in 2021. Lots of information and analysis packed into a 2-1/2 hour session.

I don’t have to tell you that 2021 has not been the easiest year for those of us in the wine industry, so look forward to honest, straightforward analysis with a focus on practical strategies as we move ahead into the uncertain future.

The Unified is back. See you there!

Three Things I Learned About Wine Marketing from Kevin Zraly

Eric Asimov‘s recent “The Pour” New York Times column on Kevin Zraly and his career in wine is titled “The Accidental Wine Educator” and it is required reading for anyone interested in making or selling(or drinking”  wine. It is a fine tribute to Zraly, an iconic figure who has done (and is still doing) so much to shape the American wine market.

Zraly is forever linked to Windows on the World, the fantastic restaurant at the top of New York’s World Trade Center back in the days before 9/11. His work there produced the Windows on the World Wine School, and a popular and influential book, The Windows on the World Complete Wine Course.

My first experience of the Zraly magic happened many years ago. Sue and I had the pleasure to dine at Windows on the World just once — in the company of her parents, Mike and Gert. I can remember everything about the view (the Statue of Liberty seemed like a bright little jewel down in harbor far below us) and the company, but alas nothing in particular about the food. I’m pretty sure that the wine we drank was a modest cru Beaujolais — a choice that Zraly (who probably put the wine on the list) would approve because of its ability to pair with many meal choices.

I finally met Zraly and experienced his magic in person in 2015 when I spoke at an Italian wine conference in New York City. The weather outside was terrible — one of those frigid winter blasts — so we were all holed-up in the Waldorf-Astoria hotel — we pretended it was a cruise ship filled with Italian food and wine — best voyage ever!

Zraly was there to give a seminar on Italian sparkling wines and it was the hottest ticket on the program. A big crowd struggled to fit into the room and when I looked around the audience was a who’s who of wine. No one — me least of all! — wanted to miss whatever Kevin Zraly had to share with us.

But Zraly fooled us. He looked out at his audience and decided to “flip” the classroom, deftly orchestrating and organizing a terrific seminar where the audience took the stage, with Zraly as the wise stage manager and conductor. There was a ton of wine IQ in that room, but I think everyone came out knowing more than when they went in. And it was Zraly what did it. Amazing.

Asimov’s NYT column gave me a chance to remember and appreciate those moments and it also made me think about the secrets of Zraly’s success and how those secrets need to be constantly remembered and refreshed. Here are three things Zraly taught me.

Wine Won’t Sell Itself

I suspect that most people who came to the Windows on the World restaurant were interested in having a bottle or glass of wine with their meal. It was part of the experience. But that doesn’t mean that they didn’t need help. Zraly realized that the success of his wine program depended on his staff, their knowledge of wine in general and the restaurant’s wine list in particular, and their ability to answer questions and guide diners towards that three-star wine experience they were seeking.

And so he became a wine educator offering classes first to his own staff and then, eventually, to the public through the Windows on the World Wine School. Zraly’s evolution from wine expert to wine educator in order to sell wine reminds me of someone I met at the Walla Walla Saturday Market a few years ago. He was selling organic meat (goat and chicken, as I recall).  “I’m a redneck educator,” he said by way of introduction. His products sold for premium prices and he understood that consumers wouldn’t pay those prices unless they understood the benefits of his free-range organic goods. So he had to educate them before he could make the sale.

No one has to buy a particular wine or wine at all, but the more they understand about wine the more likely they are to be drawn into the world of wine. Zraly has probably helped sell millions of cases of wine over the years through his work as a strictly-not-redneck wine educator.

See Wine Through the Consumer’s Eyes

If you want to get a sense of Zraly’s wine class, simply pick up a copy of his best-selling Windows on the World Complete Wine Course. The book is based on the course and you can sometimes hear Kevin’s voice as you read it.

A lot of wine books are organized around geography: old world regions, new world regions, with sections on wine grape varieties and other topics. But people aren’t thinking about the world atlas when they sit down in a restaurant to order, so if you want to reach them you need to start from a different place.

Zraly’s book is organized around a restaurant wine list. Red wines, white wines, sparkling, Rosé, and so on. The goal isn’t to make the reader a wine expert, it is to make them comfortable choosing a wine from a wine list and knowledgeable enough to make pleasing choices.  Indeed, as Zraly reveals in the Asimov article, some of his first students signed up because they were intimidated by the wine list or were afraid to make poor choices.

This is a great example of meeting customers where they are, not where you might want them to be. If the problem is dealing with the wine list, then make the wine is list the focus of the effort. You don’t have to have advanced WSET credentials to enjoy wine with dinner (at least I hope not).

When Consumers Move, Follow Them

When the covid pandemic hit many wineries had to shut down their tasting rooms and find other ways to connect with customers. Some had more success than others and it will be interesting to see which of these practices and strategies endure as the world of in-person experiences re-opens.

Zraly has followed his customers, too, and in the process has entered a global arena. When wine consumers moved on-line during the pandemic — to Zoom meet-ups and web-retailers —  Zraly shifted gears to form a partnership with Wine.com for a series of one-hour classes that have run through the fall (the final class in December is on Pinot Noir).  Tuition for the Pinot class is $100 and the wines, purchased through Wine.com, are about $300 more. Not inexpensive, but not too costly, either, given the quality of the wines and the rare opportunity to have a Kevin Zraly experience, albeit virtually. I hope Zraly and Wine.com continue their partnership in the future.

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A thousand thanks to Kevin Zraly for all he has taught us about wine and how to sell it. And thanks, too, to Eric Asimov for his NYT profile of this great wine educator.

Wine and the Trouble with Halloween

Everyone knows that wine consumption is at least in part occasion-driven. Although some of my friends insist that they don’t really need a reason to pop a cork, for many consumers the act of drinking is closely tied to occasions of one sort or another.

Thus, for example, wine sales here in the US typically peak during November and December when a series of holiday occasions roll by starting with Thanksgiving and ending around New Year. Wine sales and festive occasions are a perfect pairing.

The Trouble with Halloween? 

But what about Halloween? The spooky holiday that we celebrate on October 31 is a favorite festive occasion for lots of people who decorate, dress-up, and generally go a bit wild. Over on the food side of the aisle, Halloween is really embraced with lots of special products and offerings. Take a look at the listings for the Food Network this week and you will see many variations on the Halloween theme.

It would be great if wine could jump on the Halloween bandwagon somehow. It has been done, of course. I vaguely remember Dracula-themed Romanian wines showing up on some grocery shelves this time of the year, but not a lot more. And then there is Hallowine, a spiced sweet apple wine from Wisconsin that I found on the internet. That’s the spirit! But you have to admit that Halloween is for the most part a missed opportunity for wine.

The trouble with Halloween is what to drink with it — and what sort of hook would draw consumers into enjoying wine as part of this unique occasion? I really haven’t thought of this before now and I admit that my first thought was Aperol Spritz. The color is seasonally festive and a bit of bitterness is very nice. Yes, I think an Aperol Spritz would work for adult Trick or Treat.

Halloween Haunts the Beer Aisle

I may not be giving the potential Halloween market much thought, but it is clear that some others are thinking hard about it. We recently received samples of two fruit-flavored Hefeweizen beers from German producer Schõfferhofer, for example (a Passion Fruit version is also available). The Pomegranate beer is blood red and the Grapefruit beer — a 50-50 blend of fruit juice and hefeweizen — is pumpkin orange — or at least that’s how I would describe them at Halloween. The sweet/tart fruity flavors are strong and I admit reminded me a bit of the puckery trick or treat candies (think Starburst or Twizzlers) that we also received.

A beer to sip while you munch through the inevitable surplus of trick-or-treat candy left-over after the kids have gone home? Interesting idea — and good response to an under-served occasion. I wonder what would happen if you mixed the two beers together in a sort of witches brew? I’ll bet the color would be great — a little like an Aperol Spritz!

So how was the beer? Well, it certainly delivered on the sweet/tart promise. I liked the Grapefruit better than the Pomegranate. Sue wasn’t keen on either one — not really a fruit drink and not really beer, she said. Kinda a Franken-brew, I guess. But fun for Halloween and food for thought when it comes to addressing this under-served occasion.

The Devil Made Me Do It

Concha y Toro, the important Chilean wine producer, has also taken aim at the Halloween market this year with promotions for its popular Casillero del Diablo Cabernet Sauvignon and Carmenere.  Google translates Casillero del Diablo as “Devil’s Locker,” but I prefer Devil’s Den because it has a nice haunted house feeling to it.

The wines are good and, at about $12 per bottle, have a price point that drives a stake through the heart of the market (I’m trying to get into the Halloween spirit here). The popular Chilean-born actor Pedro Pascal stars in a commercial you might have seen for the wines that features a suitably devilish twist. I admit that I don’t really understand the video, but it is hard not to like the wines and to enjoy their warmth during the Halloween season.

But What Really Scares Me …

I appreciate the creative leveraging of the Devil’s Den theme, but I think Concha y Toro can tell an even scarier story for Halloween. Ghosts and goblins are frightening, for sure, but do you know what scares me even more? Climate change!  And that’s where CyT is a sort of wine industry ghost-buster.

Concha y Toro recently became the wine world’s largest Certified B Corp, an indication of its commitment to a set of values and practices that embraces the environmental cause. Each of CyT’s operations in Chile, Argentina, and the U.S. is now a Certified B Corp. Outstanding.

Fetzer Vineyards, the California producer that is an important part of the CyT family, was recently re-certified with an even higher score, making it one of the highest-rated Certified B Corps of its size. A very high score for environmental efforts is noteworthy.

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So can we make Halloween into a wine occasion on the scale of Thanksgiving and New Year? Maybe not, but I think there is a creative challenge here to find ways to bring wine more directly into the spooky picture. Trick or treat?